L'Air Liquide Ord

Good morning, ladies and gentlemen, and welcome to the Early Keep 2020 Interim Results Conference Call. All participants are currently in a listen-only mode, only until we conduct a question-and-answer session, and instructions will be given at the time. I will now hand over to the Early Keep team. Please begin your meeting, and I will be standing by.

Good morning, everyone. This is Aude Rodriguez, Head of Investor Relations, Thank you very much for joining our conference call today. Benoit Poitier and Fabienne Le Corvizier will present the first half 2020 performance. François Jacob, Executive VP, supervising Europe, Africa, Middle East, and healthcare hubs. And on the phone from Houston, Mike Graf, Executive VP, supervising Americas, Asian hubs, and the electronic business line. They will both participate in the Q&A session. In the agenda, our next announcement is on October 23rd for our third quarter revenue. Let me now hand you over to Benoit.

Thank you. Good morning, everyone. Thank you very much for attending this call. Before presenting the performance, let me just start by recognizing our teams for their dedication and courage during this period, this unprecedented global sanitary and economic crisis. Overall, the performance in the first half, and especially the second quarter, has proven the high resilience across businesses. We've been able to deliver significant margin improvements in a very difficult context, in particular thanks to the responsiveness of all the teams to deploy temporary measures, those where necessary, to reduce costs, fixed costs, and to adapt to lower activity levels. Fabienne will come back to this later. In all regions, the healthcare teams continue to fight the pandemic and I commend their strong commitment. Business development has been very active in the first half with a high level of investment decisions and an increasing number of investment opportunities. Finally, we have updated our assumptions in the current environment and given the evolution of the pandemic worldwide, we are in a position to confirm our full year guidance. I would like also to take this opportunity to announce that we will be postponing our next capital market day that we originally intended to hold in the first quarter next year, but indeed we will reschedule it for the first quarter of 2022. And in between, we will revise our five-year strategic plan in light of the lessons that we drew up from the COVID-19. But also, we would like to use 2021 as a reference, which is a much better reference than 2020 for the starting point of our new strategic plan. But of course, we'll give you visibility for 2021. On slide page four, we highlight the key figures that illustrate the resilience of the group in the first half, with first limited sales decrease to minus 3.2% on a comparable basis, a stable operating income recurring, resulting in a significant improvement of margins, both at the group and gas and service levels. We have actually 100 basis points improvement for the group. as published and 50 basis points including energy path through impact. We managed to preserve net profit already in the first half growing by 1.8%. It's very much in line with the guidance. And also to be highlighted as well is the strong cash flow thanks to a very close management of expenses and a good rate of collection. The cash flow is at 23.1% of the sales, which is a 170 basis points improvement versus last year. On the next page, I would like to come back on the sales and their evolution over the first half. In Asia, China was the first country hit by the COVID-19 in the first quarter, and recovery was very quick there with growing sales in the second quarter. Other countries in the region have been hit by the pandemic in the second quarter and lockdown measures have not been listed yet in some countries. As a matter of fact, only Taiwan and Korea were in positive territory in terms of sales in the first half. Europe has been severely affected by the sanitary crisis from mid-March, especially in the southwest of Europe in industry. And recovery is very progressive since the beginning of May. Our activities in Northern Europe, to some extent, and Eastern Europe have resisted better. Sales resilience in the region also comes from the high share of the healthcare activities, which represent around 40% of the sales in the region. The situation is very contrasted in America. The U.S. and Canada were hit from the end of March. after showing first signs of recovery in May in some markets, activity has stabilized in June, and several states strengthened lockdown measures following a resurgence of the virus. Latin America has been impacted later and is still fighting the pandemic. Finally, Africa and the Middle East was impacted later and lockdowns are still in place in most countries. Sales evolution in each region reflects this contrasted pace of recovery. Moving to margins, next slide, we delivered a significant margin improvement in the first half, driven by three main actions. The pursued efficiency program that was already in place and that happened despite lower volumes. The second point is the agility of the teams to quickly deploy in all our operations the cost containment program to reduce costs and adapt to lower level of activity. Fabienne will come back on that in more details. And the third point is the sustained pricing in industrial merchants with a 2.9% increase in pricing over the first half. On slide seven, in this crisis environment, interestingly, business development remained very active. The 12-month portfolio of investment opportunities increased to a high 2.9 billion euros, and we see more opportunities of asset takeovers. Signings and decisions remain also at a high level of 1.3 billion, despite difficult context, with a record level of electronics projects, especially in Asia and the U.S., with major signings also in large industry, with one project we announced in Russia that includes a takeover of assets for hydrogen and rare gas production. We also see more projects related to energy transition. In fact, close to one-third of our signings were related to energy transition in the first half. And to be mentioned are the 25 long-term on-site contracts we signed in industrial merchants during the semester. As you know, active business development today prepare the growth of tomorrow. All those numbers do not include Sassol Secunda oxygen plants takeover, which was announced yesterday. The size represents 42,000 tons per day capacity, which is the biggest oxygen site in the world. On slide 8, finally, the main outcome today from this global sanitary crisis is that a new era is already starting, even if the pandemic is not yet over. What we observe is that the pre-COVID trends emerge stronger, at least for those which are related to our business. And we have identify the three major trends. First, the healthcare trend. The pandemic has increased the focus on healthcare systems everywhere. The pandemic was global, but the responses have been local, and the healthcare systems will look now for more local healthcare solutions. And if we look at R&D, probably the R&D in particular on vaccines, but probably also on diseases in general will be more global. So there will be a shift in the healthcare industry taking lessons of this pandemic. We also like to mention that the extensive use of AI and platforms in healthcare is a lesson learned from the crisis. Actually AI was used for managing the pandemic and the platforms were used to give access to data And I think this is a trend that will go on in the future. The equipment manufacturing footprint also will change. Maybe there will be less focus, there were less focus in the past. But the crisis has demonstrated the strategic importance of equipment to deliver drugs, as well as the need for manufacturing locally. And I think it will be part of the new healthcare footprint in the future. We, as EarlyKid, have a local presence, and we have developed the digital tools and the platforms in our own healthcare business, and we have equipment manufacturing centers, so we think we are well positioned on those trends. The second trend is energy transition. There is a strong demand from citizens and from the society globally to embark even further and quicker energy transition. The proof is really in the hydrogen momentum. There were announcements from Europe, from Germany, from Portugal, and I think yesterday from Spain, that they would put in place significant plans with several billions, between 5 and 10 billions each country, to boost the hydrogen development and the hydrogen society. This is, of course, a great opportunity for Aliquid. And in that regard, I'd like to mention the fact that we have now 92 members in the Hydrogen Council, with two new steering members and nine new members, or standard members. And interestingly amongst the two, one was CMA, the Maritime Transportation Company, and the second one is Microsoft. So it means that now the digital industry is thinking about making their industry greener. We also see, of course, that all industries recognize strong needs to decarbonize their production processes. And we see more takeover opportunities. Of course, the CECL deal is the perfect illustration of an industrial deal on the one side, but also a climate deal on the other. And the combination of the two is probably a good proxy of what may happen in the future. Digital, I mentioned the usage of digital in the healthcare sector, but it is really pervading all industries. There are new ways of working that have been put in place, so there will be something left after the pandemic. There will be need for more semiconductors, so it will directly and indirectly improve and boost the electronics business. And if we look at what will be the next big developments and needs in digital investment will be in B2B, but also in B2GG, meaning governments. So there will be an active transformation, but it has started already. And we think overall we are very well positioned to be a leader in this global transition. I'd like now to hand over to Fabienne.

Thank you, Benoit, and good morning, everyone. We'll now review our numbers in more detail. The limited sales decrease during the first phase of this crisis has indeed demonstrated again the resilience of our various business models. Gas and services comparable sales for H1 at minus 2.7% show a modest decrease despite significantly lower volumes in large industries and in merchants. Electronics and healthcare, for different reasons, remain strong. We will review that in a moment. To be noted, June activity was better than anticipated in some regions. Contribution of engineering to consolidated sales continued to be low in connection with the active development of group projects and with the temporary closure of workshops and construction sites. Total engineering sales are down 20%, with order intake picking up in Q2. Global markets and technology saw a decrease in cryogenic equipment sales in Q2, but still delivered growth over H1, and the ordering take is very strong, 45% above last year. Overall, comparable group sales are down 3.2% for H1, while published sales at minus 6.2% are penalized by the decrease in energy prices, as well as a negative scope effect as the acquisition of TechCare in the U.S. is not completely balancing for the diversity of food jam last year. Looking now at the geographies, it is clearly in America that we saw the strongest COVID impact in Q2, first due to the later development of the pandemic in this zone, but also to our extended presence in merchant. Large industries were penalized by low oxygen volumes in North America, but continued to progress in Latin America with the help of startups and ramp-ups. Merchant volumes, and in particular hard goods volumes, were weak in the U.S., notably for the industrial markets, but rentals and pricing remained strong. In the U.S., we saw a slight recovery in mail, but some kind of plateau in June. In electronics, advanced materials and equipment and installation sales continued to be high, and health care sales were significantly up in Latin America in connection with COVID. In Europe, the pattern has clearly been different. with a slight improvement in southwest and central Europe since the middle of May, and a very strong healthcare contribution. Large industries suffered from very deprived production, as well as from lower demand for chemicals in Western Europe, but resisted better in Eastern Europe. Merchant was mostly hit in France, Spain, Italy, and to a lesser extent Central and Northern Europe, but we saw signals of recovery, in particular for packaged gas, at the end of the period. The pricing also remained positive. In Asia, the good news is obviously the return to growth in China in all business lines. However, the COVID impact amplified in Japan and Southeast Asia, which are not out of crisis yet. Outside of China, in large industries, demand was low, notably in hydrogen in Singapore, with one major turnaround. Industrial merchant volumes outside of China were also weak, around 85% of pre-crisis levels across the zone. Conversely, in electronic carrier gases and advanced materials, sales continued to be very strong, showing more than 10% growth sustained by ramp-ups, even if equipment and installation continued to be low compared to the exceptional level of last year. Africa Middle East was hit by the COVID impact on merchant demand, but our major large industries operations held strong. In terms of business lines, as expected, industrial merchants is the most impacted, with sales decreasing 14% in Q2 in most of the countries except China. Markets linked to consumption and services, however, started to show progressive recovery since mid-May, which was slightly more solid in Europe than in America. We managed to maintain strong pricing all over the period at 2.9% in Q2, like in Q1, including for helium, where the pricing has not softened yet, despite a lower demand. In large industries, in air gases, we only saw chemicals bottoming up at the end of the period, remains weak in mature economies while recovering in developing economies, China and Latin America in particular. Electronics was penalized by low equipment and installation sales compared to the exceptional level of last year in Asia, but conversely, carrier disease and advanced material sales were very strong, around 9% throughout the semester, supported by solid man in America and Asia, as well as ramp-ups of new units. Our teams are confident that this very good trend will continue in Q3. In health care, growth at plus 8% in Q2 continues to be driven by hygiene and medical equipment. Medical gases sold to hospitals linked to the COVID are softening progressively, as is in Europe, and the restart of elective surgery as well as the reopening of private clinics takes time. In home health care, the onboarding of your patient is progressively picking up, In terms of performance, we continue to improve along with our commitment. We're still decreasing 6.2% as published and 3.2% compatible. We managed to maintain operating profit, to raise operating margin by 50 basis points as explained by Benoit at the beginning, and to slightly increase net profit as published. Our teams also did a tremendous job in terms of cash management and collections, resulting in a cash flow to sales above 23%, 170 business points higher than last year. Digging a little bit more in the details, purchases and external costs were very proactively adapted to the low demand, and personal expenses were frozen while the low depreciation increased a benefit from the sale of Fujian in H2 last year, partly compensating for the 2020 startups. This resulted in an operating margin at 17.6% to be compared to 16.6% for H1 last year, progressing 100 basis points as published and 50 basis points excluding the energy pricing impact. Margin improvement is supported both by our structural plan rely on pricing, efficiency and portfolio management, and by the crisis cost containment plan. This additional plan, which delivered an amount of cost reduction around 100 million over each one, is compensating for the low level of activity and is not supposed to be sustainable over time. What is really important is that the focus remains on our structured improvement plan, Pricing is holding, in particular in America, with campaigns at air-gas and excellent adjustment to inflation in Latin America, and in a lesser extent in Europe as well. Efficiencies are very high, at 200 million euros at last year's level, which is a real achievement in the context of lower volumes, thanks in particular to the acceleration of operations centralization and optimization projects in large industry and merchant, and to the deployment of business support centers We are confident to reach our 400 million objective for the year. Active portfolio management continues. Cryo PDP and Schulke Deal should close very soon. More diversity projects have been launched and we pursue our Bolton acquisition program in merchants and healthcare in particular. A quick look now at the bottom of the P&L. Non-recruiting operating income and expenses are close to last year. They included last year the impairment linked to the food and livelihoods issue and include around 45 million euros of exceptional COVID expenses this year. Restructuring expenses around 30 million euros are in line with last year. Cost of debt is down 2.9% on average, which coupled with the progressive deleveraging results in decreasing financial costs. Effective tax rate is pretty stable to last year if we exclude the impact of the non-deductibility of the Fujian impairment in 2019. As a result, net profit has published is up 1.8% and recurring net profit, meaning excluding Fujian last year and exceptional COVID expenses this year, is decreasing 1.1%. To be noticed, we are already more or less aligned with our full year guidance. Thanks to the effort on cash and debt management as well as on collection, we managed to reduce our gearing again. Net debt stands at 13.2 billion at the end of H1, an 800 million increase despite the full payment of the 1.3 billion dividend in H1 and the 130 million euro scope. As mentioned before, cash flow was exceptionally strong at 23.1% of sales and also allowed to finance solid industrial capex above last year's levels. On top, we have refinanced all of our maturities for the year, fully featuring liquidity. Benoit already mentioned the dynamism of the investment activities. The 12-month portfolio is up, thanks to electronics and energy transition, while we have more requests for takeover from our customers. Industrial decisions for the semester remain high at the level of 2019, resulting in an increased backlog at 2.9 billion. Once again, these figures do not include the startup projects announced yesterday, for which we are in exclusive negotiations with the customers. Despite delays due to the pandemic, we also confirmed the full year guidance for the contribution of startups and wrap-ups, with 10 startups already completed. to be between 150 and 180 million euros. This amount should increase to around 300 million euros in 2021. To conclude, on the basis of our resilient H1 performance, we confirm our guidance for the full year, recognizing we have some uncertainty on the actual end of the lockdown in certain geographies, and in the US in particular. We nevertheless remain confident in our ability to continue to improve margins and to maintain net profit at a level close to last year. Thank you very much for your attention. We will now open the Q&A session.

Thank you. If you wish to ask a question at this time, please press star 1 on your telephone keypad. please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. Again, please press star one to ask a question. We will now take our first question from Gunther Zeckmann from Bernstein. Please go ahead.

Hi, good morning. Thanks for taking my questions. Can I start with two, please? Firstly, could you talk us through what exit rates in terms of growth you've seen in each region globally, and particularly in industrial merchant, if you can. And the second one is on healthcare. It's still a business for you that is very heavily screwed towards Europe, given COVID-19. Has that changed your strategic view of diversifying that geographically, possibly with acquisitions? Just your thoughts on that would be very much appreciated. Thank you.

So if I understand well, the first question is more related to growth rates in IM. As a matter of fact, when we look at the different market segments, there's a huge contrast between the different market segments. I mean, it goes from – we just take the second quarter from minus 10 to minus 50 in terms of market. If you take the car industry, they were down – by about minus 48%, nearly minus 50%. There were others like beverage food, which was just down by a few points. So the growth rate in the third and fourth quarter will depend, of course, on all those market subsegments recovery. And what we can say is that if we just look at the end of the second quarter and the beginning of the third quarter, so July, there's no major change in the trend in that no further deterioration of the sales. For those countries where the pandemic is still very active, it is a very slow recovery. And I'm thinking about the US in particular. where we saw an improvement, a very small improvement, end of May, for sort of a plateau in June, slightly better at the beginning of July. So the truth is that it's going to be slow. For others, for Europe, the signs of recovery are, let's say, more visible. So we hope that Q3 is going to be somehow sort of catch up with what we saw in the second quarter, but this is the holiday, the summer holiday period, so it's not the best in terms of business activity. And if we look at Asia, China in particular, Fabien mentioned that the IM growth in China was 6% in the second quarter, so China did rebound in the second quarter. So overall, overall, I think that The most affected sectors like the car, the aerospace, the trains, truck construction in general, will probably do better in the second half, which is good news, because that was the most affected. The food and farmer markets will probably come back to positive territory in the second half. Materials and energy, where we have the The primary energy sources, the conversion, chemicals, metals, glass, basic minerals or utilities will probably be nearing the 0% in the second half. And technology and research, which were done, are normally recovering faster. So that's what we can say in terms of segments. And as all those segments are present everywhere, normally they should be in line, but clearly it will depend on the lockdowns and it will depend on the way the pandemic is actually eradicated if it can be in the second half. The healthcare question. It is true that most of our sales are in Europe. This was our strategy because we have a strong position and because we were able to actually grow the business and develop the home health care. We are present in the medical gas everywhere, and it's doing pretty well in North and South America together with Europe. Asia in general is slower in the development of medical gases. Africa and Middle East had a good start, but it's still very modest in terms of weight in the healthcare. So the real question actually relates to home and home healthcare. It may also relate to the medical equipment, but we are very small in the medical equipment. So I don't think you have to expect a fundamental change in the strategy in the near future. meaning maybe the 12, 18 months. If there are opportunities, because the healthcare global system is changing, we will look at the opportunities to expand our business, but we will be, I would say, reasonably cautious in our approach, because we have tested those markets in the past, and we know that some of them are pretty difficult, others present opportunities and may be a good source of growth in the future. So no real big change short-term, and mid-term will depend on how the global system is actually recovering from this crisis. Next question.

We will now take our next question from Theodora Joseph from Goldman Sachs.

Please go ahead. Hi, good morning. Thank you for taking my questions. Two, if I may. The first relates to the SASO contract that was announced yesterday. Just wondering if you're able to give any colour when you expect that to close, when you expect that to contribute to your top line, the magnitude of contribution, and whether I'm right to... to understand that, you know, your expectations of the contribution for next year doesn't include anything from the contract. And based on the capital intensity of such a contract, that the potential contribution might be, you know, more than what you're expecting for next year in terms of startups and ramp-ups. And then my second question is more relating to hydrogen. It's a little bit more of a thought experiment, but we have seen quite a few interesting recent developments here. So just wondering how you think this is going to develop, whether you think in, you know, future hydrogen production is going to be more like a local business production and consumption model, like your current industrial gas business model, or whether there is more of a global opportunity that involves significantly more cross-continent transportation. Thank you.

Yes, I think Francois will take the first one. Just a brief comment on SASDOL. It's very interesting to see that the whole deal was actually negotiated during the COVID crisis. So, be it a result of a crisis or just an acceleration of a trend that was before, it's hard to say, but we did nearly everything during the three months of the second quarter, and we are pleased to announce that deal. This is an industrial deal, a very major one, but this is also a deal that relates to our climate change policy, because as we announced, we'll be able to reduce the CO2 emissions of this site by 30 to 40 percent in cooperation with Dassault, of course, and by investing on different portions of the and by using the expertise and the best technologies that Air Liquide has. That said, I would like to hand over to Francois to cover your question.

Thank you very much, Benoit, and good morning, everybody. So, indeed, we made the announcement about the SASOL takeover yesterday, which is great news and a great contribution to Air Liquide. sasol to air liquid of course but also as mentioned by benoit to the climate so we are in the phase of finalization of the definitive agreement with the customer we do expect pending i mean the due regulatory approvals to close everything in q4 of this year so we should see some contribution by the end of the year, but definitely next year. Again, it depends on some regulatory approval. You have to notice that during the first few months, something like the first 12 months, there will be an interim period where actually we will be putting in place all the metering for the energy measurements. So the sales contribution that you will see will not take into account the energy portion. So it's going to be maybe a little bit difficult for you to interpret in the first year, let's say, but after it's going to be a full classical over-the-fence sales contribution. Order of magnitude when the contract is going to be running is in the range of 400 million euros based on the current exchange rate and energy pricing, of course.

So the capital intensity of this deal is much lower than usual, but this is just explained by the depreciated assets and the fact that for the size of the site, which is 42,000 tons per day of capacity, we are investing a limited amount for a big business. So this is unusual low capital intensity. Your second question was related to hydrogen. There's an interesting momentum, as you mentioned it. There's an appetite from countries, governments. Most of the key governments in the world have now issued their plan. Japan and Korea and China were the first. But in Europe, we have now Germany, Portugal, Spain yesterday, and the European Commission, which actually issued on the 8th of July a very ambitious hydrogen plan. So it means that there's a high interest in this energy vector for the future. When we look at the new members of the Hydrogen Council, we have not just industrial companies, but we also have, I mentioned, Microsoft, but also we have financial institutions now at our members. We have a special category of members that we group the financial institutions. And it's interesting because now we're going to be able to build a real investment plan for the world actually in hydrogen because those institutions will be much more aware of what is at stake and how much money and how efficient we can be in investing in hydrogen. The model is going to be both local and global. Local because if we have small electrolyzers in the future using electricity, renewable electricity, to produce hydrogen locally, it will be the equivalent of the on-site business, of the IM business line today. So we are prepared for that because we can produce, we can store, and we can transport electricity or directly deliver this product to customers. If you look at the large industries, those who are consuming hydrogen today, like the oil and gas, the chemical and other industries, they will progressively shift to low carbon hydrogen. So that will be a large industry business. There will be more infrastructure being built, pipelines in particular. And so access to hydrogen will be easier. That will be more an LI model. And finally, the supply chain that we have today in oil, in natural gas, in particular liquefied natural gas, may be applicable to hydrogen in the future. We can just think about those countries that have sun and ability to export that can actually set up a new supply chain with export of hydrogen from producing countries to the countries that would consume it. So that would be the global supply chain on hydrogen. So there's a local, there's a large industry model, and there's a large supply chain model that may apply to hydrogen. I think I have covered your question. And cross-continent transportation will be, of course, also possible. And we have good technologies to achieve that in a very efficient way because, as you know, GMT, our Global Markets and Technologies Division, is actually selling a lot of technology for the LNG chain to preserve the losses from that.

Sorry, on the first question, to be extremely clear, the SASOL contribution is not included in the 300 million euro startup and wrap-up contribution that we presented for next year.

Thank you. Next question.

We will now take our next question from Andrew Stott from UBS. Please go ahead.

Yeah, good morning, everybody. Thanks for taking the questions. The first one's probably Francois again, just back to the Sasol deal. Could I just check a couple of things? So firstly, did you say the revenues attached to that were 400 million euros? I just wanted to check that. Secondly, Patrick Benoit, you mentioned the carbon footprint moving down by 30% to 40%. I read that partly this might be related to the renewable energy purchases that SASOL is thinking around. Is that all of that, or does Erlich bring something specific to those ASUs that can reduce the carbon emissions for SASOL? And then finally, what's the actual... How many years have you signed up for, or sorry, have SASL signed up for the ASUs? So, sorry, that's one question with lots of small questions in it. The second one is more straightforward. Pricing, I think 2.8% for IM and Q2. How are you thinking now for the second half and also for 2021, thinking about all the moving parts and, of course, helium as well? Thank you.

Andrew, good morning. Thank you very much for your question. And thank you to come back to this SASL deal because it's indeed a very significant achievement. We have been chasing this for, I would say, 40 years. As you know, this is the largest oxygen site in the world today. And what we have been accomplished, I think, is very significant. In terms of business opportunities, but also in terms of contribution to the climate. So, yes, I do confirm that what I said, if I was not clear, is that when the contract is going to be fully running, we do expect 400 million euro sales per year in terms of contribution. Of course, as any large industry contract, it does depend on the price of energy, in this case, mostly electricity. Regarding the carbon footprint, which is a very important element, and as a matter of fact, that's an integral part of the offering. And for us, it's absolutely key, and we are very well aligned with the customer. And this is our objective to reduce by 30% to 40% the carbon, the CO2 emissions associated to the oxygen production. And clearly with this deal you see that it's a concrete illustration of what we can do for our customer and how we can contribute to the energy transition of existing sites with existing CO2 emissions. So how are we going to do that? There are a few levers and basically we have listed already and we are working with the customer on a series of key initiatives that will allow us to reach that goal. Part of it is to bring the best of Air Liquide in terms of operations, meaning all the know-how on how to optimize, of course, the safety, the reliability, but also the efficiency of the plants, to bring digital tools, to do part of the remote optimization of the site also being connected to all the network of the air liquid plants to bring of course the best experts and to rely on social experts which are also very good but to give them some tools. We will be doing some investment, small investment to improve the efficiency to modernize part of the equipment. There is another part which is more significant investment which could be new units You know that in 2015, we have started the Train 17, which was a new investment, 200 million for 5,000 tons per day plant. It's possible, and we have some plans for additional units similar to this one that will be replacing older, less efficient assets. So that definitely will be another way to contribute to this objective. And the last part is, as you mentioned, the renewable energy sourcing. Today, most of the energy is either sourced from the grid or internally produced by SASOL, either through electricity or through steam generation. We will replace a large part of that by securing a large quantity of renewable energy, which would be a way to decrease the carbon footprint. which would be also a way overall to improve the energy mix of, I would say, South Africa in general, as promoting renewable energy is one of the key objectives of the country. So you see, again, there are a portfolio of initiatives and opportunities that we are bringing to reduce the carbon footprint of this country. Last point, the contract is a 15-year contract, classical, strong, large industry contract.

Thank you, Francois. Fabienne, can you take the pricing question?

Yes, sure. So you've seen that the pricing has remained relatively constant over the period 2.1, 2.2. You also know, because we mentioned it in Q1, that there is an helium component in this pricing effect. What we've seen in the first semester is the demand for helium reducing significantly in volumes, but the pricing remaining strong. However, this helium effect on pricing is going to soften over the second period of the year just because of the comparison effect, because the price of helium started to rise significantly in Q3 last year. For the rest, for the other gazes, the price increase relies on, of course, pricing campaigns, but also a very good adaptation to inflation in some countries, and we are confident that this should continue for the full year. Then 2021, We don't think that inflation is going to slow down or accelerate much, but of course, the pricing capacities will depend on the pace of the economic recovery. So it's fairly early to see. So H2, the anion component is softening. The rest will continue, and 2021 will last. We discuss that later in the year, I think.

Thank you, Vivian. Next question.

We will now take our next question from Tony Jones from Redburn. Please go ahead.

Yes, good morning, everybody. Thanks for taking my questions. I've got two. Firstly, you mentioned on the call asset takeovers, and I seem to remember in the last financial crisis, customers came to you and activity stepped up. Is that correct? And can you talk a little bit about which regions or any particular market where there's an increasing activity? And then my second question is on the U.S. If we get a change in government and a switch to Democrats, could you talk about the tax impact and potentially any other implications like in health care?

Thank you. Yes. So takeover opportunities, yes, we see a trend because most of the customers start thinking about their coal business, number one. The economic situation forces them to take decisions. And because of the energy transition and the pressure that climate is putting on every single business, they may very well say I'm better off outsourcing my industrial gases. That's more or less exactly what happened with Sassol, and we expect to have more in the future. So yes, this is a trend. We cannot say how many deals will be done, but this is clearly a trend. What regions and markets do we see with a decrease in activity? We don't see a decrease of activity. I mean, we were hoping to have a sort of beginning of recovery and of Q2. It was the case until the pandemic actually started again or did not disappear. And so it slowed down the recovery, but there's no decrease, as we speak, in the activity and in the different markets. And I can mention all of the segments of all business lines. There's nothing really decreasing as we can see it right now. The tax in the U.S., yes, it will have an impact, and I think Fabienne will cover it very well.

So, in fact, if Mr. Biden is elected, he will raise the taxes. We all know that. So we, of course, have done our own estimation. The income tax should go up from 21 to 21.5 to 28%. then we should have also an increase on the BEAT tax on international flows. So it should increase our tax in the U.S. by probably a little bit more than $50 million. So it's pretty significant. $50 million, considering that the new tax law is effective January 1, 2021, which may or may not be the case. You remember that the Trump's new tax law was promulgated on December 23rd, retroactive January 1st. You never know. So that's where we stand for the moment. We would also have a massive adjustment on our deferred taxes, deferred tax liabilities in particular. But, of course, this will be non-cash on the treaty that's going on. That's what we can say at this stage.

And we won't ask Mike to give you any forecast of who might be elected. That is really something we cannot comment, of course. Next question, please.

Next question from Martin Rodriguez from Kepler. Please go ahead.

Hello. Good morning. I have actually two questions. First is an ESG question. Coming back to the Zargo deal, at this point in time, all these 16 air separation units are run on coal generation power. And I calculate roughly 600 tons CO2 emissions at this point in time. Who will book these CO2 emissions in scope one? Is it Eliquid or is it Zazzle? And the second question is on your guidance for operating margin, excluding the energy effect. The margin was up by 50 basis points. Given the efficiency measures you further implement, given solid pricing in the second half, given... likely operation leverage and assuming that the business in the second half will be higher than the first half, is it fair to assume that in the full year you will have an even stronger margin expansion or less equal than in the first half? Thank you.

Okay, definitely the second question will be for Fabien, but I take the first one. It's true that the energy today supplied to the air suppression plant in Segunda is a combination of electricity and steam. So electricity is more the national grid and the mix of the country, and the steam is coming from the site, the SASO site. We have a lot of progress to make, and that's part of what we intend to do, try to transform the electricity system into renewable electricity as much as we can. That's why we have this PPA in the pipeline that could improve the CO2 emissions. And we may also act on the steam side, but that's a cooperation with SASOL. The steam is actually a steam which is produced by the process, and if we don't use it anymore, then SASOL will have to find a use of it or to reduce it. So it's exactly at the heart of what needs to be done to improve the CO2 emissions of the site. We don't report the scope one, because scope one is when you directly emit the CO2. So in the oxygen business, it's a scope two. It's through electricity that we report emissions, and we will be supporting the emissions of the scope two. It will be very clear. There are international rules now for reporting Scope 2. If you make an acquisition, you actually have a rule to report how much does it represent and how you're going to reduce that. It will be fully transparent. But we will also have to think about the Scope 3 because part of the oxygen is used in the chemical process transformation of fossil energies. for chemicals essentially and for fuel. So we will be working more widely on the scope three of air liquid in the next 12 months and probably come back to the market next year on that. So it's not scope one, it will be scope two. It will be reduced as we invest and we will be thinking about scope three and include all what we can include into the scope three later in 2021. That's more or less a summary of the ESG situation for Sasson. Guidance, Fabienne.

So, what is going to happen in H2? Hopefully, the activity is going to continue to recover progressively. So, the margin will still be supported by our performance improvement plan, pricing, efficiency, portfolio management. But the additional cost containment program effects are going to soften progressively when the activity recovers. So we are confident that we'll be able to deliver significant margin improvement for the full year. As we all mentioned, we have a number of uncertainties, so I think it's far too early to promise We are going to improve the margin. It's going to be significant for the full year as it is for the first semester.

Thank you Fabienne. We can take the next question.

Next question.

We will now take our next question from Charlie Webb from Morgan Stanley. Please go ahead.

Morning, everyone. Thank you for taking questions. Just a couple from me. Just firstly circling back on the margins, can you shed any light on what the kind of order of magnitude was for the temporary savings you saw in H1? Whether, you know, putting that in context to the kind of 200 million structural savings that you made, just trying to understand what the temporary effect was. And then second question, just on hydrogen, related to your expectations six months ago, as you see all these countries come out with their plans, as well as the EU, obviously coming out with a very positive plan for hydrogen. How does that compare to your previous expectations? If you were to try and look at what this could mean for Erechid in 2025, 2030, in terms of its hydrogen business, How has that changed versus your previous expectations? Can you give us any sort of sense of how that shape could look based upon what countries have set out? Anything around that I think would be very helpful.

Yes, of course, margins.

I think margin again. So the temporary saving plan has delivered around 100 million euros of additional cost reduction in H1. But once again, this is only as a compensation of the low activity, meaning we are reducing the external staff, we are reducing the travel expense, the consulting expense, some of the business development expenses. If we look at China, inside China, the people are traveling as much as before because they want to – to recover the time lost, and they are very active in business development. So when the activity recovers, the additional cost containment plan is going to soften accordingly. So 100 million on H1, certainly not reproducible in H2.

But the normal efficiency plan will go on, of course, and this is more structural. The hydrogen... Well, yes, I agree with you. This is really positive. To see so many countries announcing new plants and putting billions on the table is really very positive. It is not really different from what we expected, even though it's coming faster. If you remember, we had a plan that we published with the Hydrogen Council related to 2050, which is far away. And if the consumption of hydrogen could represent about $2.5 trillion by the time, we had a sort of milestone in 2040. But in between now and 2040, it was a big question mark. It depended on how fast the countries would actually take over the hydrogen topic and put in place plans. The real test was the decade between 2020 and 2030. What we see now with all those plants is that the starting point is pretty fast. The countries now have realized. There's a lot of industries that think they can use hydrogen for many things, for decarbonizing progressively their sales, their products, their processes. the spirit and the mindset is much more positive than what we thought it would be even one or two years ago. That said, if we think about $2.5 trillion in 2050, that means that the world would have to invest probably $2.5 to $5 trillion altogether by 2050, which is a huge amount of money. the 5, the 10, the 15 billion that the countries have announced is just a drop in the ocean if we just take the view, the vision of 2050. But it's coming sooner, and so for me it's a very good sign that things are going to move in this decade, where, in particular, in those industrial countries that have announced a plan, and in which segments, The mobility segment, heavy duty, is clearly starting very fast now. The power to gas is in good momentum, and the transformation of the processes, the industrial processes, be it in steel, in chemicals, in oil and gas, and many others, will go fast in the transformation. The construction, I mean, the building, segment is going to be probably slower, and the use of hydrogen for industrial heat, the replacement of natural gas, LPG, or oil to produce heat in industrial processes will come a little bit later, but it can accelerate pretty far. So that's what we see today. It's pretty well in line with the views of the Hydrogen Council. But overall, it's fine. The only thing that is missing today is the implementation of the financial plans. So building infrastructure requires capital, and we've not seen yet a lot of initiatives in that field. But probably it will come in the next two to three years. That's the best I can say.

Okay, so next question.

We will now take our next question from Andreas Heinels from Maine First. Please go ahead.

I have two, basically. Thanks for taking them. The first is, if I understood it right, then the non-recurring items include COVID-19 impacts. Could you elaborate a little bit on what that means as you book the savings as normal and how that's going into the second half? And secondly, again on hydrogen, you have expanded now what's used in hydrogen. Maybe you can also share some thoughts, how Aliquid sees how this hydrogen will be produced. I've learned that this molecule is available in different colors, in green, in blue, in yellow, in turquoise, in gray. What is where Aliquid sees the highest chance for itself to participate in this hydrogen production? And how do you see the timeline in those?

Yes, Fabien is going to take the first, and I'll take the second.

So to be very clear, the impact of the COVID crisis in terms of underactivity and sales decrease are in the operational numbers. What we have recorded in exceptional for an amount around 45 million euros is really the exceptional cost along with our accounting standards, meaning, for example, the purchase of protection equipment, the additional disinfection costs, the additional quarantine costs because we had to pay for the quarantine of some of our employees, the bonuses that we are giving to the health care team who have over-delivered over the period. So it's just the exceptional costs. The consequences, I would say, of the pandemic are clearly in our operational numbers.

Thank you, Fabienne. Hydrogen, it's true that hydrogen is becoming a rainbow. There are colours all across the planet. The position of the Hydrogen Council, and we, of course, stand by, is the fact that we should not put a colour on hydrogen no more. We should just say, look, the starting point is very cheap and very competitive hydrogen produced with natural gas today. We will have to go to low-carbon hydrogen that we call clean hydrogen and progressively mix it with hydrogen from renewables. Renewables, be it either electricity or biogas or whatever. And the name of the game is to make hydrogen clean in the end, but it will be done progressively. So we are not pushing for green, blue, gray, black or whatever. We are pushing for a hydrogen that becomes cleaner and cleaner as we go. Wheat means, by the way, that production technologies will have to be improved. The traditional one is well-known, but the electrolyzer technology using either alkaline or PEM technologies will have to be improved. But as the quantities grow, the cost of those technologies will decrease, and as R&D improves the membranes that are used, it will also increase efficiency and decrease the cost. So there's a lot of things to do, but that's a good thing. It means that hydrogen has the potential to become even more competitive as we go. The best chance for air liquid is actually to make sure that we master production technologies, but also packaging and distribution technologies, supply chain in general. This is where we are good. This is where we can really add our expertise in the game. And we have the experience. We have 50 years of experience today. We want hydrogen to be safe, to be reliable, and to be competitive as we go. And we think we have the best position in, let's say, in all industries to achieve that. The timeline, we are working hard on technologies, on markets. We are signing deals. We are working with customers to actually make their process cleaner by either reducing the CO2 emissions, example is Sassol, but also by promoting hydrogen through in the steel industry to replace potentially oxygen and coal in the future. So the timeline is now, but the progress will be slow at the beginning and accelerating as we go. And we expect to see really a difference in the next 10 years. with a milestone in five years. Next question.

Next question.

We still have room for a couple of questions.

Hello? Yes, please.

Hi there. I'm not sure if you can hear me. It's Jean-Baptiste Roland from Bank of America. I'm going to start with two questions. Hi, Benoit. Hi. Thank you for taking my questions. I just wanted to check with you. You have talked about a third of your new signings being related to hydrogen. At the same time, I see that you have signed 25 new long-term industrial merchant contracts. How are these two numbers related? Is it hydrogen, which is supporting such a high sustained level of long-term IM contracts versus the signing level you had last year of 40 contracts? And then second question is related to hydrogen. So I'm trying to understand exactly or at least to have an idea about how or when, rather, hydrogen could actually get into your numbers. It looks to me that, obviously, you have a sustained level of signing, as we just discussed, and at the same time, You're not just seeking business in green hydrogen, which is probably going to take a longer time to develop. So most likely you're going to be... having a higher level of contracts in relation to carbon capture and utilization, et cetera. Do you expect a pickup in those contracts in the coming two to three years? Do you expect also the industry, as you just talked about, externalization in relation to CO2 footprint, et cetera? Do you think that the level – of contracts that you could gain from the refining industry, which we know is actually a lot captive at the moment. You believe that there is an opportunity coming within the two to the next four years for contract signing. And then could you maybe just give an idea about how long it would take then to filter into your numbers, whether it would take more likely two or more likely five years? Thank you.

Okay. So let's be clear. The signings were not related to hydrogen energy, but to energy transition. So it's different. And we can clearly relate customer signing contracts because they want to make progress on their climate and CO2 emissions and consume less energy because it's all related to energy transition, but not to hydrogen energy yet. Let's be clear. The second question, the third question, everything is related. We have embarked into an energy transition. Air Liquide is already selling for 2 billion euros worth of hydrogen. So we are not a newcomer. This hydrogen today is for the chemical and the refining industry. They will have to transform their own processes. And we may expect to have in the future... new contracts signed with those industries on the basis of cleaner hydrogen, which means either sequestration of carbon through CCS, and there might be a partner in the S in the sequestration. And so if you take a refinery, we may expect that in the next five years, the hydrogen produced for the refinery will be based on a cleaner process, be it either sequestered capturing and sequestrating the CO2, which is one, or mixing hydrogen with renewable hydrogen. Renewable hydrogen means hydrogen produced from renewable energy. I am expecting to see a significant change in the, say, next five years from those two industries, chemical and refining. The hydrogen energy portion, the pure sales to mobility, or to new applications will be modest in the next year or so, but the number of people who are interested, and it's not just industrial customers. You have a lot of cities. You have a lot of regions for buses, for trucks, for, in the future, for planes and for boats. If you take all those industries, they are today studying the use of hydrogen in their products. So, if we come, I cannot say exactly how fast, but I made the same comment as the one I made earlier. In the next 10 years, we should see all those sectors take off and start producing business opportunities and successful air liquids. And it will take five to ten years, but it is starting now. We may take one last question, maybe two. So the next one, and we'll see whether we can be short in the question and in the answer, so that we can take another one. Next.

Next question is from Peter Clark from Societe Generale. Please go ahead.

Yes, thank you. I always squeeze in. Actually, on one of my favourite subjects, Sassol and hydrogen. Sassol, just to be clear, I mean, it looks a very good deal, certainly financially. I presume this reflects the investment you have to put in and that you're going to give some indication of that, obviously with a lot of spend and upgrading. And then on hydrogen, obviously a bit competitive. Yep, hydrogen, obviously a bit competitive. and the global movement, the big competitor announced the green ammonia route. Just wondering your thoughts on that, obviously if you think a very, obviously a carbon-free hydrogen scale as against the additional costs of the ASU and the separation of the hydrogen at the end. So just your thoughts on the green ammonia route for the hydrogen story. Thank you.

Thank you. Francois, can you take the question on platform and take the second one?

Yes, thank you, Peter. Regarding the investment, we have included already, I would say, in the economics and in the contract, investment for maintenance, for modernization, for refurbishment of all the facilities. If we have to decide large new units, that will be an additional investment. which is not included for the time being, which will be decided. We have agreed with SASOL on the process to do that, but it's not included in the initial investment.

How does that in the competitive nature of hydrogen and fuel? The market is still at the beginning, so it's difficult to say. today where amongst the five market segments we identified early on, where the first ones are going to be developed. We think hydrogen mobility for heavy duty is going to be one. We think, of course, that hydrogen as a feedstock to process industries is just going to be greener and cleaner, no doubt. The rest remains to be seen. There are many companies that have stated that they are interested, so we'll see how we can develop. But we think we have a big competitive advantage because we are present along the supply chain, from production to the application. And in any industrial gas, you need to know not just how to produce, but also how to package, transport, deliver, and use. And I think we have a significant advantage in that. You mentioned the green ammonia route, which is, for those who don't understand or don't know, the production of hydrogen from renewables, then the conversion of this hydrogen into ammonia, then the shipping of this ammonia across the globe, and then the storage of ammonia and the conversion of ammonia back into hydrogen locally. It's a full chain. In some cases, it may be but I'm cautious. It may be competitive, but it's not a proven case yet. It's being studied by those who know how to make the calculation. It might be an option, but it will not be the option in the future. I still think that hydrogen will be produced locally, and if it is produced from a sunny country, then we will see the liquid hydrogen and the ammonia being developed in the future. So the jury is out, and we'll see how the calculations might come up with. So we're going to take the last question.

We will now take our final question from Chechen Udishi from JP Morgan. Please go ahead.

Yeah, thank you. Last question, hopefully quick to answer. Just looking at the full year, if I were to assume the full year net income on recurring basis to be slacked year on year, it implies second half net income to be up 7-8% versus first half. Just thinking about that improvement in second half versus first half, is that driven by the expectation of better EBIT in second half or you have some... below the EBIT items, which is also driving some of that improvement in the second half versus first half. Thank you.

Fabienne will take this one.

I'm not sure I fully understand your question. Net income is flat in H1. Our objective is to maintain that for the full year. Of course, excluding the capital gain on the diversity share of Schuylke-Meyer, which will be treated separately. So why would that imply a better or lower level of EBIT? I mean, we are already flat, and the objective is really to try to maintain this net profit, even if we still have a certain amount of uncertainty. So I'm not sure I really understand your question. I'm very sorry.

I was just talking about sequential second half versus first half. But it's okay. I can take that without separating it.

Well, once again, sequentially the activity should be better, but then we will have less cost cutting, so in a way it's going to balance, you know. Okay, does that answer your question?

Yes, thank you.

Okay, thank you.

Okay, thank you very much. So thank you for having, being with us. It's probably time for a break, a summer break for most of you, so. I wish you the best during that period. Be safe. The pandemic is not over, and we still have a lot of things to do in between now and the end of the year. So thank you for being with us, and we'll be back in October as all the announcements. Thanks, and have a good day.

Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.