L'Air Liquide Ord

Hello and welcome to the Air Liquide first half 2021 results. My name is Josh and I will be your coordinator for today's event. Please note that this conference is being recorded. All participants are currently in listen-only mode until we conduct a Q&A session and instructions will be given at that time. I'll now hand you over to your host, Odu Rodriguez, Head of Investor Relations, to begin today's conference. Thank you.

Good morning, everyone. This is Audrey Rodriguez, Head of Investor Relations. Thank you very much for joining our conference call today. Benoit Pottier and Jérôme Pelleton will present the first half 2021 performance. As usual, François Jacob, Executive VP, supervising Europe, Africa, Middle East, and healthcare hubs. And on the phone from Houston, Mike Raff, Executive VP, supervising Americas and Asian hubs and the electronics business lines. They will both participate in the Q&A session. In the agenda, our next announcement is on October 22nd for our third quarter revenue. Let me now hand you over to Benoit.

Thank you, Aude, and good morning, everyone. Thank you very much for attending this call. The first half of 2021 has been a special semester by many aspects. After first quarter marked by sales growth recovery in all our activities, we saw an acceleration in the second quarter with Q2 sales not only growing double digit compared to a low Q2 2020, but also showing growth above 2019 in all regions and all business lines. Overall, we've been able to deliver an outstanding financial performance thanks to a higher demand with a strong margin improvement, as well as a high cash flow, which allowed us to invest in growth, to close the SASOL takeover, to pay the dividend, of course, while significantly reducing the gearing ratio compared to the first half of 2020. Our performance must combine our financial and sustainable components. And while this first semester was still impacted by the COVID-19 pandemic in some countries, Our teams have been fully mobilized to put in place alternative supply chains to deliver medical oxygen, sometimes in remote areas or in regions where the group is not or almost not present. We'll come back on that. And despite this unusual environment, we've been able to reinforce our backlog, and we will provide you with more granularity as well as some update on the key achievements regarding the energy transition project. On slide four, to start with, I wanted to highlight the closing at the end of June of the SASOL 16 ASUs acquisition, which, as you know, is the largest air gases production site in the world in Secunda, South Africa. It is also the first time we sign an agreement with a customer to jointly commit to the reduction of CO2 emissions, which is fully aligned with the objective we disclosed during our last Sustainability Day in March. This is truly a first of its kind deal in the energy transition era. So a major contract for the group that started to contribute on the 1st of July. On slide five, a few key figures to illustrate the financial performance in the first half. Start with comparable sales growth is plus 9% in the first half, showing an acceleration in Q2 at plus 15%. Obviously, this is compared to a low basis last year. If you now compare to the first half of 2019, Sales are growing by 5%, which clearly shows the good recovery of our markets and activities. Our margin also increased by a significant plus 100 basis points, excluding the energy pass-through impact, and we'll see later that energy impact was pretty high. It reflects the long-lasting efforts we've made on pricing, on efficiencies, be it operational efficiency, or structural efficiencies on portfolio management and cost containment plan that we put in place last year, and which is progressively aligned with its recovery. The recurring net profit is up plus 19%, excluding foreign exchange, and the cash flow is still very high at 23% of the sales. On slide six, the graph shows the acceleration of the growth since the beginning of 2020, up plus 15% for the second quarter of this year, whereas last year it was only down by 7%. We also provided you with growth figures by business line, the right part of the slide, compared to 2020. And as you can see, we enjoyed a double-digit growth for LI and IM. That were the activities the most impacted by the pandemic last year. But healthcare and electronics also posted close to double-digit growth this year, while these activities were both growing in Q2 2020, slightly for electronics and at a higher pace for healthcare. On slide seven, you can better evaluate the strength of the recovery when referring to 2019. In Q2, all business lines and geographies are posting growth compared to 2019. America is plus 4%, the main drivers being LI and healthcare. Europe plus 7% with a strong healthcare and solid industrial merchant and large industry. And Asia plus 6% driven by China and all activities. Middle East and Africa is plus 8% above Q2 2019 sales. By business line on the right, figures show an outstanding healthcare, of course. high electronics, and large industry, and IM sales are now 1% above 2019. All in all, group sales are plus 6% above Q2 2019, which demonstrates the strong resilience of our business, together with its ability to pick up quickly when the economy recovers. In addition to our strong financial performance, you know that Sustainable growth is also at the heart of our strategy, as previously explained during the Sustainability Day in last March. As a matter of fact, we all know the pandemic is not fully over yet. So we brought a continued support to several countries severely affected by COVID-19. On slide eight, you can see an overview of this major healthcare societal contribution to fight against the pandemic. Not to mention them all, we highlighted here a few examples of countries or sometimes regions where the group has a limited oxygen capacity and where we put in place dedicated crisis supply chains, either by air, by sea, and sometimes with the support of the French or the local army in order to supply medical oxygen to COVID patients. Thanks to this tremendous effort, 37 patients per day received oxygen in India, 10,000 in Russia. We also supplied thousands of oxygen concentrators in Brazil and South Africa. And we have been also very active, and it is still the case now, in Tunisia or previously in Egypt. And I take this opportunity to warmly thank all the teams that were deeply involved in the management of these critical situations. I would also like to highlight the solidarity of our industrial customers who accepted to reduce or stop their oxygen consumptions so that we could medicalize the oxygen and redirect the volumes to hospitals. Also in terms of sustainability, the first semester was also very active in the field of energy transition, as I said earlier. On slide nine, in the continuity of our sustainability day last March, we want to share with you our key achievements in energy transition projects in the first half. In Europe, first, more than 50 projects are currently under development, be it for carbon capture, electrolysis, hydrogen mobility. For these projects to succeed, you need to develop local ecosystems by combining several key factors such as technology, customer relationships, but also availability of renewable energy or fundings to help in the first stage of the competitiveness of new technologies and partnerships. As detailed in March during our Sustainability Day, to develop hydrogen mobility. In the first half of 21, we signed more than 10 MOUs or partnerships. We were awarded six national or European fundings and were pre-selected for more than 10. And we signed two PPAs and we are currently working more than 10. In Asia, hydrogen mobility is developing quickly, especially in Korea and Japan. and we signed four MOUs or partnerships this first half. Air Liquide Technology is recognized by customers and has been chosen as an example in China recently for the world's largest hydrogen station. In America, the legislation is being introduced to promote new technologies and solutions for energy transition, like the Hydrogen Shot program, or the Clean Hydrogen Production Act, which are not fully validated yet. But no doubt, projects will develop quickly as well in the US as soon as these new regulations are implemented. But we already started in North America. Just to remind you, we are operating the largest PEM electrolyzer in Canada since the end of 2020. And we plan to start a major hydrogen liquid firing in the fourth quarter of this year to supply the hydrogen mobility market in California. So energy transition really is taking place in Americas as well. To conclude, a very active semester in the fall of energy transition. These energy transition projects will soon be added to the backlog on slide 10. We provide you with some granularity in our backlog at the end of June. It stands right now at 3.1 billion euros, and these projects under construction will deliver growth in the next few years. It is of very good quality, the portfolio, and well-balanced, be it by end markets, geographies, or investment size. Indeed, large industry represents close to 60% of the total, mostly, as you can see, chemicals, with only 8% of projects in refining. If you add electronics, you reach more than 80% of total backlog that are under long-term contracts. By geographies on the right part of the slide, America has come first with 41%, projects being mainly in chemicals. Asia with 34% increases most of the electronics projects. And the backlog is made of around 70 projects, having an average size of 45 million. Therefore, our growth doesn't rely on a few large projects. Such a diversified and well-balanced backlog considerably reduce the level of risk for our future growth. So the financial performance combined with this strong backlog make the first semester a very good start of the year. And I will now let Jérôme to comment the financial performance. Jérôme?

Thanks, Benoit, and good morning, everyone. I'm on page 12, and I suggest we review our numbers more precisely. So coming back to half-year, we can see that comparable gas and services sales for H1 showed plus 8% increase versus last year. This is, of course, contrasted between Q1 and Q2 with a favorable comparison effect in Q2. For the semester, all geographies and business lines, including large industry and industrial merchants that were most impacted during the crisis, are posting a very strong growth in Q2, as explained by Manon. We'll review that in a moment. Engineering and construction consolidated sales have increased by plus 66% in H1, in connection to the active development of group projects and the low base last year. There is a pursued order in tech, picking up plus 13% in Q2, representing 257 million euros. Global market and technology are also accelerating and are now showing a plus 35% in H1, boosted by biogas activity as well as last year's base effect. Overall, comparable growth sales are up plus 9.2% for H1, while published sales at plus 5.6% are impacted by a negative forex impact at minus 4.8%, and a negative significant perimeter effect at minus 2.8%. balance with a very significant impact of the increase in energy price, plus 4% over the first half year. Now for Q2, as I said before, a very strong growth with a marked recovery. We are then at plus 6% above 2019 level of sales for the group, and even sales for the business line that were the most impacted by the crisis are now above 2019. I'm on page 13, and I'm getting back on geographies. We can remember that Q2 last year was the most impacted for the Americas due to lockdown in place everywhere and due to our footprint in the industrial market. On a comparable basis, growth has been strong in this geography this year and sales are above pre-COVID crisis 2019 levels. Large industry volumes have accelerated and underlying air-gases capacities are now fully loaded in June 2021 in the US, while Latin America continues to grow, also supported by the contribution from ramp-ups. In industrial merchants, gas sales are growing and are above pre-COVID-19 levels, as all industrial and services markets are posting strong growth, except construction that is still lagging behind. Our goods are still below pre-COVID level, but overall in IM, a plus 3.2% price increase is above the Q1 level, thanks to pricing campaigns launched in late Q1 2021. Electronic cells are also improved thanks to better carrier gas, specialty materials, and advanced material, which is getting back to growth. Health care cells are strong due to med gas cells in Latin America, but also from home health care recovery. In North America, after a significant contribution from medical gases during the peak of the COVID crisis, med gas for proximity care and elective surgery are progressively taking over. In Europe, We have seen an acceleration of growth in the last three quarters, with sales significantly above pre-COVID levels. Large industry air gases have benefited from a significant increase in steel and chemical market in Western Europe, while returning is still soft, especially in the southern part of Europe. Eastern Europe is also strong, with a takeover in Kazakhstan during Q1. In Merchant, all markets are well-oriented, with good bulk volume and a good pricing dynamic. Western Europe rebounded well above 2019 level, while growth remained strong in Eastern Europe. Finally, while health care cells are still supported by strong medical gases at plus 13% due to COVID crisis, home health care has accelerated with a significant development of diabetes treatment and sleep apnea. I'm on page 14. And on Asia, Asia is still contrasted, with China continuing to show high momentum in all business lines, while the rest of Asia is progressively improving. As a reminder, China started to recover at the end of Q1 2020, as the rest of Asia had more impact still in Q2 2020. In large industries, China's sales and volumes are supported by strong chemical and steel demand, while hydrogen and CO volume are improving in Korea and in Singapore. In industrial merchants in China, all end markets are well-oriented, especially metal fabrication and electronic components, and contributing to post-plus 15% growth, with all product lines contributing, while the rest of Asia is improving, still impacted by the pandemic with some lockdowns. Finally, electronic sales are strong, with a good level in recurring growth, and in E&I. Carrier gas in China are strong, and advanced material are growing sustained by some exceptional sales in Korea and Europe. In Africa and the Middle East, IM cells are recovering progressively, despite the continued impact of the pandemic, while healthcare is supported by medical gases. As mentioned, SASOL takeover and large industry has been closed in June 2021, with no impact in cells in H1. I'm on page 15. In terms of business line, and as a reminder, industrial merchants and, to a lesser extent, large industry cells in Q2 last year were the most impacted by COVID crisis, contrary to electronics and healthcare that were still progressing. Health care has been at the forefront of the pandemic fight and is still benefiting from high medical gases in various geographies, despite a high comparable basis last year related to equipment sales in particular. Activities also benefited from the ramp-up of elective surgeries that were on hold during the crisis. We are seeing now an acceleration in home health care, particularly in Europe, sustained mainly by diabetes and sleep apnea. In industrial merchants, bulk and onsite are strong goals drivers, and all end markets are recovering rapidly, our sales in some of them being now above 2019 level, except construction in the U.S., which is a bit slower. Pricing overall is picking up at plus 2.4%, with a limited impact of helium price at minus 0.1%. I'm on page 16. In large industries, we have seen air gases benefiting from good recovery in chemical and steel, while refining and high coal were contrasting, being soft in Europe while catching up in the U.S. To be noted, a significant contribution of the startup and ramp-up into the first half growth. Electronic is pursuing growth thanks to carrier gas activity at 10% supported by startup and ramp-up. E&R is growing as well, and advanced materials are growing with an exceptional sales in June in Korea. I'm on page 17. looking at margin improvement. Getting into the detail, we can see that purchases and external costs have been strongly impacted by the increase in energy price and improvement of the activity, while personal expense are under control and have only very slightly increased, excluding Forex. Depreciation is only slightly up, excluding Forex, following the impact of startups during the first half and benefiting from last year's portfolio review impact. To be noted, all as published figures are significantly impacted by a negative forex effect from minus 4 to minus 5%. This has resulted in an operating margin at 18% compared to 17.6% last year, a plus 40 basis point increase as published, and an outstanding plus 100 basis point increase excluding the energy price impact. As you can see, the energy pass-through has a significant mathematical dilutive impact on the as-published margin this semester that is not reflecting the strong underlying margin improvement. This impact needs to be taken into account in your financial models. I'm on page 18 on structural performance. This is still delivering. The focus on our structure improvement is indeed impactful. Pricing is accelerating, in particular in the Americas. with Campaid at Ergas and in Europe. Efficiencies are very high at 206 million euros. We are then confident to reach our target of more than 400 million euros for the year. Atlas portfolio management has been pursued. We executed five divestitures in H1 and closed about 11 Bolton acquisitions over the period. On page 19, we can comment on the margin improvement, which is supported by both our structure and fee. structural plan rely on pricing efficiency and portfolio management, as well as the impact of the cost containment implemented last year that has still delivered effect in H1. This combination of structural existing plan and cost containment impact have contributed to deliver this plus 100 basis point margin improvement in H1, and along with the activity recovery, the progression was softened in H2 comparing to an already very high level basis last year. I'm on page 20. Let us now look quickly at the bottom of the P&L. Non-recurring operating income and expense have decreased compared to last year, as 2020 was impacted by 45 million of exceptional COVID expenses that did not repeat this year and or were counted in operational expenses. Net financial costs have also decreased following the progressive deleverage. Effective tax rate is slightly down, benefiting from a lower income tax in France. As a result, net profit as published is significantly up at plus 15%, same for the recurring net profit at plus 19.3%, excluding forex, as the recurring net profit in 2020 excluded the exceptional cost related to COVID-19. I'm on page 21, and I will comment that thanks to the effort on cash and debt management and our collection, we have managed to continue to reduce our gearing since last year. Net debt is at €12 billion minus €1.2 billion versus last year in June, following H1 dividend payments and strong capex, including SASL payment in June. Gearing has then dropped to 56% versus 65% last year. As I mentioned before, Cash flow has also been very strong at 22.9% of sales, a plus 70 basis point versus last year improvement, if we exclude the energy effect, and has allowed to well finance our high industrial capex at 1.97 billion euros, including the capex linked to Sassol at 480 million euros, and well finance the dividend payment, which is above last year level. Consequently with this, Standard & Poor's has upgraded our credit rating from previously A- to A-stable that supports the high level of trust in our cash model and balance sheet structure. Benoît has already commented about the dynamics of our investment and backlog activity. The 12-month portfolio is still very strong at 3 billion euros, still supported by energy transition projects and including a high stake of LI and electronic projects. industrial decisions for the semester have been also very strong at 1.9 billion euros, including 400 million euros for the SASL deal only. Our backlog is strong and very diversified and has increased to 3.1 billion euros. On page 24, we can see that the level of startup and ramp-up contribution to sales has reached 130 million euros in H1 2021, with the SASL takeover that will start to precipitate in July 2021, this should reach about 320 million euros for the full year, including a 70 million euro contribution from SASOL takeover in H2. I'm on page 24. As discussed, we have right now a very strong investment momentum. The recurring return on capital after tax is now 9% at end of June. and we confirm our objective to reach double-digit by 2023 and 2024. To conclude, on the basis of our excellent performance in H1, we confirm our guidance for the year. In the context of recovery in the second half, we remain confident in our ability to continue to improve margin and to deliver a recurring net profit increase at constant ethics. Thank you very much for your attention, and we will now open the Q&A session.

Thank you very much. If you would like to ask a question or make a contribution on today's call, please press star 1 on your telephone keypads now, please. To withdraw your question, please press star 2. Please ensure your line remains unmuted locally and then you'll be advised when to ask your question. So that is star 1 on your telephone keypads now, please.

Thank you very much for your patience there.

We do have a few questions coming through. And our first question comes from the line of Gunter Zachman from Bernstein. Gunter, please go ahead. Your line is now unmuted.

Hi, good morning. I've got a couple of questions on margins, please. So the first one, pretty straightforward. On the four-year guidance, you used to comment on earnings calls that quantitatively we should look at about 70 basis points of operating margin improvement. Is that still the case, given what you're saying about the H2 comps and the results on profitability that you've delivered now in the first half? And then secondly, if we could look at the European margins a little bit closer, please. That's the region that's been lagging the other areas geographically with 30 basis points improvement excluding energy. Could you help us deconvolute the moving factors within that and why that's been lagging? I know that childcare divestment has been a slightly more profitable business than the rest, but then you divested also operations in Greece and France. So that should be a creative. The growth is very good. So there should be some operating leverage. Pricing is good. So if you could just give some color around what has been going on there and what we should expect going forward, please.

Yeah, thank you, Gunther. Maybe Jérôme will take the first question about the guidance, and we'll give you more insight into the European margin together with François. Jérôme?

All right, good morning, Gunther. So, effectively, you know, we communicated last year, you know, a significant margin improvement in 2020, plus 80 basis points. On the margin for the second half of the year, you had to have in mind that last year was a significant improvement in our margin at 110 basis points, which was the result of the coming back of the activity and also the fact that we have the full impact of the cost containment that was started to be implemented last year. So for the year, what do we expect? We expect to have a second half year where the impact of the cost will start to decrease. However, we'll have the full benefit as well of the efficiency that we are continuing to develop, and that would reach more than 400 million euros for the year. So basically, overall for financial year 2021, we target a margin improvement, I would say at least aligned with the recurring part of the improvement we delivered last year at the same period.

I would say this way. Thank you.

So maybe for Europe specifically Francois can take over and I'll make a global comment about what we saw in the first half. Francois?

Yes, thank you Benoit. Good morning everybody. So in Europe overall we had a good performance. In comparison this is true that the margin improvement is to some extent lower than what we have seen in other parts of the world. But there are a few specific factors that can explain that. Overall, there has been a very strong energy impact. The rise of the energy has been very significant. Maybe not everything is captured in what we call the energy impact, but we have seen that clearly both on natural gas and on electricity in Europe. That was quite fast also, and sometimes not being catched by some of the index in our pricing. But overall, the main reason for the lower improvement, again, in comparison to the rest of the region, is due to the mix of the activities. To some extent, the large industry has seen less improvement than the industrial merchants. And also the health care, which has been growing very fast and growing again in some of the activities like the home care, had a little bit dilutive impact for that growth on the overall. The mix for large industry is due to mixed in terms of regions and mixed also in terms of product lines with the high cost. seeing some growth in some area, but very little growth, especially in the southern part of Europe. Overall, we are quite confident about the roadmap for the margin improvement in Europe. There are several things that are going to contribute, especially in industrial merchants, which overall is very well oriented in terms of growth, but also in terms of margin. And you mentioned the pricing. The pricing in Europe especially, I think, is something which is positive. You remember that in the first quarter, we have seen a 1% pricing increase. And in the second one, we are registering 1.7%. I think more is to come, probably in the same trend. So we are more optimistic than I would say at the beginning of the year regarding the pricing in Europe. And this is mostly due to the fact that we have some indexes which are a little bit lagging behind in the bulk in terms of energy recovery. And the energy increase is going through as we speak into the pricing. And also, we had a very active pricing campaign in several countries in Europe. You remember that at the end of last year, we launched campaigns in the Nordics, in Iberia, for example. But beginning of the year, France, Italy, Benelux, UK, Germany have seen price increase campaigns being launched. And we are seeing the effect, and we will see more in the second part of the year. Maybe, Benoit, you want to comment?

Yeah, just to supplement what Francois and Jérôme said, when we look at the business lines, in the first half of this year. Overall, IM did very well, and this is across the board in the four regions, meaning Europe, America, Asia Pacific, and Africa Middle East. Large industry is more or less the same, to the exception of Asia Pacific, where we saw the effect of the pricing structure, because growth was more volume growth, So people just took more volume within the framework of their contract. So the margin ratio for additional volume in a contract is under the average of the margin. There's no impact of the fixed part of the invoicing. So that's what we see. In electronics, we still have this impact of the transformation of short-term sales into mid-term sales. I think we made this comment already in the first quarter. So we have the impact in advanced materials of a slight transformation, positive transformation of the model from short-term to mid-term sales. And we had to accept some price decrease in specific molecules. But this impact is actually temporary. And finally, I think Francois made the comment on healthcare. Healthcare was okay in three regions, and only in Europe we had two impacts. One is the price pressure that we see in Europe, but also the divestiture of Schulke, which impacted negatively the margin. So overall, I would say that apart from those specific points, in LI and IM regions, And healthcare, except Europe, we had positive margins. And electronics is positive in Asia, but we have a slight negative effect due to this transformation of short- to mid-term contract. So that's a business line comment in supplement. Thank you. We can take the next question.

Thank you very much. Our next question comes from the line of Andrew Scott from UBS. Andrew, please go ahead. Your line is now unmuted.

Good morning, everybody, and a first hello to Jerome as well. Two questions, please. Thank you for slide seven. It's a very interesting map of the recovery. I was slightly surprised, though, to see that Asia-Pac was the third worst of the four regions in terms of that. two-year stack. Are you surprised or is there a good explanation? I'm just wondering if it's around that equipment sales phasing on that base of 19. So that's the first question, your performance in Asia. Second question was back to margin. Can I just clarify that I heard correctly that you're saying you'll do at least the same as last year in on recurring margin? And in other words, is that the definition on X energy? So 80 basis points, which was last year's X energy. And sorry, I'm going to steal another two and a half, I think. Just a very quick one on the investment ops. It seems to have gone down from 3.2 billion to three. At least that's how I read it. I wanted to check that that's the case. Or has SASL dropped out and gone into the backlog? Thank you.

Okay, as my graph is online, I would like to ask Mike to comment the Asia-Pacific. Actually, Asia-Pacific is doing very well. I mean, overall, and during crisis. So maybe the interpretation of this lagging growth compared to the others needs some clarification. So Mike? Okay.

Thanks, Benoit. Good morning, everybody. Andrew, I think in terms of Asia, we see very strong fundamentals. And I think I would start by saying that part of the differentiation in Asia that Benoit and Jerome mentioned earlier is the fact that in Asia, China obviously was mostly impacted in Q1 of last year. and recovery there started to begin clearly in Q2, whereas the rest of Asia really started to feel the more significant impacts later in Q1 and continued to feel those impacts into Q2 and in some cases into Q3. But if we look at the numbers across the business, all the business lines and all the geographies are clearly posting growth in the first half. I think that if you look at large industries, sales are up double digit. We see a lot of strength continuing in China in terms of demand for steel, demand for chemicals. And also, now we see the resurgence of growth in steel for Japan. We see very strong hydrogen volumes evolving in Singapore, as well as for Heiko in South Korea. So I think the demand there is very strong and is really recovering, and certainly volumes are above where they were in 2019 very significantly. A lot of that initially driven by China, but then South Korea, and then picking up elsewhere in Asia. In terms of the merchant business, we've continued to see very strong growth, clearly driven by China. The numbers are up 14% in the second quarter. Volumes in China, if we compare it to the the first half of 2019, are up very significantly. We see clear growth in metal fab. We see it in electric components. You know, in China, I think the recovery there began with a lot of investment in construction and infrastructure. And I think as we get towards the end of Q2 of this year, we see that very significant double-digit growth benefit begin to wane a little bit because of the year-over-year comparator and the fact that much of the infrastructure spend has started to evolve to a more normal basis. And at the same time, we see anything tied to technology, anything tied to manufacturing, looking at automobiles, looking at secondary electronics and primary electronics, everything is starting to grow very significantly if we look at China in that regard. So across all segments, bulk on-sites and packaged gases, very strong growth. If we look outside of China to the rest of Asia, the volumes are all improving. And I think all the volumes now are basically back up in general above 2019 levels. And clearly we see that it exceeded when we look at liquid and the developing economies especially is very strong. And then from an electronic standpoint, as was already mentioned, I think it's very strong. It was very strong last year, continues to be very strong this year. you know, close to double-digit growth in the second quarter. I think that clearly we see some differentiation between the various sectors there. The carrier gases are strong. Equipment and sales are a bit off. But I think that in general, things will continue to grow and be very strong. So I think actually Asia is clearly in the recovery mode. China back to a more normal year-over-year kind of comparator as we see the continuing growth and significant growth there. And the rest of Asia is caught up.

Thank you, Mike. Second question, maybe more clarification on margin. Jerome?

All right, so let's go back to margin. As you can recall, last year there was about, in 2020, there was about 80 basis points of margin improvement that was broken down in two ways. First, 20 basis points which was coming from the cost containment specific impact that we mentioned, and I would say a recurring part of 60 basis points that we had last year. So what we see this year, as you know, we are still committed to improve and continue to improve our operating margin, which was, as you know, very strong in H1. For the full year, you have to have in mind that, as I said before, there will start to have a decreasing impact of the cost containment in the second part of the year, which is totally aligned, and that's a good thing, with a good recovery of the activity that we start to see in Q2, in H1, and that will start to continue in H2. So this impact of the cost containment will start to slow down. So what can we say? So overall for financial year 2020-21, we target a margin improvement, as I said, aligned at least with the recurring part of the improvement we delivered last year. To be a little more precise, last year the recurring margin improvement, as I said, was around plus 60 basis points. That will be my answer.

Well, thank you. On the investment side, you're right. We had a $3.2 billion portfolio in the first quarter. We have a $3 billion. When I look at the breakdown by geography, there's absolutely no change in Africa, Middle East, in America, and Europe. The numbers are pretty comparable, which means that the projects we won actually were compensated by other projects that were added to the portfolio. The only difference is Asia-Pacific where one specific project was removed. This is more hydrogen liquefier. So that is related to the hydrogen energy business, which is not as accurate in terms of forecast as anything else we have. This project may be materialized, but probably later, and so we removed that unique project out of the Asia-Pacific portfolio. If we don't do that, or if we put it again, this is exactly the same. So no change in the portfolio in a nutshell, and by region, we were able to compensate all the signed projects by new projects. We can take the next question.

Thank you very much. Our next question comes from the line of Mubasha Chowdhury from Citi. Please go ahead. Your line is now unmuted.

Hi. Thank you for taking my question. So I've got two keys. You've talked about the recovery in health care and electronics from an Asia perspective particularly. Could you widen those comments out on a group level for the second half of the year and how you see that trending given the strong performance in 1H and whether that strength is likely to continue. And the second question is a little bit more longer term. Could you provide your thoughts and potentially implications following the announcement of the Fit for 55 initiative and how that impacts your thought process into the energy transition? Thank you.

Okay. So this The question will be split between Francois on healthcare and Mike on electronics for the second part of the year. I think they are well positioned to answer. Francois, maybe you start with healthcare.

And Mike, then. Yes, thank you very much. As we mentioned before, healthcare overall had a very strong quarter and a very strong first half of the year, more than 9%. And we are well above 2019 overall. So that's a mix of different effects by geography, but there are some common trends. I would say overall, we see that the medical oxygen demand is still very high. And this is true in many, many countries. If you just take the example of Europe and the medical oxygen volumes, in the first half of the year, they were 40% above what we have seen in 2019. So you see, even if there are some progress in the reduction of the pandemic, overall, the consumption of oxygen is still very high. As mentioned by Benoit before, in many developing countries, we see still a very strong demand. And unfortunately, with the new waves coming, we probably should expect some quite high level of consumption for medical oxygen. This being said, we do expect also things to come back to normal in terms of normal use of oxygen, especially for surgeries. And that's something that we have seen in the past few months where many of the elective surgeries which were postponed actually are taking place. So we do expect something more normal to see across the world. What we have seen also is the healthcare activity which had a very strong recovery. You remember that last year during the, especially the first waves of the COVID, We had many patients which did not go to the doctor to get their prescription. So we saw a decrease in terms of new patients coming for the home care treatments. And in many geographies, we have seen this underlying demand coming back to normal. On top of that, we see the results of our strategy in terms of development, especially in diabetes in many European countries, but also in sleep apnea. And those two therapies are enjoying very strong growth. There's maybe even a little bit of a catch-up which is happening, so clearly double-digit growth for those segments in Europe especially. So that's, again, a strong momentum both for the medical gases and the home care activities. Again, we'll come back to the normal trend, but probably at a higher level for the rest of the year. If just a comment in terms of geographies, I mentioned Europe. Overall, we see this momentum increasing. being strong in Europe for the two segments, the med-gas and the home care. In the Americas, there is a special mention to North America, where we see, thanks to our position in air gas, a very strong med-gas growth for the hospital and for the clinics. And in Latin America, we see a combination of a very strong growth medical gas demand, and a strong home care demand, which is something that we have seen for many years, but which is now picking up very strongly in several Latin American countries. So overall, for the second part of the year, good growth. Keep in mind that the comparison with last year is very high, so we need to have that in mind. But overall, the underlying growth is very strong.

Thank you, Francois. Mike, if you could make a comment also on what you see in the U.S. right now in terms of investment from Asian companies and also what we see in Asia and then how it will look like in the second half. Mike?

Sure. Thanks, Benoit and Mubashara. Thanks for the question. I think before I get to the investment piece, I think the first thing I would talk about are the global drivers from a market standpoint. You know, clearly we saw across the board every market for electronics, whether that's, you know, end-use PCs and smartphones, servers, cloud data, IoT, automotive, 5G, everything last year continued to grow despite the pandemic. And we saw similar growth trends in the first half of this year. And as we look to the second half of the year, and more importantly, looking out to the next several years, we see those trends and those drivers actually continuing to accelerate and beginning to look later in the year and going into next year at double-digit growth drivers everywhere. And I think as a result, to Benoit's point, we see these as very significant drivers for new investment markets in the industry. It was already very strong. It was already growing significantly. And I think the combination of the continuing and growing demand for devices, especially those that use the more advanced logic and memory chips, will continue to be very pronounced going forward. And as a result, we have seen a very active development of new projects and a resurgence of new investment in the U.S. Almost every one of the major producers of integrated circuits, be that for logic, be that for memory or for analog, are all looking to grow significantly. And there's a lot of support even from the government, thinking about security of supply chains and a variety of other things to drive that. We see those same efforts in Asia as well. a very significant level of new business development on top of what was already very strong, looking at carrier gases, looking at advanced materials. And as you also saw, you know, the European Union announced a very strong ambition to produce roughly 20% of global demand by value in the integrated circuit and semiconductor space by 2030. So there are the market drivers. I think there's the geographical drivers and the investment drivers that are all very strong. And as a result, if you look at the forecast for logic, for memory, and for analog, as we get closer to the end of the year and into next year, you see everything in strong double digits in terms of the actual markets themselves. And obviously production will follow that. And so for our own investments, Obviously, we continue to go ahead and drive that from a business development standpoint. And in addition, one of the things obviously that occurred as a result of the pandemic was that our customers as well as our own new investments in terms of construction in the field were delayed because of the impact of COVID, because of the impact of the pandemic. And there were several projects that were slated to start up in the first half of this year that got somewhat delayed to the second half. And so we'll see the benefit of that. The rest of the industry will see the benefit of that. And that will help go ahead and drive the industry forward in terms of the level of growth that I mentioned. So carrier gases, advanced materials will continue to strengthen as we get into the fourth quarter and beyond.

Thank you, Mike.

Maybe an additional comment from Jerome. Thank you, Benoît, and thank you, Mike. Just to come back on figures on electronics as a whole, at the group level. As you noticed, Q2 was very strong, 8% for total electronics versus last year, and we had a significant impact on carrier gas from a startup and a robot. But basically, both recurring cells and ENI were strong in Q2. What we do expect for the next quarter is still growth. And that will be very much sustained by the carrier gas that will be also very close to double digits. So basically, we are confirming a growth in electronics for the Q3 period.

Thank you. The third question was related to the feed for 55. I have to apologize because the report is about 1,200 pages. So I'm not as accurate as I could be. I'm not sure I will read the pages, but let's look at what is inside and what may impact Air Liquide. The Red Renewable Energy Directive is setting a new target, and that will translate, hopefully, into more renewable energy being invested and available to the market. That's good news because we need that for our scope 2 projects, target. We need to buy cleaner energy. And second, because it will help developing the hydrogen market based on electrolysis. So that's one point. The energy efficiency directive and the land use forestry and agriculture will have a great impact on us. On the contrary, when we look at the regulation for new cars coming down by 55% for new cars from 2030 and 100%, meaning no industrial combustion engine cars by 2035, will have a huge impact on electric cars, be it battery-based or hydrogen-based. Now, I just want to highlight one thing. The Hydrogen Council actually issued very recently a new study on What is the optimum in terms of infrastructure if we compare batteries and fuel cells for cars? And the conclusion is pretty simple. The optimal is to do both. And there are a lot of facts and numbers behind. So if you have time, I invite you to just read that, because the consequence of that feed for 55% new regulation might be that we see a development not just of battery-based vehicles, but also hydrogen for cars. There's also in the alternative fuels infrastructure regulation, a very important point for us is the installation of new charging points, be it electricity or hydrogen. They are talking about 60 kilometers for every electric charging stations and every 150 kilometers for hydrogen. If it is implemented, it will mean a lot of investment in infrastructure, but also the development of a huge market. Two other points. One is the ETS allowances. The system is being transformed. There will be more markets actually covered by that. The only impact we have to mention for Air Liquide is the fact that we have now more or less in all our contracts a pass-through clause in our contracts so that the CO2 cost might be pass-through to customers. Now, it will fluctuate the way energy today is fluctuating. So that's an impact. And finally, I want to mention the CBAM contract. which is a mechanism at the border of Europe that is a new system. We don't exactly know how it will work. It is good if it comes in supplements to the existing free allowance system. That more or less works today. So that's the position that we will take as far as the CBAM. As we could spend hours on that, I think I will stop there. And take the next question. Next question.

Thank you very much. Our next question comes from the line of Tony Jones from Redburn. Tony, please go ahead. Your line is now unmuted.

Yes. Good morning. Thanks, everybody. I've got two. Firstly, on merchant pricing, should we now be thinking that the new range for the year is going to be more like 2% to 3% rather than the 1% to 2% you used to talk about? and maybe also related to that, could you split out the volume and inflation component for the 12% purchase inflation in the first half? So that's my first sort of question. And then the second one was a bit more high level on the energy transition projects that you've got on slide nine. Can you help us understand a little bit more about how some of the contract structures might work? So for hydrogen particularly, are most of these projects going to be long-term take-or-pay contracts, or will they more be supplied a little bit similarly to the industrial merchant model? Thank you.

Yes, thank you. As far as the IM pricing, it's actually related to markets. We have three different continents, actually more than three, but three main. The U.S. has a market behavior that is pretty agile I mean when market changes it's it's it's rather easy to explain and pass through costs so typically the US market shows higher price increase than others and I think it will continue air gas now is the main player for us in in North America and So we've launched, in the course of the first half, a price increase that will have to be implemented, is being implemented, as we speak. And so on that issue, I mean, I think we will be more, as you say, in the 2% to 3% range. That's for the Americas. For Europe, it is always a little bit more complex. I think it will be higher than we saw in the past. I think François explained that country by country, we've launched... since September last year up to July this year, a series of price increase campaigns that should result overall in a higher price increase. And Asia Pacific is always more tricky to predict because it's more linked to a demand offer situation. So, by the way, that's the region right now where price increase is the lowest because the Market situation, demand offer is what it is. So overall, I say yes, we should now see a slightly higher price increase. It's never a guarantee. It takes time. It's not applicable in all contracts. But with the inflation we have, we should be able to pass on through cost to customers better than in the last six or 12 months. That's a global answer. The volume, maybe I could pass on this message, this question to Jérôme. Jérôme, the volume.

The volume part of industrial merchant was very strong overall in the first half, except what we said on the construction, non-residential construction in the U.S., which is the overall market that is still lagging behind. But basically, you know, it's mainly impact of hard goods. And you know that this is basically better for our mixed product because, you know, the hard goods margin is lower than the rest of the gas and so on. So the margin is benefiting from that. But we expect still have a significant volume in the second part of the year in merchant in general. We still have a question mark again related to the construction, non-residential, especially in North America. For the rest, you should come as well.

Thank you. For the contract, so for slide page 11, I think it's differentiated. If you think about the supply of hydrogen to large industries, steel, chemicals, refining, clearly the contracts related to energy transition will be typical large industry contracts, same business model. For those industries, the CO2 deals will probably be the same because we will have to invest at least in the capture part of the CO2 supply chain, probably also in the supply chain, be it pipeline or liquid. And then there's a downstream part of the chain where you have to transport and sequestrate, which is not part of our business model. So CO2 might be also long-term contracts. On the hydrogen energy part, which is essentially related to mobility, I think it would be more merchant type of business. And we will have to link those contracts with sources of high pressure or liquid hydrogen. The way we link it in IEM today to large industries. So the name of the game will be build ecosystems where we have a critical mass so that we can justify significant investment in production and packaging, meaning either liquid or high pressure, and then it will enter into a typical merchant market type of business model. So the answer to your question is both. Both large industry and IM, but depending on the segment. I hope I answered your question.

Yeah, that's really helpful. I appreciate it.

Thank you very much. Next question.

Thank you. Our next question comes from the line of Peter Clark from Societe Generale. Peter, please go ahead. Your line is now unmuted.

Yes, good afternoon, everyone. I think it's a question for Mike, although Jerome sort of answered part of it. I think, Mike, you predicted that the underlying growth against the 2019 basis in air gas and the Americas IM would be up about 3 or 4%. It sort of was in the second quarter. I thought it would be better actually because of the winter freeze effect. Are we saying now, because construction is very slow in recovery, it's starting to momentum now, that we're going to see a kicker perhaps in the second half, maybe even 3Q, where you go above that 3 to 4% improvement on the trend line against 2019? And then the second question, perhaps for Francois, I don't know, but the health care price deflation, you say in the statement, was only very modest. And then I think Benoit mentioned actually Europe still has a drag factor. I'm just wondering when we come out of this COVID-19 pandemic stuff. how on earth the pricing moves from there. Has this deflator deflated a little bit? Is it a bit better when you look forward where you see healthcare price moving forward or is it definitely the COVID pandemic that has helped it temporarily? Thank you.

Okay, thank you, Peter. You have allocated the questions already, so it's easy to do it. So Mike, you start.

Thanks, Ben. Good morning, Peter. Maybe just to build on what Jerome said, because I think he said it well. Clearly, from a merchant standpoint in the U.S., the sales continue to show very significant improvement, given the comparator with last year. But clearly, after the effect of the winter storm that you mentioned that we saw in February, the gas sales continue to recover, and now they've returned to levels that are higher than that we saw in the first half of 2019. So gas volumes are clearly backed up. Liquid, well beyond where it was in 2019. Packaged gas is basically back to recover very close. And probably where there's the lag still is in hard goods. You know, I think that the markets that are referenced there, clearly construction is one of those, and actually heavy equipment or heavy machinery manufacturing is still yet to fully recover. In that market, think about major heavy equipment for oil and gas, for construction, and for mining. I think on the construction piece, there's a number of factors there. Clearly, with COVID last year and a variety of other things. Some projects were somewhat delayed and continue to be re-engaged as we speak. There's been a few announcements recently on some projects that were basically stopped or deferred for a period until things sorted themselves out. We see those now starting back up in terms of construction and finalization. At the same time, A number of major projects came to a close, and I don't think we've seen the next wave of investment yet evolve from a chemical standpoint or even an LNG standpoint in the U.S. markets, which will all be big drivers for air gases as well as for the rest of our business. So I think from a second-half standpoint, we will continue to see sequential recovery in both the construction markets as well as in heavy machinery markets. And again, it's really the hard goods piece that is lagging a bit more because those areas are far more hard good intensive. So we'll see clear benefit from a gas standpoint as they recover. But the hard goods will have another level of recovery to come as well as that evolves. So I think that kind of covers it. I think structurally, with long-term views on all this, you've got reinvestment in the industrial infrastructure in the U.S. I think you see localization or reshoring on certain activities. There's also a drive to further modernization. Think about automation of the U.S. manufacturing base. And even some of the things in the energy transition as these new markets open up and the new builds begin to evolve will help drive that as well.

Thank you, Mike. Healthcare, Francois, you take it.

Yes, good morning, Peter. When we talk about pricing in health care, basically we have to really look at, I would say, a matrix with two dimensions, one which is the geography, Europe and basically the rest of the world, and on the other side of the matrix, I would say, the med gas and the home health care. And the situation is quite different in those different segments, I would say. If we look at the home care overall, we have seen a negative price impact in Europe, which was, compared to what we have seen in the past, recently quite moderate. This is clear. However, for the home care, especially in Latin America, we see a much more positive pricing impact. For the Medgas overall, We see a pricing which for the group is positive, taking into account that Europe remains slightly negative, less than what we have seen in the past. And it's quite positive or very positive in the Americas, both in the U.S. and in Latin America. Now, if we look forward and we try to see what could be the impact of the current situation and the COVID, we do expect overall a kind of a pause in the pricing pressure that we have seen in some geographies. I think it's clear. It's also the recognition of the contribution of the sector to the crisis and the importance to maintain, I would say, a healthy and robust health care sector to cope with such a situation. Specifically in Europe, we probably will see some pressure, but again, probably opposed from the governments. and also the impact of the value offer that we are developing, which tend to really promote value-based health care and provide some savings to the social security, which enable to provide the same quality or even better quality of service at a lower cost. So all in all, if you take a historical perspective, we do expect, some of the same trend that we have seen, but probably on the decreased side, less than what we have seen in the past.

Thank you. Understood.

Thank you. Thank you, Peter. We'll take the last question.

Okay. Thank you very much. Our last question comes from Chetan Uteshi from J.P. Morgan. Please go ahead. Your line is now unmuted.

Yeah. Hi. Thanks. Two questions. First is on electronics. So I think there was a reference earlier on the call that there is a price decline for certain products this year with the aim of having better prospects in the future. So can you maybe talk about what changes in the future with the price declines that you have accepted? Is it the Is it that the market share of eliquid rises in some of these molecules? Is it the growth is faster in these molecules which you aim to benefit in the future? I'm just wanting to understand what is the upside in the future by accepting prices which are lower today. And the second question is more just around the topic of cost containment actions continuing in first half. And I was just looking at some of the numbers in the P&L, but it seems like the other purchases, the other operating expenses, all these numbers are actually rising faster than the revenue growth on a constant currency basis, or at least in line with the revenue growth. And so I'm just wondering, does it not actually signify that some of these temporary cost savings are actually coming back rather than being held at second half levels? Or is it just the lag between, like I think one of you mentioned, lag between the raw material prices versus indexation on merchant prices? I mean, just to specifically highlight a few points here. So sales have risen about 6.5% on constant currency prices. but the other expenses are up 9.7% and purchases are up 17.5%. I think half of that may be energy, but just wanted to understand the dynamics between different lines moving in the P&L. Thank you.

Okay, thank you. The second question, clearly, Jérôme will address it because I think we have more details. On the first one, Mike, just on this ALAM project, pricing and the positive consequences of this transformation, if you could just clarify that.

Sure. Thanks, Benoit, and good morning, Chetan. With the advanced materials business, we have an entire portfolio of molecules. It continues to evolve, continues to grow, and you're continually developing and introducing new molecules, that grow and evolve with their use over time. Other molecules will mature over time. And so you've always got this kind of mix as things evolve. And I think the continued growth in advanced materials for the advanced nodes, a lot of the drive last year because of supply chain issues along with growth, and likely the deferral of some projects that normally would have come on stream early and benefited in the overall mix for price and for volumes were somewhat delayed because of COVID. So you've always got that balance that's there. And specifically to the point that Benoit and Jerome articulated earlier, you know, we have some molecules that over time will mature and they reach a very high volume of demand. And we want to preserve those volumes long-term. And as we renew those contracts, in order to securitize the long-term volumes and the long-term perspective for those molecules, we may agree to a slightly lower price long-term given the very high volumes that we are delivering in order to go ahead and prolong the life of those molecules and continue to benefit from the previously made investments and all the technology that we have put into that. So I think that that's just the evolution of what we see here. And absent the startup of new molecules, it's probably a little more obvious in the overall portfolio than normal.

Thank you, Mike. On the second question, the cost containment, Jerome.

Yes, Benoit. Thank you very much. Thank you, Chetan. So basically, just to come back on the cost containment. What we say is quite simple. We said that the cost containment impact will start to diminish in terms of impact for the second half of the year. But I was expecting, you know, we are seeing now some recovery in our activity and some costs like, you know, furlough that we had last year are starting to very much diminish, as well that, you know, travel expense, even though they are still contained. But, you know, we have recovery in the activity, so we have, you know, these costs which start to decrease. Now, it doesn't mean that we are not pursuing our structural plan. You see that we have been able to deliver plus 206 million in efficiency, and we are totally today very much confirming our objective of above 400 million for the year. So this efficiency will be structural and will be a significant part of our operating margin improvement that we'll continue to deliver, and that's very clear about that. Now, to come back more precisely on the cost in the P&L, basically we see purchase increase this half year, but it's totally aligned with the increase of the energy. You know, we have a 4% of impact of energy. And as it passes through, you buy it and you would say pass it to the customer, so there is no impact on the underlying margin improvement. As a regard to personal expense, they are quite well contained, and we are at only plus 2%. And you know when you look at personal cost to sales ratio, we are basically at 19.6% in H1-21, 20.4% excluding energy versus 21.2% last year. So clearly we see an improvement in cost as well and the structural cost organization. Finally, author expense also increases, plus 6% in published, plus 9.7% excluding Forex. Clearly, this is due to three things. First, maintenance has a little bit increased this year, especially in the Americas. It's a consequence of the freeze that we had at the beginning of the year. I don't know if you recall, but that was significant in the U.S. And we had also some other costs like insurance, which is a little bit picking up. as well, but basically, you know, it's still under, because when we look at the revenue, which is plus 10.4% excluding forex, we are quite below in terms of cost versus two cents. So that will be my answer.

Very clear. Thank you.

But overall, if I may, we will keep the sort of continuous improvement programs that have been in place for years, number one. Number two are efficiencies. And the way we produce them by investment, by working differently, by operating differently, will stay. And the more structural or transformational programs that were put in place in the past few years will also stay. The only thing, and they will produce, all of them will produce. The only thing that will change, and this is just understandable, is this cost containment mechanism. a program that was put in place last year for the exceptional situation where we nearly froze half of what we were doing, no traveling, no marketing, nothing, and workforce reduction. We need to readjust the base to the recovery, and that's the only thing we will do in the second half. So the impact of the cost containment will be, of course, lower than what it was since last year, first half. But we are really focusing on cost. You cannot increase your margins if you are letting your costs go up, and we know that very well. So thank you very much for all your questions. Again, good set of numbers. We are confident in our ability to increase, number one, our operating margin, and also in our ability to deliver recurring net profit growth. And as Aude said earlier, we will have Q3 conference later in the year and the full results in February. Thank you. Have a good day. And for those who can go on holidays, good holidays. Thank you. Bye-bye.

Thank you. Thank you very much for joining today's call. You may now disconnect your handsets. Hosts, please stay on the line. Thank you.