L'Air Liquide Ord

Good morning, ladies and gentlemen, and welcome to the ERLI-KIT 2021 results conference call. All participants are currently in listen mode only until we conduct a question and answer session and instructions will be given at that time. I will now hand over to the ERLI-KIT team. Please begin your meeting and I will be standing by.

Good morning, everyone. This is Aude Rodrigues, Head of Investor Relations. Thank you very much to be with us today. Benoit Pottier and Jérôme Pelleton will present the full year 2021 performance. For the Q&A session, they will be joined by François Jacob, Executive VP, supervising Europe, Africa, Middle East, and healthcare hubs, and on the phone from Houston, Mike Graf, Executive VP, supervising Americas and Asian hubs, and the electronics business line. In the agenda, our next events are on March 22nd, our capital market day, and on April 27th, our first quarter revenue announcement. Let me now hand you over to Benoit.

Thank you, Aude, and good morning, everyone. Thank you very much for attending this call. I'll start immediately with page three of our presentation. As you can see, 2021 has been a year of strong profitable growth in a record inflationary environment, especially in the second half of the year. In terms of performance, we ticked all boxes in 2021, being able to deliver on growth, efficiency, pricing, and signing. We will come back on each item. As we previously communicated to all of you over 2021, it has also been a year of key achievements in energy transition. I'll come back to that later. And importantly, it's another year of very active business development with high level of signing and strong backlog, which positions us very well for future growth. On page four, starting with performance on the left, we recall the main characteristics of the environment in 2021. We faced an unprecedented spike in energy prices in second half of the year with, for example, in Europe, natural gas price being multiplied by five between the 1st of July and the peak in December. Inflation has been firming up as well in all regions and COVID-19 pandemic has remained present in the background in all countries, lingering local lockdowns, disturbing operations and the overall business environment. In such a context, we've managed to deliver strong results across all performance criteria. After resilient sales in 2020, they increased by plus 14% and plus 8% on a comparable basis in 2021, and were plus 6% above 2019. Despite the inflationary context, the operating income recurring margin improved again by 70 basis points, excluding energy pass-through impact, with a strong leverage on net profit growing at plus 13% on a recurring basis excluding foreign exchange. Investment decisions have been high again, about 3 billion euros for the fourth consecutive year, notably thanks to a strong cash flow at 24% on sales. And Jérôme will come back later on the details of the performance. On slide five, we highlight important key achievements in 2021, which position us well for the future. First, of course, the strong involvement of the team to supply medical oxygen to COVID-19 patients. Liquid medical oxygen volumes increased by plus 50% in 2021 compared to 2019. Second is the announcement in March of ambitious sustainability objectives, first of its kind in our industry, including carbon neutrality by 2050 with key milestones, one of them being to reduce by one-third our CO2 emissions in absolute value by 2035. We also announced social and societal objectives on which Jérôme will come back at the end of the presentation. The takeover of the 16 ASUs of Sassol at its second site in South Africa in June is another key achievement of the year. This takeover is combined with a joint commitment with the customer to reduce the CO2 emissions of these assets by 30 to 40% within the next 10 years, and it is progressing very well. Innovation has been supporting business development, especially focusing on energy transition, by adapting our ASU to the use of renewable energy, for example, or working on new technologies to produce low-carbon hydrogen. This has been possible thanks to the outstanding commitment of the teams worldwide facing the challenges of COVID-19 and spike in energy prices. If we now turn to page six, and focus on energy transition in particular. We went through major steps and took major business positions in 2021. You have on the slide many examples of either signed projects or MOUs or partnerships on this slide, and I won't come back to each of them. But as you know, Europe clearly is leading the way, especially for industrial projects, and this is the region where we have been able to achieve the most. This is the upper part of the slide. The U.S. are quickly catching up, but they are still not there on the map, and we are winning many projects in hydrogen mobility in Asia. This is the yellow color on the slide. We've been awarded fundings among numerous projects, and these fundings will contribute to the development of these ambitious projects to reduce our carbon footprint as well as the one of our customers. All these achievements demonstrate that Air Liquide is taking key positions, and this is essential for climate, and this is also key to prepare for future growth. We are engaging with key players, you have all the names on the slides, and partnering with market leaders. We will be pleased to explain in more detail all these opportunities during our next CMD on March 22nd. On slide seven, we propose for 2022 a dividend per share of 2.9 euros, representing an increase of 5.5% in line with the recurring net profit growth, which would lead to a payout ratio above 50%, as you can see on the slide, and plus compounded annual grace rate of the dividend over 20 years. I think the number, what is it? 7.7. Okay, thank you. In addition to that, the Board of Directors has decided to consider a new free share allocation for June 2022, all of which demonstrating our steadfast commitment to our shareholders. And I'll let Jérôme explain the 2021 performance. Jérôme?

Thanks, Benoit, and good morning, everyone. So I suggest we now review the detail of our Q4 activity and full-year performance. I'm on page 9. Coming back to the full year, group sales have been strong in Q4, reflecting a very dynamic year overall on a comparable basis, meaning excluding Forex, energy pricing, pass-through, and significant scope effects. Gas and services sales for the year are showing a plus 7.3% increase versus last year, following a Q4 at plus 6.7%. Engineering construction sales have increased by plus 35% compared to a low base last year. Order intake has ramped up to reach 1.2 billion euros for the full year, mainly supported by energy transition projects. Last, global market and technology have also accelerated and are now showing a plus 18% comparable growth, boosted by dynamic activity levels in our biogas activity. So overall, Comparable growths are up 8.2% for the full year, while published sales at plus 13.9% are impacted by a negative Forex impact at minus 1.6%, and a small perimeter effect at minus 1.1%. It is balanced with a very significant impact of the spike in energy price effect at plus 8.4%, which is passed through to our customer. It is important to highlight that this level of growth is built on a resilient performance in 2020, as our sales were almost flat last year despite the pandemic crisis. In regards to the market we address, and I'm now on page 10, the vast majority of our end markets have improved and reinvigorated strongly compared to last year. Steel and chemicals are indeed solid, with slower construction and automotive. This drove a positive impact across all geographies and our four business lines. As a consequence, I am now on page 11. All geographies and business lines are posting very strong growth on a comparable basis versus last year to reach a plus 8% growth comparable year-on-year for group sales. This percentage doesn't take into account the acquisition of the 60th ISU of SASOL in June 2021, reporting insignificant scope. Let's now review the activity for each of our main geographies. My comments will be mainly related to Q4. I am now on page 12. After a good Q3, Americas has seen a strong contribution for all business lines. Large industry volumes have been strong in air gases, and underlying hydrogen demand was solid, both being supported by startup and ramp-up contribution in the U.S. and Latin America. In merchants, gas sales and volume are growing with well-oriented industrial and services markets. except low construction in the U.S., which impacts the level of recovery in our art goods business. This, coupled with customer portfolio refocus, results in art goods volume in the U.S. below pre-COVID level. Pricing finally has been very strong, with an acceleration of plus 7% versus last year, in conjunction with the rising inflation. Electronic sales have also improved, thanks to very high E&I sales for large customer and strong specialty materials, advanced materials growing steadily. Health care activity is strong due to dynamic med gas sales in Latin America, but also due to home health care recovery. In North America, medical gases are strongly supported by proximity care and COVID-19 volume in early Q4. In Europe now, we have seen an acceleration of growth in the last four quarters, with sales significantly above pre-COVID levels. Large industry has been solid, despite strong base effect last year with the one-off sales in Q420 in Russia, benefiting from a continued strong underlying demand in steel and chemicals for air gases. Refining is catching up, and we have now new project contributions in Eastern Europe. In merchant, all end markets are growing and have been well-oriented with good bulk volume, in particular in Western Europe. Energy cost pack has been very well managed with a strong and record pricing effect at plus 10%. Finally, health care cells have remained robust thanks to strong home health care, diabetes, sleep apnea, and strong specialty ingredients despite normalizing medical oxygen demand for COVID. This versus a high base last year together with exceptional equipment and respirator sold into 420. Asia is still contrasted. I'm now on page 13, with China continuing to show high momentum while the rest of Asia is progressively improving. In large industry, China's sales and volume are still impacting by easing dual energy control and planned maintenance turnaround in Q4, while sales are strong in Singapore and Japan for steel. In merchant, we have seen a very strong China supported by volumes and an acceleration in pricing, especially in bulk, with all end markets were oriented in particular for packaged gas and on-site. This is contributing to post a plus 18% growth there while the rest of Asia is improving, notably in Singapore. To be noted, an accelerating pricing effect at plus 2.6% overall for Asia. Finally, electronic sales are strong with a recurring sale at plus 10% driven by strong carrier gas from the startup and ramp-up of several units and advanced material over the region, partly offset by low equipment and installation sales compared to high base effect in Q4 2020. Finally, Africa Middle East activity sales in merchants are recovering progressively despite the continued impact of the pandemic, while healthcare is impacted by normalizing demand in medical gases versus acute COVID crisis in Q4 2020. Finally, again, large industries have continued to recover thanks to higher loading at YASRES. SASL contribution is strong, and as a reminder, is accounted for in significant perimeter. I am now on page 14. In terms of business line, and as a reminder, industry and merchant, and to a lesser extent, large industry sales were the most impacted by COVID crisis in 2020, creating a rebound effect, contrary to electronics and healthcare that were still progressing last year. Large industry has seen air gases benefiting from strong recovery in chemical and steel, while refining and ICO are improving well in Europe and catching up in the U.S., above 2019 level. In China, again, dual energy control has been softening, while several customers took the opportunity to perform turnarounds in Q4. To be noted, a significant contribution of the startup and ramp-up, which is accelerating versus Q3. Finally, electronics is pursuing strong growth thanks to both carrier gas, the gaseous contribution supported by ramp-ups in Asia, as well as specialty and advanced materials that benefited from strong volumes. ENI cells are stable versus a strong Q4 2020 base in Asia. In page 15 now, in Merchant, gaseous volume growth drivers are vigorous and all end markets have continued to recover rapidly except construction in the U.S., which is slower. Pricing impact is very high and picking up at 7%, showing now our ability to implement faster pricing campaigns that quickly precipitate. Healthcare has been at the forefront of the pandemic fight and is still supported by slight medical gases growth despite a high comparable Q4 basis last year related to equipment sales and oxygen volumes in particular. Activity is also benefiting from the ramp-up of proximity care in the U.S. that were on hold during the crisis. We are also seeing an acceleration in home health care, particularly in Europe, sustained mainly by strong diabetes activity. On page 16, this performance improvement is also very well demonstrated by operating margin being up plus 70 basis points for the group and plus 80 basis points for gas and services, excluding the impact of the energy price pass-through increase. Getting into the detail, we can see that purchases and other costs have been impacted by the increase in energy price and improvement of the activity, while personal expense have only very slightly increased. Depreciation is slightly up after the impact of startup during the year compensated by drops mainly. This has resulted again in a published operating margin of 17.8 percent, which is translated in 19.2, excluding the energy effect. Again, a significant plus 70 basis point increase, excluding the energy price impact. after 80 basis points already achieved last year. This margin improvement shows the strength of our business model and our performance overall. All the more that it compared with high base effect last year where we benefited from the full impact of the cost containment plan launched by the group during the peak of the COVID pandemic. This margin improvement is supported by a structured margin improvement plan that continues to deliver on page 17. As you can see, IM pricing has significantly accelerated in all regions at a fast and record pace. I will come back in more detail in the next slide. We have also exceeded our objective for efficiency to reach 430 million euros for the full year. Portfolio management has been pursued. We executed six divers each year and closed about 21 Bolton acquisitions over the period with our continued focus on our profitable activities. As you can see on the slide page 18, our pricing action in Merchant has been very impactful and campaign executed in a very quick and efficient way, mainly in bulk and packaged gases, leveraging on our escalation formula and surcharges to pass through the energy costs. In Q4 only, Europe achieved a plus 10% year-on-year pricing impact, a record landmark. François, we may come back later, as he was leading the effort, while the Americas delivered a plus 7% and Asia plus 2.6%, mainly in China, year on year. Let's now quickly look at the bottom of the P&L. Net non-recurring operating expense are close to last year level. As a reminder, 2020 was impacted by the capital gain linked to the divestiture of Schulte and negatively by the assets review portfolio, as well as exceptional COVID costs. Net financial costs have also decreased following the progressive daily rate, cost of debt is decreasing versus 2020 down to 2.75%. Effective tax rate is at 25%, which is comparable to last year, excluding the non-recurring item of last year. As a result, net profit as published is up plus 5.6% and plus 8.9%, excluding Forex. Now, when we talk about recurring net profit, excluding major exceptional items of 2020, is significantly up as well at plus 13.3%, excluding effects in line with our guidance. On page 20, as mentioned before, cash flow has also been very strong and is up plus 9.1% at constant exchange rate, at 24.5% to sales, which is plus 40 basis point versus last year if we exclude the energy effect, and has allowed to well finance our industrial and financial CapEx at 3.4 billion including the acquisition of the Sassoul air separation units for €480 million. Thanks to the effort on cash, working capital and debt management, we have managed to reduce our gearing, net debt reduced to €10.4 billion and without dividend payment at €1.3 billion and despite a €465 million unfavorable currency effect. On page 21, we can see this improvement of the cash flow to sales for the last 20 years with a strong acceleration since 2016 at plus 8.5% in average for the last five years. The 12-month portfolio of opportunities remain at a very high level at 3.3 billion euros among page 22, despite the good level of decision for the quarter. supported by energy transition projects and a high proportion of electronic projects. Industrial and financial decisions for the year have been very strong at 3.6 billion euros, including 480 million euros for the acquisition of CECL air separation unit. Finally, our sales backlog is also strong and very diversified. It has increased slightly to 3.2 billion euros, representing 1.1 billion euros of additional sales after full run-up. On page 23, with the SASL takeover that started to precipitate in July 2021, the level of startup and ramp-up has reached a very high number to close to €350 million contribution for the year 2021, slightly above our initial guidance. For 2022, the contribution should be in the range of €410 to €435 million, including SASL impact at €135 million. On page 24, Those cumulative effects of very strong results and cash management are translating into a return on capital employed at 9.3% recurring and as published at the end of December 2021. As you can see, we're very well on track to reach our objective to meet double digit level by 2023-2024. On page 25, since the announcement of our new sustainability objective in March, including in particular carbon neutrality by 2050, we have made significant progress. CO2 emissions are now managed similarly as financial KPIs through budget allocation and regular reporting. We will publish in addition a first set of water objectives in our registration document. In addition, already 1 million people have been granted with access to oxygen in low- and middle-income countries. Finally, we have already 31% of women among managers in line to achieve 35% by 2025. As you can see, non-financial objectives are now fully embedded in our global performance. Finally, to be noted also, all ESG rating agencies are positioning Air Liquide in the first quarter and we have recently confirmed our air range with CDP both on CO2 and water. Finally, on page 26, this is to conclude on the basis of our excellent performance in 2021. We are setting up our guidance for next year, taking the assumption that there will be no major economic disruption in 2022. We believe in our ability to continue to improve margin, and to deliver a recurring net profit increase at constant FX compared to 2021. Thank you very much again for your attention, and we'll now open the Q&A session.

So first question, thank you, Jérôme. First question is coming from Andrew Stott, UBS. Andrew?

Yeah, morning, everybody. Thanks for taking the questions. First one is on pricing. You've obviously done a very strong job in Q4, but just wondering on the maths here, so what was the exit number? If 7% is the average, what were you doing by the time you got to December the 31st? Also, is there a surcharge within the 7% or are they price increases that are fully negotiated, if you like? That's the first question. Second question was on the dividend. I get the fact that it's in line roughly with your reported net income, but given the cash flow performance is good, given the recurring net income growth is 13%, just wondering why only 5.5% DV growth? Is that one eye on the bonus allocation in June, or is there other thinking there? Thank you.

Thank you, Andrew. As Europe was really making very good performance in pricing, I will ask Francois to answer the first question, and I'll take the second one.

Thank you, Benoit. Good morning, everybody, and good morning, Andrew. Indeed, Europe was very strong in terms of pricing. Just as a reminder, we started the year with the 1% for the first quarter. then 1.7%, 2.2%, and 10.4% pricing in IM for the last quarter. So clearly the momentum was there. And when we are talking about pricing, we are talking about IM, of course, but mostly to catch up with the very strong energy increase. And there, this is mostly the bulk business which has been impacted. Keep in mind that for bulk, 60% around of the cost is are related to energy. So for that, I mean, of course, we have a contract with index, not all of them. Maybe in Europe, 60% of the contracts have an index. So we checked all the index to make sure that they are well applied, that they are applied with no delay. And whenever that was the case, that either the index was not appropriate or was basically lagging, we came back to the customer with a very strong position and a legitimate position to cover our cost. So we changed and updated the index. That was a very good opportunity thanks to the very strong action of the commercial team to also, I would say, dust off all the indices that we have in the different contracts, make sure that they are well aligned. And whenever the energy increase was not covered by the contract or with the index, we apply some temporary surcharges. We have well in mind that those are temporary measures, but in almost all the situation, we have managed also to negotiate with the customer a new set of indices to make sure that we can carry on the fact that we will cover our cost. So all in all, a very strong momentum. We were not used to do that in Europe for sure, but you remember that we have been talking about this for now a few months, almost two years, trying to apply also what we have learned through the air gas organization, through training, through tools, but also the mindset, the incentive of the sales force, and clearly this has been paying off.

Thank you, Francois. And your second question about dividends. Second question about dividends. The first parameter that we take into account is obviously the growth in net earnings. The second one is the payout. We have a payout of 55%, which is high. It's okay. It's reasonable, but it's more on the high side. And third, because we have already said we would allocate a bonus share in June, that would automatically translate into an increase in dividend of 10%. the following year. So when we take everything into account, we think at this stage that we have a fair way of returning cash to shareholders. But that being said, cash flow allocation, if cash flow grows, there will be more opportunities for both investments but also return to shareholders. And I'm sure we'll be talking about that during our capital market day. Thank you. Thank you very much. Next question.

The next question comes from the line of Martin Rudiger from Kepler Chiffre. Please go ahead.

Yes. Good morning, Benoit, Jérôme, François, Mike, and the whole RR team. First of all, a clarification question on your guidance to expand the margin in 2022. Is it correct that this guide excludes the dilution from energy pass-through in large industries, but it includes the price hikes in industrial merchants to cover cost inflation? There's my first question.

The answer is very simple, yes. Okay. Yes, it excludes energy and it includes any pass-through of inflation in merchants.

Then a follow-up question to Andrew's question. What is the time... lag in industrial merchants to pass on the increased energy cost to customers, if there is any, and if there is any difference in the respective regions. You just talked about Europe, but there are also inflationary tendencies in other regions.

Yes, thank you. I think we talked about Europe already, so I may ask Mike to make comments about what he saw and still sees in the U.S., in particular in air gas, which is the number one

uh operations we have in the world in merchant mike yeah thanks good morning everyone uh martin specific to uh the question of timing um for the for the liquid business for the bulk business uh there's typically a bit of a time lag uh might be on average about three months uh to fully capture all the energy increase uh that passes through so you see that on a regular basis On the packaged gases and hard goods, that's all driven primarily by pricing campaigns. So all that would evolve clearly with the price campaign immediacy in terms of acting upon inflationary trends, energy, whatever the case may be. So that's really how that evolves. And you will see that in each of the geographies, that is a critical driver. The other critical driver, of course, on pricing is availability of product. I think what you've seen in Asia is a drive with those elements, as well as the fact with the dual energy control in Asia. A bit of a decline in the amount of available byproduct liquid from a variety of facilities, which also helped to aid some of the pricing.

Okay. Thank you. Next question.

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

Yes, good morning, everybody. I've got two. So the first one's on the project backlog. So it seems to me that the industrial gases industry should be benefiting from mid-cycle recovery. And then almost all your end markets should be seeing a cap acceleration in response to the strong price inflation we see. So that translates to really good volume trends next couple of years. Is that reasonable? So any comments appreciated there? And I had a second question, which was just on the underlying economics. So operating profit increased by, I think, about 370 million euros year on year. You booked over 400 million of savings. And then if I assume comparable growth generated nearly 10% underlying earnings growth, there was quite a big 450 million negative impacts. Any detail on that on that basic math will be appreciated and what the cost headwind was. Thank you.

OK, so the first question about the backlog. What we see in the backlog is a mix of projects that were decided, I would say before the COVID, and before the acceleration in the energy transition. So that's one thing. When we look at the portfolio of opportunities and the decisions, there are more and more projects linked to the energy transition. So there will be an acceleration in CAPEX. We see that. It's the fourth time in a row that we decide more than $3 billion. And I think it should go on, but that's good news because we have also the cash flow to invest. It will definitely translate into volume and sales growth for the years to come. I think you are familiar with most of those projects. The ones that are not yet visible are related to CO2 abatement. It will be an additional way of developing sales, service, uh introducing technologies into the uh the market and probably develop something that was not existing before so all in it will translate into volume and sales growth for the next the years to come uh the underlying economics i would ask jerome to actually take this question yeah thank you benoit thank you for your question uh tony basically you know what we have said as a support to our

improvement in operational performance is first, as we said, the pricing, and plus 7%, and we say that, and it's clearly written on the bottom line. Efficiency has been very significant as well, plus a total of €430 million, which is, you know, compared to last year where we had about €448 million. So we are on the top of our target. Target is €400 million. So it's clearly something that, you know, has helped. And, you know, we are also monitoring our portfolio management by divesting the less profitable activity to reconfirm, to go to an acquisition that are more core business and also more profitable. So all those actions are also working to drive the performance up. And in addition, you know, we are all slightly also working on the rest of the activity in order to make this performance better. So that's where we stand today.

Thank you very much. Thank you. Thank you, Tony. Next question.

The next question comes from the line of Günter Zechmann from Bernstein. Please go ahead.

Good morning. A couple of questions, please. Firstly, in the past, you gave a more quantitative guidance around how much margin expansion you expect. Can you please share your thoughts around comparable margin expansion in 2022 and how much of that is pricing that's required to offset the cost increase that you expect this year? And then secondly, return on capital employed has improved quite significantly and isn't too far off your 2023-2024 ambition of more than 10%. What are your expectations, if I can just push you on the previous question on CapEx a bit more? What do you expect in terms of CapEx for this and the next two years, please? Thank you.

You take the first question, Jérôme? Yes. So for the margin expansion guidance for 2022, you know, we stick to what we have just said at the beginning of the presentation, meaning that, of course, assuming no significant economic death rate disruption, we are confident in our ability to further increase our operating margins. So that's something that we say during the last year as well, and to deliver recurring net profit growth at constant exchange rate. So we stick on this... On this guidance for now, and that's where we stand, we will review, you know, our capital market days, but that's where we stand today. In terms of return on capital employed, yes, it is true that today we are seeing, you know, a capex rate which is around 15%. So we see clearly an acceleration on the capex side, which is supporting the return on capital employed, because, you know, we're extremely clear on the fact that we're taking projects which are profitable and are supporting our return on capital employed ambition. And we will come back again to Capital Market Day for other detail on capital allocation for the next years.

So a little bit of patience and I think we'll have occasions to come back to that. So thank you, Gunther. Next question.

The next question comes from the line of Laurent Faru of PMPXN.

Please go ahead. Good morning all. My first question is on pricing. Back to Andrew's question, I was wondering if you could share the exit run rate in Merchant. I'm assuming it's double digit, but any quantification would be helpful. The second part of the pricing question is in healthcare. Maybe that's one for Francois. I was wondering if you could talk about the lack there in terms of getting pricing and whether or not the margin squeeze there is larger than in merchants. And then lastly, one for you, Benoit. I don't know if it was wishful thinking. I think I heard you mention buybacks in terms of the overall capital allocation piece that you would talk about at the capital market. I just wanted to double check. Is that a word that you use? And if you can share more thoughts on this, it would be very helpful. Thank you.

Maybe I may ask Francois to answer the first and the second, and I'll take the third one. Francois?

Thank you very much. Good morning, Laurent. So regarding the pricing, as mentioned, I mean, the momentum, and here I'm talking about Europe, but this is true also in other regions of the world. The pricing was very strong in October, November, December. We have seen the same kind of pricing for the beginning of the year. Some actually of the action have not precipitated yet in December and just started in January, especially in some of the Western Europe countries. So for the time being, we do expect, I mean, this to continue. Of course, I mean, we watch very closely the energy price. And we will make sure that we cover and recover our costs so the pricing is going to be highly impacted, of course, by the inflation. The very good news is that we have the willingness, the ability, the tool to cover those costs whenever they happen. The second question is on health care, and if we focus on the pricing piece of the health care, what we have seen overall is in line with what we are used to see in health care in terms of pricing. Overall, the pricing for the med gas business globally has been positive, and the pricing for the home care business was slightly negative in Europe and overall positive in the rest of the countries. That's overall for the situation. The bulk of it, of course, is in Europe where we typically don't have the same kind of indices in the contracts for hospital. There again, we have been engaged into a negotiation with most of the hospital, and the good news is that we start to see in the new tenders which are coming in Western Europe the inclusion of the increase in the energy price in the new tenders, so the prices are going up for medical gases for hospitals.

Thank you, Francois. So on your third question, I don't remember having mentioned buyback, to be honest. I just say return to shareholders. This is the broader question of capital allocation. And I think we'll spend more time during the CMD on that topic. So I don't want to start a discussion on that today. But I more broadly mentioned return to shareholders. Thank you, Laurent. Next question from Peter Clark, I guess.

Yes. Good morning, everyone. Thank you. The first question is on the margin squeeze you're suffering in Europe in the second half because of the cost situation. I mean, the reported number we have, obviously the 520 basis points hit. You can play around with the numbers you give, but it probably implies the underlying margin down 150 basis points, probably worse in Q4. When do you think you'll catch that up? When do you think the margin in Europe will be starting moving positive again on an underlying basis? Following on from that, I guess in Europe, customers have never seen Air Liquide push the industrial merchant price 10% plus. You mentioned that you've got strong tools to do that. Just wondering what the customer reaction is generally. And then in America, Jerome alluded to the fact that the construction is still weighing very heavily on hard goods. There's some portfolio reorganization stuff going on there. You mentioned customers or something. Just what is going on with the hard goods business? Thank you.

Francois is going to take nearly all questions except the hard goods, and I will let Mike to make comments on that. Francois?

Thank you, Benoit. Good morning, Peter. So for the first question on the margin for Europe, let's keep in mind that when we report Europe overall, we have a mix of industrial operation and health care. Healthcare is broadly 40% of our turnover in Europe, so that has a very significant weight overall. When we look at the industrial business, the margin has improved. So most of the decrease, the 10 base point decrease in the Europe margin is coming from the healthcare operation. So all that we mentioned about the pricing, about the efficiency, but also about the cost management in the industrial operation, is actually visible in the P&L. We do expect this to continue. Again, it's quite an achievement, and that's clear for the industrial operation. The reason for the decline in the healthcare operation is basically three things. The first one is, as I mentioned, the price pressure in the home care operation, mostly in France, by the way, and this is absolutely clear. But also two, I would say, comparison effect also. The first one is that you remember that we had last year for half of the year Schulke, which had an exceptional start of the year due to the pandemic and the need for the products. And the second one is that we have exceptional sales of equipment, not only the 10,000 respirators that we mentioned, but overall very strong sale of equipment that we don't see today. So all that is explaining the decrease in the home care margin, slight decrease, but overall that's why you see this for Europe. Regarding another question about the customer reaction and some of the action that we have taken, I think clearly we never find an happy customer when we have to increase the price. It's absolutely clear. But what we are seeing is, I would say, a very high level of understanding from the customer. Again, this is the fruit of what I mentioned before, which is, not only increasing the price, but bringing the value to the customer. So whenever we can, we really work with the customer to find an added value solution. And in the current context, I think it's obvious for many, many customers that there are very legitimate cost increases. We had to, in some cases, go the hard way, I would say, and we had to cancel some of the contracts in IM. But overall, I think the relationship and the understanding of the customer is very good. When we look at the NPS and the Customer Satisfaction Index, we have been able last year to increase that. Again, I think it's proof of the quality of the interaction of the commercial team with our customers.

Thank you, François. And thank you, Peter, for asking this question about construction and the markets that are not yet at the level of 2019. So, Mike, can you take this question on hard goods and non-residential construction in the US?

Sure. Thanks, Benoit. And good morning, Peter. Specific to construction, clearly that's been the slowest to recover coming out of the pandemic. And you look at the forecast for 2022, we now see an uptick in expectations for construction. we begin to see the plans for major projects start to evolve. And we would expect that the construction part of the market will improve, especially in the second half of 2022. In terms of the hard goods and gas sales, while clearly that's been a bit slower in the construction market, actually on a sequential basis, we do see growth in construction quarter to quarter. I would also point out that we are seeing a significant uplift in industrial hard goods sales into metals and metal fabrication. In the fourth quarter, while clearly we saw growth in gases and growth in industrial hard goods into that sector, we clearly saw industrial hard goods in that sector outpace the growth in gases, traditionally a good sign. The other thing I would say in regard to portfolio management of our hard goods offer, there is a portion of our hard goods solely related to safety hard goods that has evolved over time and even more significantly over the last couple of years during COVID that has evolved away from being associated in any way to specific gas sales. Note that we are in the hard goods business in order to support the needs of our gas customers. So whether it's industrial or safety hard goods, we want to sell and provide those products to those that are also buying our gases. So this particular segment evolved in a way that it was solely related to the sale of safety hard goods and nothing else. And it's become ever lower margin. And so we have looked at our portfolio and we have moved in such a way that we are no longer focused on that part of the business.

Thank you. Very clear, everyone. Thank you.

Thank you, Mike. And thank you, Peter. Next question.

The next question comes from the line of Alex Jones of Bank of America. Please go ahead.

Great. Thanks for taking my questions. Good morning. Two, if I may, please. The first on the SASL takeover, you disclosed in the EBIT bridge that there's roughly 30 million of inorganic EBIT contribution in the second half. So if I annualize that and compare it to the 480 million that you paid for the assets, I get to roughly a 10% post-tax return on capital. Is that the right way of thinking about that? And is that the return profile you expect for that acquisition going forward? That's the first question. And then the second on carbon capture, you mentioned sort of carbon abatement projects and you received EU funding for two of those in the fourth quarter. Could you talk a little bit about how you see that business in terms of carbon capture as a service versus just equipment sales? and how your discussions with customers are evolving on the sort of choice between those two. Thank you.

Thank you. François, can you take the first question, SASOL, and take the second one?

Thank you. Good morning, Alex. So, regarding SASOL, what we reported is the sales contribution, so that's €70 million for 2021. It's going to be around 135 additional for next year in terms of contribution. So overall, I mean, we have not reported the specific profitability of the SASOL deal, but be ensured that this deal is above the 10% threshold that you mentioned. This is a very reasonable deal in terms of profitability. But I think it's also a demonstration of the value that we are bringing to the customer. First, the safety of the operation, but also the efficiency. We have already, I mean, started to bring some value. We have already started to invest, and we will invest more to make this plant more efficient, but also to reduce the carbon footprint. So that's for the SASL project. Benoit?

Yes, your second question, Alex, on the CCS. CCS is very interesting. As you know, we have technologies. We don't have just the cryo-cap. We have a full bunch of technologies. Our business model, clearly, is to invest at our customer sites, invest the cryo-cap and all the equipment and the other technologies there, and then to sign a long-term contract then to actually take the flue gas or the CO2 stream and capture it and then orchestrate the sort of collection of the CO2 in an industrial area together with other industrial companies and then ask an oil and gas or equivalent company to actually take care of the sequestration. So that's the building of a new supply chain from the capture, the transportation to the harbor, and then the shipment to the final field. This is something that is taking place. And you're mentioning the two funds that we will be receiving from the European Commission. They are exactly focused on that. Those are consortia. where we will collect the CO2 from different industries using early key technology in many cases, signing long-term contracts, and then contracting with people that will be able to use or sequestrate the CO2. So that will be a recurring business, more or less like a large industry, and that will be a technology and service business with the operation in our hands. That's the model we are pushing. And I must admit, to make a link with the SASL deal, that the SASL opportunity was the first of its kind where we could couple the supply of industrial gases with the reduction of CO2. It was not carbon capture, but that was the beginning of discussions, contractual discussions with the customer. And as a result of that, we were able to deploy that strategy in particular in Europe. I think I covered your question, Alex. Thank you. Next question.

The next question comes from the line of Shetan Udeshi from JP Morgan. Please go ahead.

Yeah, hi, morning. You know, a couple of questions. First is, I'm sorry if I missed this, but I was just wondering, can you give us some color on how to think about the CapEx for 2022? I'm talking about more the industrial capex, which is to some extent more under control. And I think the second question was a bit more broader question. Can you remind us, like, what is the sort of total spending you guys have on energy? So this includes both gas and electricity as a group. And how is that roughly split between say the on-site business where there is a pass-through arrangement and how much of that is in the rest of the businesses where maybe you have to raise prices to fully offset the inflation from time to time. Just so we have that full picture with us. Thank you.

Thank you, Chetan. The capex for 2022, but not just limited to 2022, will be very much in line with what we have invested in In the past three, four years, we expect to see that capex increase slightly and progressively because we have more opportunities and because the cash flow is also increasing. In any case, we have the opportunities for that, good opportunities. The spending on energy, it's interesting. We spent last year about $6.5 billion worth of energy. This is about two billion more than the previous year. So from 20 to 21, we actually roughly had two billion more in energy. When you think about what it is, this is half of our operating income. So if we had not been able to pass through this energy, it would have had a significant impact So I think that gives you the context of how much energy we spend and how much it represents. There is no doubt that the vast majority is in large industry. I would say that probably two-thirds is in large industry. The second consumer of energy is IM, but IM is probably one-fourth of large industry altogether. And the two remainder businesses, electronics and healthcare, are not consuming a lot. Still, electronics is consuming a little bit, a few hundred millions. So altogether, this is 6.5 billion, and the vast majority is large industry. Large industry has been covered because we have escalation formula. We talked extensively about IM and our ability to pass through this energy cost into our pricing. It is not over. I'd like to just stress that. We still have some energy increase to pass through to customers, in particular at the beginning of this year, so in the first half of this year. And we have, I think Francois explained that, we have the mechanisms and we have the mindset in place today in both the three regions, Americas, Europe, which was overdue, and Asia-Pacific, to be able to really manage this energy component in our pricing in the months to come. I hope I answered your question.

Yeah, that's useful. If you're going to squeeze one, as part of your Capital Markets Day and broader capital allocation, and I think you guys have talked about portfolio management as well, I was wondering, I mean, are you guys open-minded to the ownership of some businesses which might not be you know, within the, let's say, realm of industrial gases. And I'm sort of reminding myself here of your CEPIC business, you know, which is a healthcare excipient or students business or your electronics molecules business where, you know, one may argue that if they were to be, you know, monetized, maybe the multiples could be higher than what you are valued as a stock today. So just any comment on that topic. Thank you.

You know we are open-minded people, of course. We've proved that. But I will let Jerome answer your question.

He's very well-placed to answer. Thank you very much, Chetan, for your question. I will talk specifically about CEPIC. CEPIC is a key part of our business today, so we don't have the intention to sell it. It's really something that is part of a health care strategy, and the special ingredients also, by the way, are having a significant operational margin. So it contributes to the value of the group and contributes also to the acceleration of the operational margin improvement. So today the situation is clear. We don't want to sell it.

Thank you everyone, very clear. Next question.

The next question comes from the line of Georgina Fraser from Goldman Sachs. Please go ahead.

Hi, good morning. Thank you for taking my question. It's great to see such strong operating performance and especially the pricing strength. I was just wondering if you could highlight if there are any parts of the portfolio where Air Liquide is actually more of a price taker. and whether the current environment where you've got both inflationary pressure but also very strong growth opportunities out there would prompt a review for owning any assets where you do not dictate pricing.

First of all, thank you for your comment, Georgina, about the strong performance. I think this is very true. I don't think we have any part of the portfolio which is not so strong as such, but in the pricing environment that we know, I think the weakest part, and I think Francois has been very clear on that, is the healthcare, because the healthcare world is regulated. We have tariffs, and it has been, and I think it will remain, difficult to re-pass through energy cost into the healthcare sector. We have discussions on a yearly basis with the authorities in different countries, but it takes time and it's not automatic in the discussion to have a recognition of a situation like the one we have in energy. So that is probably one weak point. Of course on technology and ENC, I think we have proven that we could go through a crisis. So this is not really weak at all. And the rest of the business is very strong. This is applicable to large industry, to industrial, to electronics, of course. And what we have proved with IM and the pricing in Q4, and it will go on, is our ability to also act very significantly in IM. So that's very reassuring for the future. And honestly, I've never, in my career in Aliki, never seen such a spike in energy. This is incredible. That's one thing. And the second thing, we also have to realize that this has affected Europe first. If we look at the other regions, I mean, North America and Asia have been less affected by this spike in energy than in natural gas in particular, but also electricity. So we've proved our resilience, which leads me to say that we don't have really any part of the portfolio which is weak or not so strong, in particular related to the energy crisis. I hope I covered your point, Georgina.

Yes, thank you very much.

Thank you. Next question, and probably the last question.

The next question comes from the line of Mark Bianchi from Cohen. Please go ahead.

Thank you. Looking at the cash from operations excluding working cap, it was very strong for the year, but when I solve for what the fourth quarter looks like, it seems to have inflected pretty significantly from the first three months, approximately $1.6 billion, it looks like. I understand there's some seasonality perhaps that falls off entering into 22, but was there anything unusual in fourth quarter that might be non-recurring, or is this maybe the run rate to be thinking about going forward?

Jerome? Yeah. So, as you said, you know, the cash flow has been very strong because for the year for net profit at 8.9% excluding ethics, you know, we have a cash flow from operating activity at plus 9%. So, it's a good... translation into things. There is typically strong seasonality with a high level of cash flow in the Q4. But when you look at the cash flow when you compare to EBITDA, there is a similarity because EBITDA is also moving at a plus 8.5%. So you see very much a cash conversion, which is totally aligned. We may have from time to time, as you say, in Q4, some seasonality. But we have this year a very strong parallel between EBITDA, cash flow, and operating and net profit effect.

Thank you very much. That's all I have.

Okay. Thank you, Marc. And I think we've reached the end of this conference. So let me just briefly summarize. 2021 has been an excellent execution year, I would say, in particular in volumes with the recovery post-COVID. In the cost management, we had to limit the sort of boomerang of cost past 2020 related to PECS, the personal expenses, the GNA, cost of goods sold, and we had our program, efficiency program, well in place, and this is the reason why we could really post those good results. We had to absorb inflation and minimize the impact. We had, of course, to to swallow two billions increase in energy costs, I mentioned that. We had to translate part of all of that into pricing, and we also had to develop, and I'm thinking about CO2, hydrogen, energy transition and technologies. So all in excellent execution here, and I would say we are well prepared for the future, well positioned in the market, well equipped in technologies, in people with very good teams. So undoubtedly we are preparing for a bright future. Thank you. Thank you all. And I think we will talk to some of you later in the day or during our roadshow today or tomorrow. Thank you very much.

Thank you for joining today's call. You may now disconnect.