L'Air Liquide Ord

Good morning, ladies and gentlemen, and welcome to the iLiquid 2022 results conference call. All participants are currently in list and mode. Only until we conduct a question and answer session and instruction will be given at that time. I will now hand over to the iLiquid team. Please begin your meeting. I will be standing by.

Good morning, everyone. This is Aude Rodriguez, Head of Investor Relations. Thank you very much for attending the call today. Francois Jacob and Jérôme Pelleton will present the full year 2022 performance. For the Q&A session, they will be joined by Mike Graf on the phone from the US. Pascal Vinet, Senior VP in charge of the Europe Industries and the Africa Middle East, is in the room with us in Paris. In the agenda, our next announcement is on April 27th for our first quarter revenue. Let me now hand you over to François.

Thank you very much, Aude, and good morning, everyone. It is my pleasure to be with you today to share the highlights of 2022, which was another very good year for Air Liquide. So what are key takeaways of 2022? First, a strong performance. the increased attention and discipline that we have put on bottom line contributions is paying off. We were able to adapt quickly to unprecedented situations in terms of pricing agility, strict cost control, rigorous energy management, to name but a few key achievements. Some indicators that we will see next are demonstrating this clearly. Second, in 2022, we successfully deployed ADVANCE our strategic plan. Having a structured roadmap well rooted in key market trends help us in turbulent times to stay on track. It provides clear priorities and reinforces the resilience of the business model. Third, our value creation strategy encompasses all stakeholders. In that context, we strengthen our leadership with significant progress in energy transition while being firmly on track to deliver on our ambitious ESG roadmap. Let's look at numbers on page four. In 2022, we have achieved a strong comparable sales growth of plus 7%, but also a 70 base point margin improvement, excluding energy pathway impact, and despite an inflationary context. If you recall, We deliver a 50 base point in the first half and we accelerated our efforts in the second half of the year. We are demonstrating our strong commitment to steadily improve our overall profitability regardless of the environment. We also achieved 17% of recurring net profit at constant exchange rate, a good performance and a strong leverage. At 10.3%, Our advanced objective of having a recurring ROCE above 10% is achieved one year ahead of the plan. And last but not least, the operating cash flow on sales, excluding the energy impact, improved by 110 base points. This strong performance was delivered despite an adverse environment, which shows, once more, the resilience of our business model and the agility of our teams. On page five, as you can see, we are delivering on our commitments. We are ahead of advanced trajectory on two of the three main objectives. First, comparable sales growth, and then return on capital employed. And the third objective on CO2 emission is on track with the plan. This achievement was possible thanks to the highly engaged teams worldwide that I would like really to praise here this morning. And thanks also, of course, to a strong business model delivering resilient growth. As part of our strategy, we are positioning ourselves very well for the future. I am now on page six. We seized significant growth opportunities in 2022 with an outstanding $4 billion of decided investments. Keep in mind, it's a record level. Over the last five years, investment decisions were between 3 and 3.7 billion of euro. This is fully in line with the 16 billion investment plan for the four-year advance plan. Electronics projects represent more than 1 billion of these signed investments in 2022 and a significant share of the backlog. These projects will provide recurring cash flows and will fuel the future of the growth. Innovation also plays a key role in project signing. In particular, among all industrial companies, we have been at the very top in terms of European funding for energy transition, demonstrating the quality and innovation content of our projects. And also, for example, we have been recognized worldwide as the number one international patent holder for hydrogen production and distribution. This demonstrates the fact that we are one of the companies which has the potential to create value through innovation in the energy transition. Energy transition projects, by the way, are already a high share of the project decision in 2022. And on slide seven, let me recall just a few tangible business successes last year. So first, as already mentioned, seven major European projects, either linked to CCS or hydrogen production by electrolysis, and representing more than 1.8 billion euros of accumulated investment, have been approved for European fundings and are underway. On top of these projects, we signed more than 40 OxyCombustion projects, typically LuxPulk or small on-site contracts. Here we provide proprietary solutions to reduce our customer consumption of natural gas in a context of the surge of energy prices. We pursued the development also of our biogas activity in Europe, in the US, and we have signed our first unit in China last year. 2022 was also a year of major flagship projects. For example, we are creating the first industrial pipeline systems with all, I would say, shed of hydrogen by adding blue and green hydrogen production units on three of our existing pipeline systems in Germany, France, and Benelux, Netherlands. Another example is the first of its kind, large quantity biohydrogen production for total energy, new biorefinery in France, producing sustainable aviation fuel in a circular economy scheme. We also signed seven partnerships and operational joint venture with major industrial actors in hydrogen for road mobility, aviation, or CO2 transportation. This shows that Air Liquide is a recognized leader in the energy transition by trusted partners. The introduction of the Inflation Reduction Act in the US is now creating new opportunities. As in Europe, Air Liquide is well positioned in the U.S. to pick the best projects, being number one in the industrial gas market with an extensive pipeline network. Additionally, our in-house technologies are very well adapted to the specificities of the projects in the U.S. On slide eight now, I would like to emphasize that Air Liquide is on track with its CO2 emission trajectory. defined as a major objective in advance. Indeed, we delivered a stable CO2 emission trajectory for the second year in a row. The slide is a recall of what was presented during the Sustainability Day in 2021 with the three levers of our plan, each of them weighting around one third. We highlighted here a few actions we took in 2022. First, Under the umbrella of asset management, investments have been decided with customers to switch from steam-driven to electricity for some of our air separation units in China. This will contribute already to the reduction by 1% of the group's CO2 emissions. Regarding actions taken to decarbonize our existing assets, we have been selected for subsidies to equip three of our hydrogen steam methane reformers with carbon capture units. The third category is low-carbon electricity sourcing. We signed four major PPAs in 2022 and made great progress in sourcing more than 400 megawatts of renewable electricity at the Cecil site in South Africa. Altogether, actions decided in 2022 will deliver a reduction of more than 1.5 million tons of CO2 per year. Our efforts are recognized by external rating agencies and through the first validation in the industry by SBTI of our CO2 emission trajectory. We show a global leadership in ESG. Indeed, our ESG commitment in advance go beyond CO2 emissions trajectory. I am now on slide nine. Regarding employees, safety remains the first priority. And we have encouraging results here with more than 10% reduction in last time accidents. Also, more than 40% of our employees benefit now from a common basis of care coverage, well on track to reach 100% in 2025. We are acting also for global society, providing access to medical oxygen to 1.8 million of patients in low and middle income countries. reaching 800,000 more people compared to last year. Finally, we put in place a new governance, splitting the role of chairman and CEO. Please note that a call dedicated to sustainability achievements and objectives will be held on March 24. I would like to conclude by reinforcing our commitment, commitment to value creation for our shareholders on slide 10. We propose to the vote of the General Assembly dividend per share of 2.95 euro in 2023. It's an increase of 12% that takes into account the rise of the nominal dividend amount and, of course, the free share attribution in 2022. It compares with the 8% average DPS growth over the past 20 years. The total shareholder return over 20 years reaches now 12%, showing our commitment to shareholder value over the long term. I will stop here and ask Jérôme to present our financial performance. Jérôme.

Thanks, François, and good morning, everyone. So I suggest we now review the details of our Q4 activity and full year performance. So coming back to the full year, I'm now on page 12. Group sales have been strong overall, including on a comparable basis, meaning excluding ethics, energy pricing, and significant scope effect. And this despite the very challenging environment described earlier by Francois. Gas and services sales for the year are showing a plus 6.1% increase versus last year. Engineering and construction sales have increased by plus 21% compared to last year. Ordering tech has reached over 1 billion euros for the full year, alphabet coming from either electronics or energy transition project. Global market and technologies have again seen very strong activity with plus 26% growth boosted by our biogas business. So overall, comparable sales are up plus 7% for the full year, while published sales are significantly up by 28%, supported by a record impact of energy price pass-through coming from our LI business, which translate into a plus 15% impact on sales for the full year. on top of an overall positive FX effect of 5.8% and a limited scope impact of 0.2%. On gas and services sales, I am now on page 13. Americas and Asia geographies are posting very significant growth, while on the business line standpoint, merchant and electronics are the two main growth drivers, with sales growth both above plus 14%. Let us now review the activity for each of our main geographies, My comments will be mainly related to Q4. I am now on page 14. So after a very good Q3, America has seen another strong growth at plus 9% in Q4. Merchant sales have been very strong in Q4, driven by strong pricing at plus 14.5%. From a volume standpoint, they have been positive, excluding helium, and this despite a specific extreme freeze event in the U.S. in December, impacting packaged gases distribution. In the time sense and volume have also remained solid. For large industry, high co-activity for refining has been robust in the U.S. during Q4, whereas air gases volume to steel have been softer with chemical cells impacted by both softer demand due to lower export activity, the freeze event at the end of Q4, and by several turnarounds. So despite high comparison basis in Q4 2021 due to COVID-19 impact, especially in the U.S., Healthcare sales have been very solid, with strong proximity care activity in the U.S. driven by pricing. LATAM has also been strong, thanks to both med gases and home healthcare, mostly driven by strong pricing. Finally, electronic sales have been impacted by lower equipment and installation in a context of high comparable sales last year. Carrier gases and specialty material sales have been solid during the quarter. In Europe now, we have seen strong sales in merchant and healthcare, while largest three large industry has been low to be noted again as well that russian operations are no more consolidated since september 1st 2022. in large industry volumes were done minus 16 overall as air gases demanding steel and chemical has been weak impacted volume while echo has also suffered from a low refining activity and chemicals with major turnarounds In Merchant, despite a strong base last year as pricing started to accelerate last year in Q4, sales have been strongly supported by a very strong price pricing at plus 23%. Volume have been resilient and flat, excluding the specific impact of LCO2 shortage, mainly impacting in the UK. Healthcare sales have been very solid. Home healthcare sales have been indeed strongly supported by high diabetes activity. Med gas volume has been softer due to a strong comparable base last year due to COVID-19. Finally, sales in specialty ingredients have been outstanding, notably in Asia. To be noted that pricing overall in healthcare has continued to improve during the quarter. I am now on page 15. In Asia first, merchant activity has been strong despite slow activity in China due to COVID-19 surging in December impacting bulk and packaged gases partly offset by higher sales in the rest of Asia. Pricing has again been strong at plus 7.5% in China and an acceleration in the rest of Asia. Electronics now at plus 17% has been again buoyant, with high growth in carrier gases, supported by one startup this quarter and the ramp-up of all investments. Equipment and installation and specialty materials have seen high growth throughout the region. Pricing was also strong in rare gases and helium. Finally, large industry has been impacted by low activity in China in the context of COVID-19 surge. In the rest of Asia, activity was soft, mainly in Singapore and Japan, in line with the soft metal and chemical activity seen worldwide. In the Middle East and Africa, growth has been driven by large industry with strong demand in India and Egypt, and by healthcare, supported by home healthcare that are not hindered anymore by COVID-19, high comparable in 2021. Merchant has been impacted by small divestiture in the Middle East, offsetting good prices. I will now comment on our Q4 activity by business line. I'm now on page 16. In merchant, we have seen strong growth. Overall, we sell at plus 13%. Pricing has indeed continued to stay strong in Q4 in all geographies to reach about plus 15% to counter the spike in energy and inflation. To be noted, IM prices already started to increase significantly by plus 7% in Q4 21. Volumes were resilient, excluding the impact of the shortage in helium, which has been partly shifted to serve electronic customer and bundled with carrier gases contract. By end market, materials and energy have been robust, while automotive and fabrication were most resilient. In large industry, sales have been lower year on year in Q4. Americas and Asia have been softer, impacted by low demand as well for export on metals and chemical, as well as customer turnarounds, whereas your euro volumes were lower except in refining that was more resilient. We nevertheless saw a solid contribution from startup and ramp-up. Page 17, electronics has been very strong again during the quarter. Carrier gases and specialty material have been the two gross drivers supported by startup and ramp-up contribution, and by strong pricing in specialty material and helium for carrier gases. Finally, health care was very robust, as you see, supported by a very good activity in diabetes that has supported the growth in home health care. Medical gases have seen normalizing volumes after COVID-19 with a positive pricing impact, especially in the US, while specialty ingredients continue to deliver outstanding growth. On a pricing standpoint, we saw overall increase in origins. On page 18, our performance improvement plan continued to deliver as we posted an operating margin up to 70 basis points for both group and gas and services, excluding the energy pass-through impact in large industries. This margin improvement shows the strength of the business model in a very challenging environment reinforced by our advanced performance plan, and this despite, as you know, the mechanical dilutive effect of the overall inflationary increase, especially in our merchant sales. So for the third year in a row, group operating margin, as it did, improved, by at least plus 70 basis points, showing our commitment to deliver stronger performance year after year. On page 19, this margin improvement is again supported by our structured improvement plan that continues to deliver. As you can see, pricing in IM is still significant in all regions at a fast pace. I will come back in more detail in the next slide. We have also ramped up our efficiency to reach close to 380 million euros in line with our strategic plan And this despite the very significant adverse effect of inflation on our procurement reduction effort. As you know, avoided costs are not reported inefficiencies and were significant again this quarter. Those have contributed to the performance for the year. Portfolio management and streamlining have been further pursued. It has a relative contribution to the margin. If you take merchant with diverse businesses where we don't see any improvement in terms of density and we make acquisition in other geographies, where we see potential to increase both density and therefore profitability. Performance improvement is again our key focus point, and we continue to work on those three areas. As you can see on page 20, our pricing action in merchant has been again very powerful, and this in every geography, to reach plus 15% overall in Q4 after plus 18 in Q3. Our pricing campaign has been again executed in a very efficient way with record impact, mainly in bulk and package gazes, leveraging on our escalation formula, surcharge, and pricing action to address inflation and pass through the spike in energy costs to customers. In Q4 alone, Europe achieved a record nearly plus 23% year-on-year pricing impact, comparing to pricing acceleration already in Q4 2021, while the Americas delivered a plus 14.5%, and with a notable Asia at plus 7.5% year-on-year for the quarter. Let us now review quickly the bottom of the PLN. I'm now on page 21. Non-recurring operating expenses that amounts for the year at minus 570 million euros have been impacted mainly by two exceptional non-cash items. As you recall, during the first semester, we took a controlling stake in one of our large generators in China, which triggered the revaluation of the asset with an exceptional non-cash book gain around plus 200 million euros. Then we adjusted down the value of our Russian assets recorded an exceptional non-cash provision amounting to approximately minus 400 million euros in the second semester we are further impaired our russian access assets by approximately minus 180 million euro non-cash exceptional charge following the deconsolidation decision sorry of russians activity as of september 1st 2022 to set our russians assets to zero in our books following the deconsolidation of Russia activity from September 1st. Net financial costs are very stable despite interest rate increasing. Cost of debt is indeed close to 2021 level at 2.97%. As a reminder, 90% of our gross debt is at fixed rate. On an effective tax rate standpoint, our ratio is also stable at 25.7%. As a result, while net profit as published is up 7.3%, Recurring net profit excluding FX is significantly up, up to 70%, excluding major exceptional items that have no impact on the operating income recurring aligned with our guidance. Page 22, as I mentioned before, cash flow generation has also been very strong, up to 12% of constant FX rate. Now 20.8% of sales exclude energy, which is plus 100 basis points versus last year. and allowed to offset more than our high industrial and financial capex at 3.2 billion euros, together with dividend payments at 1.5 billion euros, and this despite an unfavorable currency effect. As a consequence, group debt debt reduced last year to 10.3 billion euros, and our gearing stands now at 42%. On page 23, the 12-month portfolio of opportunities remains at a very high level of 3.3 billion euros, This, despite the very good level of decision for the year, supported by energy transition project that represents more than 40% of the portfolio. To be noted, mid-term US opportunity-linked IRA come on top of this portfolio of opportunity as the timeline for decision is mostly beyond 12 months. Industrial and financial decision for the year have reached a record level of 4 billion euros, of which 3.9 in industrial decision, which is plus 30% versus last year. This is fully aligned with our advanced roadmap and include more than 1 billion euros decided on electronics project. Finally, our sales backlog is also at historical high level at 3.5 billion euros supported by electronics and large industry projects in Asia, Europe, and America. That represents 1.3 billion euros of additional sales after full ramp up. Page 24. The level of start-up and ramp-up contribution has reached a very high level at €293 million, and you can add €128 million related to SASOL air separation unit contribution reported in significant scope. This is at the top of the range of our initial guidance. For 2023, the contribution should be in the range of €300 to €330 million, which is a higher contribution than in 2022 when you exclude the SASOL contribution. Last year, I am page 25, was a very important landmark as the group recurring return on capital employed, meaning excluding 2022 significant non-recurring items, Russian impairment mainly, got back to double digit at 10.3%. First time since the acquisition of Ergas in 2016 and one year ahead of the commitment we made during the advance announcement. To conclude, on the basis of our excellent performance in 2022, We're very confident in our ability to continue to develop and to improve our performance, even in a potential difficult context. We have set our guidance for the year, and Air Liquide is now confident in its ability to further increase its operating margin and to deliver recurring net profit growth at constant exchange rate. Again, thank you very much for your attention, and we will now open the Q&A session.

Ladies and gentlemen, we now begin the question and answer session. If you wish to ask a question, please press star 1 and 1 on your telephone. To withdraw your question, please press again star 1, 1 to withdraw your question. Please, given the time consistency, if you could please limit yourself to two questions so that everyone is given the opportunity to ask a question. We're now taking the first question. The first question is from Andrew Scott from UBS. Please go ahead. Your line is open.

Great. Thank you. Good morning, everybody. A couple of questions. Can I start with the sort of high-level state of play on subsidies for some of your thinking about your energy transition strategy? Any early thoughts on the European Union Green Deal plan that was unveiled? You know, both obviously fairly key, but more importantly, as importantly for your customers. So appreciate your thoughts on that. Second one was more specific on your targets. To some extent, you're victims of your own success here. But, you know, mathematically, you've done almost two years of your margin target in one year, and you're already... above your return on capital target. So do you start to rethink what you can achieve in the next two or three years on margins, or are there very specific challenges for this year, for example, that we may need to think about? Thank you.

Thank you very much, Andrew, and good morning. For the first question, I will ask Pascal, who is in the first line on those European projects. to speak about the momentum and what we see overall in terms of environment and subsidies. Pascal.

Thank you and thank you for the question. I guess what we see is a very positive environment and we see Europe moving. We see the regulations being clarified and that's, I think, a very important point for us and for our customers. We see the rules being clearer. We see the push for hydrogen. We see the push for decarbonization. And that gives us a lot of opportunities. You have seen already our successes that we have had to have some of our projects, some of the projects we also have with our customers, getting subsidies from the European Union or from the different countries they are in, I think this is only the start and the clarification that is ongoing. The regulations that are being put in place will help us going forward.

Thank you very much, Pascal. Regarding the advance and the target that we set for advance, so the very good news is that we had, I would say, a very strong and a great start for the plan, in spite of the environment, which was quite adverse. I think we stay fully committed to advance. Today, advance is fully valid. In terms of strategic direction, I think it's very powerful to have clear directions. And the environment is basically supporting the trends and the strategic direction that we are focusing on. So I think that's very good. Decarbonization, the growth markets, the electronics, bringing value. I think all that makes a lot of sense, the financial and the extra financial performance. So we are at the beginning. It's a marathon. Of course, we are running like a sprint, but it's a marathon. So it's too early to revise the objective of the advance plan. We must focus on the two pillars, which are improving the performance and delivering year after year the performance and improvement in the performance and investing for the future. Again, for the time being, we have been very successful in doing both. However, the environment and especially when you talk about energy prices, inflation, geopolitics may bring surprises. We have shown that we can go through them, but we need to continue. So it's too early to revise, but be sure that we have ambition. And whenever it's time, we will update, if needed, the ambition.

Thanks, Francois. So just to clarify, no specific challenges that you see for 23 that you didn't see in 22, as things sit today?

No. But again, we had a lot of surprises in 2022. So I think we need to be humble in that regard. But again, I think we have demonstrated the resilience And we will continue to, I would say, apply the recipe about our business models in large industry, in industrial merchants, regarding pricing, regarding the strong contracts and business model that we have and the investment strategy that we have. So I think all that will continue, of course. And we do expect, based on what we are seeing, that the environment may be a little bit more favorable in terms of volume and in terms of growth compared to what we have seen, especially at the end of the year. But, okay, let's be cautious on this.

Thank you.

Thank you for your question. We are now taking the next question. And the next question for Alexandre Jones from Bank of America. Please go ahead. Your line is open.

Great. Good morning. Thanks very much for taking my questions. The first, please, on pricing. Clearly, energy prices in Europe have started to fall, and there's some indexation in your portfolio. But can you give us an idea of how you would expect merchant pricing to evolve and whether you think this can remain positive even as energy prices fall, which could potentially help margins? And then the second question on the IRA opportunities, you mentioned in the prepared remarks that a lot of those are beyond 12 months in terms of timeline. Could you just give a bit more color on sort of the exact timelines for many of those projects and what the key hurdles are, whether it's just the case of doing all the engineering and site planning or whether there's specific regulations you're hoping are clarified by the U.S. government? Thank you.

Thank you very much, Alexander. So on the pricing issue, I will ask Mike first to give some color on what we see, especially in the Americas. And then Pascal will talk about the Europe situation where we have seen the greatest pricing power overall. And Mike will come back on the opportunities in the U.S. following the IRA. So, Mike, do you want to talk about IM pricing for Americas?

Thanks, Francois. Good morning, Alexander. Sure. You know, in 2022, from a pricing standpoint, we saw two major price campaigns. And we continued beyond that with a very targeted approach for certain markets as well to continue to drive price. And while energy prices may have mitigated a little bit, as you know, there's other inflationary cost drivers that go well beyond energy. So we plan to continue to move forward with our focus on pricing, to continue to be very strategic and scientific in our approach, and we will continue to drive pricing through the year.

Thank you, Mike. Pascal?

Thank you. For the IM pricing in Europe, I want to say that our pricing efforts will continue. We do not expect pricing to turn negative. We expect it to remain positive in the next month. We'll be now passing through the general inflation we face, and we also have some lag effect anyway on the energy indexes. So all that will help our pricing efforts. Of course, in percentage terms, since we'll now compare with 2022, which already had very significant price increases in terms of percentages, again, we will not see the same high percentages going forward. But we have been, I think that's the important point, we have been in a permanent pricing campaign mode in Europe since the end of 2021, and this will continue in 2023.

And I think one of the key points when we talk about IEM pricing is, of course, to be able to pass through, I mean, some of the costs, energy and inflation, but also to create value for customers. And clearly, that's where Air Liquide is making a differentiation by bringing solutions to help customers cope with the situation. And we talked about oxycombustion, for example. We talked about many of the applications which are bringing value. And I think we are entering into this phase where for the long term, We need to be in a position to create value for customers to make sure that they stay competitive. And, of course, we are in business with them. So let's talk now about the U.S. And, Mike, can you tell us how we see the opportunities being supported by the IRA?

Sure. And to that point, Alexandre, I think that, first of all, as you know, the IRA – accomplishes many things. Two very core drivers for us are the decarbonization of industry as well as the decarbonization of the transportation sector or mobility. If we focus in on the decarbonization of energy-intensive industries, just for example, on the Texas Gulf Coast, the U.S. Gulf Coast in general, you've got likely 15 world-scale crackers that in some period of time likely will look at decarbonization. They won't all happen at once. There's not a direct requirement for that, but clearly there's enormous potential there. In addition, you've got the opportunity to use low-carbon or renewable hydrogen in the actual production process itself that is a core component of what is produced, like blue ammonia. So these bring significant opportunities. But there's a lot of complexity to this because in almost every case, you're dealing with the large-scale production of low-carbon hydrogen potentially, the large-scale capture of CO2 and its sequestration, and then also large quantities of oxygen that are necessary to make this work. We're fortunate because we have all of the technologies necessary to do that. We do not need to license from others like some of our peers do in the industry, but we have the ownership of all of those technologies. So where we are today is we're looking to leverage our existing infrastructure, meeting our customers' needs while simultaneously reducing the carbon footprint of our own assets, which results in very large, complex projects. And to the point that Francois and Jerome made earlier, because of the size and the complexity, there's multiple options and multiple solutions to be considered. which really push a lot of the decisions of our customers out beyond the 12-month period into 2024 and potentially beyond for some of these large opportunities. So it creates enormous potential for us. Clearly, besides the number of projects and the complexity, we're also in a position to be selective on what makes the most sense for us to leverage our capabilities, to leverage our infrastructure, and to move forward.

Thank you very much, Mike. Let's not forget also that there is a strong momentum around the Semicon industry in the U.S. There is a dozen of fabs, mega fabs, which are being built or developed currently. And there again, I mean, those are significant opportunities, probably less located on the U.S. Gulf Coast, but we are very well positioned again, leveraging our number one position in electronics worldwide. with key companies. So that's another opportunity for North America for us. Thank you.

Thank you.

Thank you for your question. We will now take the next question. The next question from from Citi. Please go ahead. Your line is open.

Hi, thank you for taking my questions. Just one a little bit on the narrow term and then one coming back onto this, the potential opportunity on the IRA. The first one, are you able to comment please on the large industries and the development since the end of the year on a global basis and how they're developing? And if we're almost six weeks into the first quarter, so just some comments around that would be helpful. And then more specifically in China as well, any early observations post the Chinese New Year in terms of large industries demand there, that would be helpful. And then secondly, I think, Mike, you mentioned that you're being very selective or you're in the opportune position to be selective on projects that are supposed to be IRAs. Should I understand that as being your usual hurdle rates need to be met, or are you baking in some sort of margin of error or contingency within that, given this is an energy transition and there's some new technologies to be played out? So I'm starting to understand when you say selective, is that a higher hurdle rate that you're applying to these products, or is it similar to what you would normally do for your existing products? Thank you.

Thank you very much, Mubasher, for your questions. So maybe to give you an overview of where we stand and how we see basically the trends globally, I think I would challenge anybody to give a definitive answer for 2023 for sure. But overall, if we look at the beginning of the year, we see strong numbers in January overall. Of course, we need to keep in mind during the year inflation, energy, to some extent also geopolitics, as there will be key external KPIs. If we talk about just some things to keep in mind for the year-on-year trend on the different segments and geographies, I think clearly for a large industry in Europe, uh we believe that the demand has bottomed up at the last quarter we start to see i mean some positive discussion about increasing the operating rate and restarting some of the units with some of our customers and i think of course i mean the evolution will depend on the energy price but overall it's a positive trend more globally by the way large industry and in all the region of the of the world will benefit from a solid startup and wrap up during the year. If we take industrial merchants, both in Europe and America, was a key driver. As we just mentioned, I mean, we are confident that the prices will remain high, even if the comparison effect, of course, will probably will be less than what we have seen. But volume clearly, I mean, should resume the growth in the different parts of the world. And specifically, I mean, when we talk about China, we had a year of 2022 in China, which was impacted by many events from an economic point of view, from a political point of view. Also, I mean, with the COVID at the end of the year, what we start to see are positive numbers. We can come back to this. But overall, I mean, in industrial merchant and in large industry, We are confident that we should expect some kind of picking up. Clearly, electronics in China remains strong and solid. This is true for electronics in Asia overall, and it continues to be a driver. Finally, I think for the healthcare activity, it's clearly coming back to a historical growth level, strong especially in the home care business, and again, in North America, but also in Europe, strong pricing. So that's overall what we see. Maybe for the IRA selectivity, we have no intention basically to change both our business model and the hurdle rate that we are using. So overall, I think that's part of the value creation that we are able to bring to the energy transition by leveraging technologies, as mentioned by Mike, but also synergies with the existing assets and economies of scale, so regrouping certain needs and customers. We are able to create value and to have projects which have a similar return profile as what we have in large industry or in electronics. And that's really what we want to do. The fact that we see many opportunities is for us a good sign, because indeed we can be selective and pick the best project in terms of return, but also in terms of strategy.

Very helpful. Thank you.

Thank you for your question. We will now take the next question. And the next question from Laurence Favre for XMP and Bell Paribas. Please go ahead, your line is open.

Yes, good morning all. I'd like to go back to the IRA. You've talked about the potential, you've talked about your strong footprint and capability. I was wondering if you could talk about your appetite to invest in significantly larger projects. I think your two peers since last summer have announced projects above a billion worth of capital. Is this something that we should be expecting from ERIKI? And more broadly, would you expect to sign new projects or announce new projects by the end of this year? Thank you.

Thank you, Laurent. So this is true that we see more projects and we see some projects which are becoming larger projects. The very good news is that we have not only the ambition but the capability to seize any type of projects that we see fitting with our long-term view of value creation. Today, Air Liquide is a very strong position from a financial point of view to take any opportunity that we see. We have a very strong balance sheet. We have a gearing which allows us to take any projects that we see. So far, the approach has been clearly to focusing on the projects which are concrete projects where we can identify a clear business model and, very important, to find customers, customers which are willing to commit and to pay for those new solutions. That's why you see that we have several significant projects, many of them are in Europe, which actually fit those criterias. And each of those projects, when we talk about electrolyzer carbon capture, basically have a very strong business model and fit perfectly with our strategy and with our objective in terms of financial targets. I mentioned the number of seven projects, which are large projects at the European level. And if you take the cumulative investment, it's more than 1.8 billion euro of investment. If we step back, I think there is a value in having those large projects, but not those mega projects, in terms of risk management, because we know that energy transition is also a new area, that some of the market may take a little bit longer time. Some of the counterparty may be new counterparties. So in terms of... managing overall the risk profile for the company we do believe that having a strong portfolio of large project as opposed to one or two single mega project is a much better way to progress in that in that field this being said i mean we have a few large projects we are working on and whenever it's due time and when we think they make sense of course we'll announce some of them if we decide to go forward.

Thank you. And if I may ask a second one, it's related to the efficiencies, I guess for Jerome. I think the target within ADVANCE is 1.6 billion, which I guess over four years is 400 million per year. You were slightly below that in 22. Should we assume that you're slightly above in 23?

thank you very much lawrence you know our efficiencies uh has been has been very very strong the 380 million euro in the context of very high inflation you know of law we do not report avoided cost but avoided cost is also has been very strong and you as you know has contributed to the performance you know we talk more about margin uh our commitment to to improve margin and you know we have been doing that again we have done seven plus above 70 big BP improvement for the last three years. And this year, we have delivered, you know, plus 80 basis points in the second part of the year only. So efficiencies, also just for you to bear in mind, efficiencies were 380 million euros, and we achieved 211 million on the second part of the year. So we accelerated very much in the second part of the year, which meant us also improving our vertical ratio. Now, our objective... is to be able to deliver 1.6 billion over the advanced period. And so far, it's our objective. But again, 380 million euros in the specific inflation entitlement is a very strong achievement.

Thank you.

Thank you for your questions. We will now take the next question. And the next question from Jean-Luc Roman from CAC. Please go ahead. Your light is open.

Good morning. Thank you for taking my question. One of the CO2 shortage you mentioned in Europe, do you expect it to be a short-term phenomenon or to improve longer-term? Second question is more long-term about carbon capture and CO2. I was wondering if this could become an opportunity as large as hydrogen opportunity for air liquid.

Thank you very much, Jean-Luc. So Pascal will take the first question and I'll come back for the second one.

So thank you, Jean-Luc. On the CO2 shortage in Europe, as we have mentioned, it has been more acute in the UK than in any other country. And the global reason, I think we mentioned it in the previous course, is basically... as the fact that fertilizer plants, ammonia plants, have stopped producing when they were facing very, very high energy prices. And those ammonia plants are some of the big sources for the CO2 we sell in our merchant activity. So what is the near future in our views? I think we are going to see Less and less shortage because we start hearing from our suppliers in this case of CO2 that they may restart some units. There's still a question mark on the UK. We see in continental Europe things improving. So the jury is still out. It will depend on the energy prices. But we are reasonably optimistic that this will solve itself. Again, jury is still out, but positive trends, the UK being the only very difficult case we face right now.

Thank you.

Thank you very much for your question on CO2, because indeed we see a very significant market opportunity in CO2. We have been talking all a lot about hydrogen, but the topic of taking the CO2 out of the existing manufacturing sites is becoming more and more present and is being more and more accepted especially in countries like european countries so for us it's an opportunity because we are very well positioned we are well positioned because we are already i mean supplying many of those industries in industrial basins in the world but also because we have a clear lead in terms of technology on the capture part in the cryo cap and all the uh the technologies around that so we see that as an opportunity for sale of equipment from an engineering business, but more important, on the OTF type of concept, and we have already been successful today in managing to develop a new innovative over-the-fence business based on carbon capture, either on our own units or on the customer units. We see clearly the business opportunity on the capture part of the CCS chain, not so much into the transport or in the storage, which are not our core business. So the CO2 opportunities around the world will become a reality, probably at a scale which is going to be a large scale before we see a larger requirement for hydrogen for industry, for example, because the CO2 is the technologies are available. The economics is already viable even without subsidies and Also, the CO2 management concerns many industries, which for us are sometimes new customers. For example, the cement industry is a big emitter of CO2. And you know that we have announced already two projects with the cement company to capture CO2 out of their processes. So with the development of CO2 hubs in some key basins, and there again, we are taking a leading role on several of those CO2 hubs, we see opportunities coming into fruition.

Thank you. Thank you for your question. We are now taking the next question. The next question from from JP Morgan. Please go ahead. Your line is open.

Yeah, hi, thanks. I have three quick ones. One, I was just looking at one of the slides at the front talking about proprietary technologies that Ellicott has, whether it's ATR or carbon capture. And I'm just curious, how is that sort of helping you, if at all, in terms of contract wins, especially in some of the energy transition projects? Is there any sort of qualitative or quantitative evidence data you can share to help us understand the upside for Elecute from having those proprietary technologies in-house versus some of your competitors. The second question, probably more related as well, we saw one of the U.S. peers, Your U.S. Sphere, talk about cost inflation on the project side. I'm just curious, given the lead time sometimes on projects can be two to three years when you sign to when you deliver or start up, how are you protecting the returns and margins given the cost inflation dynamic in general for a lot of materials? And last question, I'm just looking at the slide 30, which shows margin improvement by regions. It seems all the margin improvement last year has come from Europe. with no margin improvement in Asia or very small in America. So can you maybe shed some light why we didn't see any margin improvement in the US and Asia? And it seems Europe has been held primarily by very high merchant prices because clearly the large industries volumes were weaker through 2022. So any color on the regional margin development? will also be helpful. Thank you.

Thank you very much, Shetan. I will answer the first question, and Mike will talk about the project in the U.S. and more globally the projects, and Jerome will probably come back to the margin. So on the first one, clearly having proprietary technologies is for us a clear competitive advantage, especially in the field of energy transition where you need to invent a new solution, both in terms of technology, but also in terms of business model. I think a clear example of that is what we have done with Total Energy in Grand Puy. We are basically, thanks to the portfolio of air liquid technologies, we have been able to invent a new solution using biofuel as a feedstock, but also being able to produce hydrogen, which is biohydrogen, and to capture CO2, which is biogenic CO2, for the merchant market. And this was done thanks to the integration of the steam methane reforming technologies, but also all the cryo cap technologies and to find a solution which was meeting, I mean, the market objective, but also making overall the solution much more competitive. So I think for us, it's extremely important to invent the solution or to open a new market with new technologies, hence the joint venture with Siemens Energy. where we collaborate very closely to do the industrialization and the scale-up of those technologies. So this will be key because the main differentiation is going to be not to make some nice slideshow about the energy transition and the new scheme, but to be able to build and to operate those large new units. And adding the proprietary technology is a clear for all those integrated schemes. Mike, do you want to talk about projects and how we manage inflation?

Sure, and if I could, maybe just to add slightly to what Francois said and build on his comments. When we look at the benefit of the proprietary technologies, recognize that many of our customers, typically when they build a project or when they're looking to add capacity, they pretty much understand what it is they may need from us. In this particular case, they are actually in a state where because of all the complexities we mentioned earlier, they're not really sure what the best approach is. And to Francois' point, because we own all of the various technology bricks, we are able to quickly develop, without getting third parties involved, a variety of different options for solutions. And so we are, to Francois' point, the solution provider that can help them understand what to do and then help them do it. And I think that creates a real benefit. I think on the cost inflation piece, clearly we've seen acceleration in costs. We've talked about inflation. We've talked about a variety of other things. And what we have worked to do with many of our large projects in recent time is either up front in the agreement on the contract to include inflationary context already built into the construction piece, or as always in our large industries contracts, we have inflationary terms that are built into those long-term contracts as well. And the tradeoff between the two help mitigate the overall inflationary costs we may see.

thank you very much mike jerome yes all right thank you very much shetan for your question so i will come back on the margin improvement in europe and america so you're right europe has a as a significant margin improvement there are basically four uh explanations for that first the pricing and you saw the pricing has been very strong even on the on top of a large base effect last year so the first first explanation the second explanation is efficiencies you know most of the efficiencies also accelerate in the second part of the year including in europe the third item was also the something that you know very well is the li contract structure in a context of lower volume you know that the fixed part is very much and the value is very much in the fixed part so mathematically and mechanically when you reduce volume and cells you're basically make your your margin more relative and there is also a specific item on the code activity that was good So that is for Europe. For America, it's also the same story in terms of AI and good efficiencies and as well as, you know, also co-gen impact. But you remind, you know that very well, Chetan. You know, we have the major part of our business in the Americas, which is still a merchant. And even though we have been able to deliver a significant pricing, mechanically, it's dilutive to the margin. So that's why he's explaining the fact that Americas would not at the same pace than in Europe. But all in all, again, a very strong margin improvement at the group level, especially in the second part at 80 basis points. Thank you.

All right, thank you very much. Thank you. Jerome, thank you, Shetan. I think we have just time for one last question, and I guess this is Peter.

Yes, it's from Peter Clark.

Can you hear me? I hope so. I've got three very quick ones, then, if I'm the last one. I got cut out, but I just want to clarify, on the $8 billion target by 2035, if your US IRA projects are anything like the sort of things we see being signed, and you are going to leverage the pipelines, etc., you're going to go beyond that. So that was the first question. The second one, the corporate charges. I'm assuming it's the corporate charges, not the R&D charges. seems to come down significantly in the second half. Just to comment on that, because that's an encouraging trend, if that's right. And then finally, just very quickly on Mexico, I must have missed the announcement. I can't see a press release on it. Is this a little bit of a retrenchment from some of the merchant operations where I know it got very tough for you? Thank you.

Thank you very much, Peter. So just to come back on the investment opportunities, again, for the time being, we have advanced investments which is the framework for the next four years. But in this framework, you remember that we have a $16 billion of investment plan, which is 50% more than the previous period. Of course, I mean, we are looking and adapting to the opportunities. We see more opportunities, so it's possible that in due time, with the right project, we will invest more. But again, Air Liquide has the capabilities to do that, so if we see good opportunities, will be in a position to seat them. Regarding the R&D cost and the charges, Jerome, you want to comment?

Yeah, I would not comment too much. We can have some time which can be different in terms of the way that we are charging the R&D. But that's basically something that it's punctual. So we cannot make a trend of this specifically, Peter.

And basically, I mean, our commitment to R&D, I mean, remains the same. We are within the industry, I mean, the one which is investing the most in innovation, and we want to keep it that way. We see that it's making a clear difference today in the current environment and with the energy transition. So that will remain. Mike, do you want to make a quick comment on Mexico?

So, Peter, there have not been any direct press releases or anything regarding divestments in Mexico or anything like that. I think that the government is looking at its overall positioning in terms of Pemex, in terms of those types of opportunities that they had looked in the previous term to go ahead and leverage third-party suppliers and There's a lot of discussion right now with the government with some of those third party suppliers as to whether this is the right structure going forward. But there hasn't been any announcement on anything.

Thank you very much.

Thank you very much. So this will now conclude this session. Thank you very much for all your questions. Just to summarize, we delivered again a strong performance in 2022 in a challenging environment. The record level of project signing position is very well for the future. And we remain extremely focused to deploy our advanced program and achieve our mid-term objectives in terms of growth, ROCs, CO2 emissions, and value creation for our shareholders. So thank you again. I know that we will be meeting some of you in a few hours in London. We will continue probably the discussion. And I wish to all of you A very good day. Thank you.

That's going to conclude the conference for today. Thank you for participating. You may disconnect.