Good day, ladies and gentlemen, and welcome to the Air Liquide Q3 2022 revenue conference call. Today's conference is being recorded and 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 hand over to Aude Rodriguez. Please begin your meeting and I will be standing by. Thank you.
Good morning, everyone. This is Aude Rodriguez, Head of Investor Relations. Thank you very much to be with us today. François Jackow and Jérôme Pelletan will present the third quarter revenue. For the Q&A session they will be joined on the phone from Houston by Mike Graff. Pascal Vinet, Senior VP in charge of the Europe Industries Hub and the Africa Middle East Hub is in the room with us in Paris. In the agenda, our next announcement is on February 16th next year for our full year 2022 results. Let me now hand you over to François.
Thank you, Aude, and good morning, everyone. It is my pleasure to be with you today to share our continued strong performance in the third quarter of 2022. Once again, our business model demonstrated its resilience to a challenging environment, and in Q3 we delivered a performance that is even stronger than in the first half. In particular, for the four KPIs that you can see on the slide, we achieved a strong comparable sales growth of 8%, a record high 18% pricing in industrial merchant, effectively managing the increasing inflation, a high cash flow generation close to 24% of sales. On top of this, the project activity remains strong, as reflected in the EUR 1.1 billion of investment decision, which positions us very well for future growth. This was thanks to the outstanding fighting spirit and discipline of our teams worldwide.
Thanks also to a business model balance for both resilience and growth. This was, needless to say, despite a very challenging environment. Let's revisit a major strength of Air Liquide, especially in the current environment, which is the resilience of the business model. First, over the last few quarters, this model has demonstrated its ability to address soaring energy prices and the overall high inflation. Indeed, if we take large industries, the surge of energy prices mostly seen in Europe, has been entirely passed through to customers, thanks to our strong contractual clauses. Let's keep in mind that we are talking here about more than EUR 1.4 billion of energy impact in Q3, coming at 90% from Europe. This is in one quarter, more than 80% of the total energy impact for the full year 2021.
In industrial merchant, we have been successfully managing pricing to address the unprecedented spike in energy cost and high inflation. This was done through indexation formulas and surcharges in the bulk business and through proactive price campaigns that we continue to launch in several countries and also through targeted actions in the packaged gas activities. This ability to pass through cost is one aspect of the resilience of our business model. Also, secondly, as you know, resilience has always been a trademark of Air Liquide. Thanks to, first, a strong business model underpinned by long-term contracts, take-or-pay clauses plus fixed revenues from rentals. You know all that. Also resilience is due to a high diversity of business reach in terms of geographies, activities and market and customer.
The fact that we were able to deliver 8% sales growth this quarter, I think is a clear demonstration of this. Resilience is also thanks to, finally, a very robust financial structure and balance sheet with an A category credit rating and low exposure to variable interest rate, with close to 90% of our debt structured at fixed rates, which is quite important in the current environment. As we said before, ADVANCE is also reinforcing this resilience by first positioning Air Liquide in growth markets, namely energy transition, electronics, healthcare, all of which exhibit strong fundamental drivers. Secondly, by focusing the entire organization on performance, and really, I mean performance as illustrated by our strong results on pricing, cost containment and portfolio management. Now if I move to the next slide five. As I mentioned, our model is balanced for both resilience and growth.
Our backlog has increased again in Q3 to a high level of EUR 3.4 billion. It consists of projects which will start up over the next two-three years, fueling future growth. Projects to supply our customers in the semicon industry represent a significant share of the backlog. To give you an idea, more than EUR 2.5 billion of investments were approved in electronics over the last four years. These projects are now coming online and ramping up. The energy transition is another strong growth driver. We have already been very successful in convincing customers that Air Liquide has a key role to play in decarbonizing manufacturing industry, thanks to our products and to our technologies. Six significant projects have already been selected for European or national subsidies for a total gross CapEx of around EUR 1.5 billion.
This is a very strong start, and this is very well aligned with our ADVANCE objective. We are talking here about carbon capture projects, blue hydrogen production, and large size electrolyzers. This is for Europe, but there is more to come with the incentive of the new Inflation Reduction Act announced in the U.S. last August. Let's not forget, Air Liquide is the number one industrial gas company in the U.S., thanks to our positions in large industries, industrial merchant, and electronics. We are very well placed to capture these new opportunities in the U.S.. In conclusion, based on the strong performance of the first half and Q3, and of course, assuming no systemic crash of the global economy, looking forward, we are confident we will outperform on all our criteria, our ADVANCE trajectory for this first year of the plan.
Let me stop here and give the floor to Jérôme to provide more details on our performance in the third quarter. Jérôme?
Thanks, François, and good morning, everyone. Turning now to Q3 sales. As detailed on slide seven, group sales have been again very strong on a comparable basis, that is excluding the energy pass-through impact, Forex, and significant scope effect. Gas & Services sales for Q3 showed a strong +7.2% increase versus last year, similar to our growth in Q2, which was +7.3%. Engineering & Construction sales have increased by +37% in Q3 compared to last year. Order intake has continued to ramp up to reach EUR 695 million year to date. Global Markets & Technology have seen very dynamic activity with +33% comparable growth boosted by, again, by our biogas business.
Overall, group sales are up +8.3% on a comparable basis for Q3, while published sales are up very significantly at +41%, supported by the record impact of the spike in energy price during the quarter. This translates into a +24% energy pass-through effect in our LI activity for the quarter, with all positive Forex effect at +8.8% and a limited significant scope effect at -0.2%. Let's now review the activity for each of our main geographies. I'm now on page eight. After a strong Q2, Americas accelerated in Q3 with sales at +13%. Large industry volume had been strong in the U.S. Gulf Coast, driven by air gases with start-up and ramp-up contribution in chemicals, this despite lower demand in steel.
Hydrogen sales were solidly supported by ramp-up contribution in Latam, balancing a few turnarounds in the U.S.. In merchant, sales are again up significantly. Our pricing power is confirmed with an increase of over +16% versus last year, aligned with rising inflation. From the volume standpoint, gases and our goods followed end market trends and grew by +2%, excluding helium, which is impacted by the shortage in global supply. Healthcare activity has been solid despite lower medical oxygen volume compared to a strong comparator last year due to COVID. In the U.S., sales in medical oxygen and proximity care were supported by price increases. Finally, in Latam, both our home healthcare and med gases activities are increasing. In electronic, sales were very dynamic, contribution from carrier gas, equipment and installation, and specialty materials.
In Europe, sales have been stable in Q3 in the context of conflict in Ukraine, coupled with exceptionally high energy prices. Large industry has seen slowing demand in steel and chemicals. In hydrogen, some refineries are running a lighter crude slate, resulting in lower hydrogen consumption. In a context of soaring energy prices, the difference between comparable sales growth and volume evolution, which is limited to -6%, is due to calculation effect of the energy impact. Indeed, for large industry, the method value of the energy impact of the year on the basis of the volume of the preceding year, times the difference of energy prices. Consequently, in the third quarter, the rise of energy prices being exceptionally strong and volume slightly down, the energy impact is amplified, as well as a combined effect which reduce comparable sales of large industries.
In merchant, the spike in energy costs and overall inflation has again been very successfully mitigated with a record pricing effect increasing by +30%. Sales have grown in all end markets, including food, materials and fabrication, and energy. Volume increased slightly by +1.4%, excluding helium, showing again strong resilience, particularly in packaged gases. Finally, healthcare sales have remained very robust, contributing to the resilience of our sales in Europe, thanks to strong home healthcare, notably thanks to diabetes, boosted by volume as well and an acquisition in Poland. Medical oxygen sales are down compared to last year's high comparatives due to COVID, despite increased pricing. Turning to page nine. In Asia, sales have progressed strongly at +11% in Q3, benefiting again from the strong growth, notably in electronics.
In large industries, sales increased, in particular in China with strong air gases, partially due to favorable mirror effect with the dual energy control last year, balancing the softer rest of Asia. In merchant, sales have increased in all countries and pricing increased at a record +9%. APAC volume declined slightly, but is improving. Sales were high in packaged gases in China, where we are successfully pursuing our bolt-on acquisition integration program. Electronics sales were buoyant at +22% growth. Securing sales excluding E&I were also very high at +22%, driven by very strong carrier gases, with contribution from the start-up and ramp-up of several units. Specialty Materials and Advanced Materials sales were very strong also across the region. Finally, equipment and installation sales are booming, especially with our key customers. To finish, in Africa, Middle East, sales were slightly negative in Q3.
Large industry sales was up, supported by strong sales in India and in Egypt. Sales in merchant were negative following small divestiture in the Middle East, despite good pricing at +7%, while healthcare followed the normalizing demand in medical gases after the COVID impact last year. I will now comment on our Q3 activity by business line, and I'm now on page 10. In merchant, we achieve record pricing and volume has been resilient. Pricing has continued to accelerate in all geographies to reach +18% overall in Q3 to counter the unprecedented spike in energy and other costs, showing again our ability to rapidly implement pricing campaigns that could quickly recover this cost. Volumes are resilient, especially in the U.S. and Europe, although hampered by the helium shortage as some helium volumes have been shifted to serve electronics long-term contracts.
By end market, food and beverage, materials and energy markets were strong, while automotive showed improvement. For our large industry, activity has been more mixed. Comparable sales shows - 10% in the third quarter, mainly due to the calculation effect of the energy impact I mentioned earlier when outlining the large industry performance in Europe. Excluding this exceptional effect in Europe, overall volume were down only - 2%. Americas and China have been solid with robust air gases volume from chemicals, especially in the U.S. Gulf Coast, that benefit from start-up and ramp-up. Europe has seen slowing demand in all key sectors as chemicals, steel, and hydrogen. We saw a solid contribution from start-up and ramp-up. Page 11. Electronics. In electronics, momentum is very strong in all segments.
Indeed, momentum is strong in all segments with over +20% growth in Carrier Gases, Specialty Materials and Advanced Materials, mainly in Asia. This growth is supported by significant contribution from start-up and ramp-up, as well as strong pricing effect at +8%, mainly in Specialty Materials and for Helium. Finally, in healthcare, home healthcare was strong while we see positive pricing in medical gases. In Q3, indeed, we see strong resilience in the healthcare business. Despite high comparatives last year due to COVID-19, sales were up, driven by strong home healthcare. Indeed, home healthcare growth continue to be strongly supported by diabetes. Specialty Ingredients were also strong. Pricing has improved and is positive in all regions. On slide 12, as I just mentioned, sales increased sharply both in the Americas and in Asia.
From a business line standpoint, sales were boosted by both electronics and industrial merchant, reflecting again the strength of Air Liquide's very well-balanced and resilient footprint, both in terms of geography and activity. I also want to highlight the strong sales growth in healthcare, despite lower medical oxygen sales compared to 2021 due to COVID, as an illustration of the outstanding resilience for our business. Our performance improvement is again supported by our structural plan that continue to deliver. I am now on page 13. As you can see, IM pricing has significantly increased again in all regions at a fast and indeed historic pace. I will come back to this in more detail in the next slides.
We have also ramped up our efficiency in Q3 to reach EUR 260 million year to date, despite the significant adverse effect of inflation on our procurement reduction effort. As you know, avoided costs are not reported inefficiencies, but were significant again this quarter. Those will also contribute to the performance for the year. Portfolio management has continued. We executed four divestitures and closed 12 bolt-on acquisitions over the last three quarters, with our continued focus on profitable and margin-accretive opportunities. Performance improvement is our key focus area, and we continue to work on all possible levels to achieve this. As you can see on page 14, our pricing actions in merchant have been again, very powerful in every geography and we achieve a +18% overall in Q3, following an increase of +14% in Q2.
Our pricing campaign have again been executed in a very rapid and efficient way with record impact, mainly in bulk and packaged gases, leveraging on our escalation formula, surcharges and pricing action to counter inflation and pass through the spike in energy costs. In Q3 alone, Europe achieved a record +30% year-on-year pricing impact, an historical landmark with pricing particularly strong in bulk, while the Americas deliver +16% and with a notable sequential increase in Asia at +9%, mainly in China year-on-year. On page 15, the 12 months portfolio of opportunities remain at a very high level of EUR 3 billion and despite this, despite the high level of investment decision for the quarter, supported by both energy transition project, above 40%, and a good proportion of electronic project.
Our industrial and financial decisions for the quarter remain both appropriately selective but also very strong at EUR 1.1 billion. Notably, we decided on very significant projects for a large electronics, leading electronics customer in Taiwan. Finally, our investment backlog is very solid and very high at EUR 3.4 billion, thanks to the high level of investment decisions this quarter, representing EUR 1.3 billion of additional annual sales after full ramp-up. I am now on page 16. We achieved EUR 288 million sales contribution from start-up and ramp-up during the last three quarters.
We can also reconfirm that we expect to reach a full year start-up and ramp-up contribution to sales between EUR 400 million and EUR 425 million, including about EUR 135 million from our air separation unit acquisition and excluding Russian project for EUR 10 million that are no longer consolidated since September 1st, 2022. To conclude, the sales goals we achieved in Q3 and our continued focus on performance improvement make us very confident in reconfirming our guidance for the year. To be more precise, we are confident in our ability to deliver margin improvement in a similar way to what we deliver in H1. Thank you very much for your attention, and we'll now open the Q&A session.
Thank you very much. If you would like to ask a question or make contribution, please press star one on your telephone keypad. The first question comes from the line of Alex Jones of Bank of America. Please go ahead.
Great. Good morning. Thanks very much for taking my questions. I'll ask two if I can. The first on cash flow. Cash flow growth was particularly strong this quarter and has been up more than 20% in the nine months so far. Can you help us understand if there are any special things going on in cash flow that mean we shouldn't read that across to profitability? If there are, can you help us think about the profitability in the second half of the year? Second question on oxy-combustion. You mentioned in the release that you've gone ahead with one project for a customer in glass, in industrial merchant. Could you help us size that opportunity as you go forward and more customers potentially sign those contracts?
Could there be any short-term effect on merchant volumes as you maybe ship a bit more oxygen to customers who are generally trying to improve their energy efficiency in the current environment? Thank you.
Thank you very much, Alex, and good morning. I will ask Jérôme to talk about the cash flow, and probably Pascal will talk about the oxy-combustion since we see really a boom in this project in Europe.
Thank you very much, Alex. Thank you for your question on cash flow. You are totally right, and cash flow is particularly strong. It's at about 23.8% cash flow, cash flow to sales excluding energy, and it's rising by nearly 24% as published and plus 16% if we exclude the Forex. So very significant improvement. I would say that it's reflecting the performance improvement plan that we are talking all the time, you know. The fact that we are basically trying to improve at every, in performance plan, you know, pricing, efficiency, portfolio management, that's resulting into the cash flow.
Nothing more to say, but it just to mention that again, we are very happy with the level of cash flow and it is a clear resulting, I would say, a result of all the action that we have set up for now in the world.
Thank you very much, Jérôme. Pascal?
Yes, good morning. Thank you, Alex, for your question. Oxy-combustion in the glass business is not completely new, but we see a lot more opportunities right now, especially in Europe, many more than in previous years. Why? Because many of our customers are trying to have their processes adapted to be more efficient, consume less energy, and we also reduce CO₂ emission. Now, to your question, this is a mid-size type of opportunities. It's typically around 100 tons per day of oxygen. This is typically also an IM contract and not an LI contract. Again, good opportunity for us. A lot of possibilities that we see growing right now.
Thank you very much, Pascal. Next question, please.
The next question comes from the line of Alex Stewart of Barclays. Please go ahead.
Hello, good morning. Just one question. Around this European large industries adjustment, I understand and I follow the math that you've kindly put in the presentation. Can I ask how it compares with the second quarter? Because European large industries was down 10% comparable in Q2. You're now saying volumes are down 6%, but down 28% or 27% in comparable terms. How can we compare Q2 with Q3? Is it correct to look at the -10% last quarter and the -6% this quarter? Or perhaps you can help us give us a like-for-like comparison. And then also, if you wouldn't mind, and you have to hand, telling us what the gas and services comparable revenue growth would have been overall without this technical adjustment. It'd be really helpful to have those numbers. Thank you.
All right. Thank you very much, Alex. I will ask Jérôme to clarify some of those numbers. Jérôme?
Yeah. Thank you very much, Alex. This extraordinary effect is due to really very high level of increase in energy price in Europe, nearly 10 times what we had last year for the period and with a slight decrease in volume. That's why we decided to comment on this combined effect, which is again, very, very significant. Normally, at normal times it is negligible, so that's why it was important to show the volume and the... T o be more precise, on Q3, you know, the impact on the group comparable growth is roughly a bit around -10%. That's the impact. For Q2 it was more.
Negative.
Sorry?
Negative.
Yeah, -3%. -1% in Q2. It was much, much less significant impact.
Jérôme, just to be clear, can you repeat the numbers to make sure?
It's -3% on group comparable growth in Q3. - 3% is the impact of the combined effect, and it was -1% in Q2.
All right.
Sorry. Just to be clear, is that for the gas and services division overall, or is that for European large industries, the -3 percentage points and then -1 percentage points? Is it about right?
In fact, -3% group impact and -1% in Q2. That's the figure. -3% on group comparable growth in Q3, group level, -1% in Q2.
Okay, perfect. How can we compare the Q2 and Q3 Large Industries Europe results? That's the other part of the question would be helpful.
I don't think we have this number just right away available, but we can follow up on.
Yeah, you can follow up on that.
On that. Again, it was far less in Q2. As I think explained before, in the quarter before that, it was really negligible and not seen at the group perimeter. Okay?
Great. Thank you. I'll follow up with the team. Appreciate that.
Thank you very much. Next question, please.
The next question comes from Gunther Zechmann from Bernstein. Please go ahead.
Hi, good morning. Yeah, Gunther Zechmann at Bernstein. A couple of questions, one on guidance and one on trading. The trading one, could you just talk us through the demand trends that you've seen during the quarter and also heading into October? The second question, on guidance, please. Can I just clarify if the margin expansion part of the guidance includes the negative combined effect, and to that extent, whether we should still be thinking about 50-70 basis points operating margin improvement, including this effect, please?
All right, let's talk a little bit about the business trends and maybe go through the geography. I will ask Mike to comment on the Americas and Pascal to comment on Europe, and I will finish up by making some comments on Asia. Mike, do you want to give us what we see in the Americas?
Sure. Thanks, François. Good morning, everybody. Gunther, I think a couple things. In the Americas, obviously in the quarter for large industries, we saw strong air gas volumes as Jérôme talked about. We've had strong new startups contributions in the chemical sector. Hydrogen sales were actually strong across the Americas, but we did have a number of customers with turnarounds as well. I think in terms of the actual trends themselves that are gonna impact us as we go into the fourth quarter, we've seen some customers that have shifted production to the Gulf Coast from Europe, given the high energy costs.
We also see the demand for exports out of the Gulf Coast to Asia soften a bit. Primarily what we see is maybe some softening in steel and methanol, but overall we still see very strong year-over-year growth in volume. We really continue to see strength overall, some softening here and there, but the trends themselves continue to be good. In the Airgas markets, clearly looking at the revenues for the quarter, you saw the strength. What you don't see fully, because as Jérôme mentioned, the gas volume growth from the industrial side is a bit clouded given the fact that we have the helium impact overall.
Also especially looking at the Airgas business we see an effect of nitrogen services associated with Hurricane Ida last year that we don't see this year. We saw strong volumes in the overall business last year. As a result, if we look specifically at the industrial markets for Airgas we actually see a lot of strength in the quarter and continuing into the fourth quarter. To give you a sense, you know, we talked about hard goods volumes for all the industrial markets growing quarter-over-quarter. If you look at those specific to the third quarter and continuing today, they're up about 7% on a year-over-year basis.
Now gas is catching up and the gas volumes into those markets are strong as well, growing over 4%. The trends that we see specifically there are clearly driven by a lot of investment we see in metal fabrication and also in manufacturing, a lot of strength. We see a strong demand for construction equipment, for commercial vehicles and trailers. Automotive continues to be strong. The construction market in the U.S., for non-residential construction, all of the comparators, all the indices are kind of at all-time highs. You see a lot of strength, for example, in construction, given the fact with the energy transition, there's already 30 EV battery plants that have been announced. Recognize the top ten of those account for about $25 billion in spend.
You've got 16 fab-related investments associated with new fabs or the expansion of existing fabs. There's $100 billion in new LNG projects, and we haven't even begun to see the real impact of the bipartisan infrastructure bill that we'll probably begin to see in the fourth quarter and certainly well into next year. I think from a construction standpoint, that's really strong. Then if I look at the trends in electronics, whether that's in the U.S. or that's globally, there's a lot of underlying strength in electronics overall. I think we've heard a bit about especially in the memory market a bit of softening given the rapid ramp up that we saw with COVID. But overall, we still see very, very strong dynamics underlying for electronics overall.
You can see the investment profile for electronics continuing to be strong everywhere in the world, whether that's Asia, the U.S., or now in Europe, especially given the incentives we see in Europe, as well as in the U.S. That continues to be strong. I think from a healthcare standpoint, in the Americas, while we've certainly saw the decline in volumes associated with COVID, we see a lot of strength in a lot of the proximity care markets and home healthcare and continued growth in medical gas sales as well.
Thank you very much, Mike. Pascal, do you want to speak a little bit about Europe?
Yes. Maybe I start with large industries in Europe. We had quite very resilient volumes in a context, as you know, of extremely high energy prices. We are multiplied by 10, or maybe even more than 10, at the peak during the summer. Volumes were down 6%, as you saw, quite a moderate drop. Most of this drop being in the HyCO business. This was visible mostly in the chemical sector. For our gases, the situation was more contrasted with lower volumes in the steel sector, but compensated by higher volumes in the refining activity.
Maybe one more thing, the very good news is that the fear that we had a few months ago about, you know, significant energy curtailments has pretty much disappeared. If energy prices, in particular natural gas, stabilize for a while, I think down from the summer peak, as it is right now, this would be very good news for many of our large industries customers. In IM, as you saw, IM has done very well in this context of increasing inflation in Europe and very high energy prices, since we have passed through all of that in our sales. That's why we have sales for IM in Europe at +30%.
This is again, almost fully coming from pricing, but with very resilient volumes, actually slightly up, as Jérôme mentioned. It has been a fairly solid performance in all sectors. Not only the teams have done an excellent job with pricing, and it's all about execution when it comes to pricing, but volumes have stayed well-oriented. In particular, we have seen positive volumes in cylinders and a very good sales growth in the food, the fabrication, the material sector across most countries in Europe. So far I could say that the background economic environment that is important for IM has remained quite solid. A quick word maybe on healthcare. Healthcare has also done fairly well in Q3 in Europe with a solid 5.8% growth.
This is driven by the home healthcare activity that has remained very strong, led by the diabetes part, while the hospital business is still comparing with a high COVID base last year. To be noted, the specialty ingredient business was also quite strong.
Thank you very much, Pascal. I will finish up with a few words on Asia and really focusing on two topics. The first one is electronics. As mentioned by Mike, it's very strong for Asia. It's above 20% growth in the last quarter. We see a lot of growth of the current business installation all the way from the carrier gases to the advanced materials, specialty chemicals, and so on. This is true in Singapore, in Taiwan, in Korea, in China also. Mike made the comments about some softening in memory business. Overall, we see that not significantly impacting the trend that we are seeing today. Still a lot of expansion. I was myself in Asia last week, and I could see that.
The second point I'd like to mention is China, of course, because we had some question, if not concern about China at the beginning of the year between the COVID, the drought, and also to some extent, the real estate crisis. If we look at the performance in Q3, it's much better than what we have seen in Q2. It's basically double the comparable sales that we have seen in Q2. In Q3, we are above the 10% for China. Electronics being very strong, reflecting all the efforts in the Made in China for chip production, clearly. Large Industries, we benefited from some comparison effect versus last year with the dual control.
We see, I mean, volume which are holding well. In IM, we see strong pricing, again, this is not something that we have seen in the past in China, but clearly we see a strong pricing, yeah, in the 4%-5% range, with also a volume increase driven by our strategy, which is based on organic growth and also bolt-on acquisition that we are completing in China. I think clearly there has been a catch-up of China. This momentum was confirmed lately in September, and we do expect this positive momentum to continue and to be confirmed in Q4. I will stop here for the different trends and maybe briefly, Jérôme, do you want to comment on the margin, please?
Yeah, very quickly. Thank you, Gunther. In fact, there is no change in the methodology, in the calculation of either comparable growth of operating income recurring margin excluding the energy impact. That's very clear. Now, on the guidance, we confirm our guidance, and we say that confident to deliver margin improvement in a similar way that what we deliver in H1. As you see, we did plus 50 basis point in H1, so I guess, you know, we're very confident you are able to make the calculation for the full year.
That's helpful. Thank you.
Thank you. Next question, please.
The next question comes from the line of Andrew Stott of UBS. Please go ahead.
Yeah, good morning. Thank you for taking my two questions. Maybe one for François to start with. The order book has moved up sequentially EUR 400 million in Q3. I wonder if you could just walk through the main components of that order book improvement. I think the second one is probably one for Jérôme. You've called out helium a lot during the presentation. Is it genuinely material to the group in Q3, both volume and price? Sort of related to the same issue, when do you see resolution of availability of helium?
Okay. Thank you very much, Andrew. Good morning. Regarding the order book, what we see is clearly, I mean, a strong order book and backlog overall. What we see is basically something that we like because we see a strong, good, profitable, and strategic projects in Large Industries, mostly around the energy transition. Here we talk about blue hydrogen production, we talk about green hydrogen production, we talk about carbon capture, but also some oxy-combustion application. That's really, I mean, the bulk of what we see in Large Industries. The other component which is getting stronger is electronics as mentioned by Mike.
Given, I mean, the activity in terms of investment in all the regions of the world, we see a very strong demand for carrier gases, for projects which are confirmed, which are also quite large size projects. Those are basically the two main components of the order book that we have. Jérôme?
Yes. On helium, you know, on helium in terms of pricing, we're about, you know, slightly above 1% of pricing impact for helium and total for on the IM part. Now, in terms of volume, you're right. Volume are down due to sourcing issues, while you know in parallel, demand is very strong. We still expect to have a good outcome in terms of pricing. You know as well that we have also signed some electronics contracts, you know, when there is no new source which have been added to the market. All in all, we still believe that next year, you know, in 2023, there will be some tension on the market in terms of volume and also benefiting from pricing.
That's basically what I can say to you, Andrew. That's the situation, yeah.
What was the impact on volumes in Q3, Jérôme, from helium on volumes?
I don't know if I can disclose that.
Okay.
Roughly it's between -15 to around -15%, roughly.
Okay. Thank you.
Thank you. Thank you very much. Next question, please.
The next question comes from the line of Laurent Favre of BNP Paribas. Please go ahead.
Yes. Good morning, all. Two questions, please. The first question is on electronics, but more looking at the medium term. I was wondering if you could talk a little bit about China and the impact from the recently announced restrictions from the BIS in the U.S. on certain equipment. I'm wondering if it has an impact, for instance, on Advanced Materials on the leading edge side of the business. The second question is for Jérôme. I think you mentioned that there's more than 80% of your debt, which is at fixed rates, which is very good. I was wondering if there was any impact on your factoring policy from the higher interest rates in the U.S. in particular.
I'm looking at the EUR 1.4 billion of factoring that you had at the end of last year. Thank you.
Thank you very much. I will ask Mike to talk about the electronics situation in China and regarding the U.S. regulation. We did an extensive study on that. Mike, do you want to share that?
Sure, sure. Good morning. I think there's a couple key points. I think first of all, François talked about the market dynamics in electronics, which remain very strong. I think globally, with the 20% growth, the level of investment approaching almost EUR 130 billion in new fabs and a variety of other aspects for Carrier Gases, Advanced Materials, even the Specialty Materials in E&I are very strong. If we look at the specifics of what has been announced in regard to the U.S. restrictions on China, at this point in time, we do not see a material impact regarding our sales this year or going into next year, given the focus.
Recognize that for the current regulatory climate, they are in a place where they are restricting sales into logic that is less than 14 nanometer, into DRAM, which is smaller than 16 nanometer, and 3D NAND, which is greater than 128 layer. At this point, we don't see a significant impact for Advanced Materials or any other of our products that would be substantial anyway, in any way, shape, or form to what we expect for our revenue base this year going into next year. It's a watch point for us. We are certainly looking at what this looks like long term.
I think to your question on the midterm dynamics for electronics, given the level of growth we see, the underlying perspectives for growth in every aspect of the industry, we see a lot of strength. I think that will continue for many years to come.
Thank you. Maybe can I ask how much of the Asian electronics business is actually in China? Is it 1/3 ? Is it 1/2 ?
I'm sorry, there was an echo. I didn't understand.
I was asking if you could give us a ballpark figure for the exposure of Asian electronics in China, of your Asian APAC electronics business, how much of it is in China. Is it a quarter, 1/3 , 1/2?
Well, in terms of the overall impact, it's de minimis in terms of the specifics of what we see in the restrictions themselves. Recognize that for our electronic sales in China, there are other sales for either chips that are not within that realm of the higher end computing and the advanced technologies. There's a lot of sales into flat panel displays and a variety of other things which are not affected here. It's really de minimis in terms of what we would see specific to those restrictions.
Thank you.
Thank you very much. Next question, Jérôme, do you want to comment on this?
Yes. Thank you, Laurent, for your question. Factoring has increased slightly compared to 2021. It's about roughly EUR 400 million. To follow the increase of the energy impact on receivables, now that's totally making sense. That represents, you know, Europe under an Airgas program, which represents 90% of the factoring program. Now, having said that, you know, the factoring cost will increase slightly, but very moderate. Just bear in mind, Laurent, that, you know, the interest rate of factoring program are below the average interest rate for the group, you know, because it's financed on short-term most of the time. There will be an impact, but it will be very moderate on this. There is no issue on this.
Thank you.
Thank you, Jérôme. Thank you, Laurent. Next question, please.
Next question comes from line of Chetan Udeshi of JP Morgan. Please go ahead.
Yeah. Hi, thank you. I had a couple of questions. Maybe I'll start with the first one. You know, the steel production globally is weak right now, especially in China as well. It's been trending down year-on-year. I remember in the past, whenever steel production has been weaker, there has been more supply of oxygen in the market for the merchant business. Do you see that as a risk, you know, in terms of just more supply and that sort of depresses the prices? It seems there's no evidence of that in the numbers in Q3, given the pricing increases we've seen across all the regions.
I'm just curious, given the weakening production in general for the large industry customers, do you see a risk that there is more supply available for the merchant market and that sort of starts to depress the pricing eventually in the merchant side of things? That's the first question. The second question was just going back to the point around factoring. Can I check whether the cash flow number that you guys talked about, 24% increase for the first nine months, is that including the benefit of factoring or is that before the benefit of factoring? And I'm just curious, like I don't see other large industrial gases companies using factoring as much. So is there any difference in Air Liquide that you know, you guys have to use factoring to support the free cash flow?
Thank you.
Good morning, Chetan. I will talk about the first one about the impact of the steel production in the merchant market, especially in China. In the past, there has been a lot of plants which were self-producing oxygen for the steel mill, and then basically sold the excess liquid oxygen, nitrogen, and argon in the merchant market to some extent flooding the market. We have seen clearly due to the efforts of the government, the dual energy control and rationalization of production, that many of those smaller plants have basically shut down.
There has been a decrease in the amount of liquid oxygen and merchant product overall available on the market in China. That has created some kind of tension, but that also has created much more discipline with industrial gas player playing basically the role of supplying the market, developing the application in a much more structured way. Up to the point where we are considering and we are making investment for liquid merchant plant alone, standalone in China, which is the first time in the past 20 years, because there are some markets that needs the product.
All in all, this is a good trend that we see putting discipline, taking also into account that the next generation of steel mill will rely much more on direct reduced iron, which require far less oxygen in the blast furnace. Then will reduce also the amount of potentially liquid LOX and LIN available on the market. All in all, I think it's going in the right direction in terms of discipline in the market and structuring the merchant market in China, especially. Jérôme, do you want to talk about factoring?
Yeah, about the cash flow, François. Thank you, Chetan. The figure that we provide, you know, on the 24% is related to funds from operations, so it is before working capital, okay, requirement. The upside from factoring is not within the 24%, it is because by definition, it impacts the working capital ratio. Free cash flow is not something that we provide during Q1, Q3. Again, very strong cash flow, which is what I said before, the result of all performance improvement we made. Thank you.
Thank you, Jérôme. Thank you, Chetan. I think we have another question.
The next question comes from the line of Charlie Webb of Morgan Stanley. Please go ahead.
Morning, everyone. Thank you for taking my questions. Maybe just first around the efficiency measures. Obviously, running a little bit behind, I guess, a run rate of maybe EUR 300 million, if you're trying to get to the EUR 400 million. First off, you know, how confident are you of getting to the EUR 400 million efficiency measures? And second to that, just how do we think about the net effect given, I guess, broader-based wage inflation and other forms of inflation running through the business? You know, how much of price actions have been able to offset some of those broader inflation aspects? And then second question, just on a little bit of a follow-up to Andrew's question earlier around merchant pricing and the contribution for helium.
How... When you think about the other kind of specialty gases and other gases where, you know, with closures, maybe we've led to tighter supply and demand in the merchant market. You know, can you disaggregate what has been kind of price led as a consequence of supply and demand for the various merchant gases you're selling versus the price actions you've been taking to offset broader inflationary factors? Just trying to understand the supply and demand dynamics in some of those merchant gases relative to the measures that you're taking more proactively.
All right. Thank you very much. Jérôme, do you want to talk about the efficiencies?
Yes, of course. Thank you very much, Charlie. Thank you, François. On the efficiencies, yes, you know, we committed in ADVANCE to run about EUR 1.6 billion over the next four years. Four hundred million is just as an indication. We are at EUR 262 million so far. You know that in the context of inflation, it's already very difficult to just, you know, avoid costs. We have significant number of avoided costs, which we do not report. This also helping the efficiency, not the efficiency, but the performance improvement. It's not, this figure, don't take too much, don't put too much importance about this EUR 262 million. We are totally committed to deliver our performance improvement, you know, as I guided on the margin.
We are probably a little bit advanced ahead in terms of pricing impact compared to efficiency. Overall, you know, we have absolutely no doubt on our performance improvement, which is only one component. Again, not taking into account all the measure we take in procurement to avoid the cost as well. That's what I can say today, Charlie.
All right. Let's talk a little bit more about the IM pricing. Maybe let's focus on Europe, Pascal, because that's where a lot of things are happening.
Yes. Just on your question about the supply chain disruptions, we talked about helium already, so I won't come back to that. In Europe, one product where we have a supply chain disruption is the CO₂. The supply chain in Europe is disrupted actually by the low level of activity of some very important sources for this product, which are the ammonia plants. Due to very high energy prices, we have had some sources, some ammonia plants that are some of our major sources that have been down or at reduced rates.
That has been adding some or creating some difficulties for global supply chain, forcing us to move product across countries. The most difficult country being the U.K. that we have had to support with imports from other European countries. I would say in the merchant business, besides helium, CO₂ is supply chain, as a supply chain that is under some stress in Europe. Other than that, I don't see anything else that needs to be mentioned. The rest is the air gases, for example, LOX, LIN or LAR, we don't have critical issues at this stage, at least.
Maybe commenting on pricing. I think you saw the pricing results for IM. I think we see that probably continuing in the next months. I think we should be still looking at the same trends, but starting to compare with higher comparables, since we had already in Q4 last year the start of the pricing campaign. We'll have slightly more difficult comps, but we think we'll be still delivering some very significant pricing results in the coming months.
That's really helpful. On the CO₂ piece in Europe, I mean, can you give us any sense in terms of its contribution to the kind of circa 30% pricing you saw in the quarter? You know, how much of that was coming from higher CO₂ prices? I mean, I've heard some very large numbers year-on-year for kind of CO₂ here in the U.K.. Just kind of trying to get a broader sense across Europe what that contribution was from that CO₂ price.
Just quick comment on that. What you see in the U.K. is very unique to the U.K.. Very unique to the U.K.. The only comment I would make is that it's not super significant contribution to the pricing results that you see for Europe.
Okay. Thank you very much.
Yeah. Let's keep in mind that CO₂ is 5%-6% of the IM sales, so it's quite small. We have one last question, I think from Peter. So Peter, go ahead.
Yes, thank you. Thank you. I've got a couple of questions. Coming back on all your comments on China and the standalone capacity, and I think you mentioned the pricing there was a big contributor, I presume you're talking year-on-year. I'm just wondering what the underlying volume was in China in Q3. Was it actually up if you stripped out the bolt-ons? I gather it was slightly, but I'm just trying to get to that. On electronics, in the commentary for the first time, or certainly that I can remember, a lot of talk about pricing throughout the presentation in electronics, obviously rare gases, some of the specialty gases, Advanced Materials. Just wondering of the Asian growth of 22%, how much would it be in price on electronics? Thank you.
Okay. Peter, thank you very much for your comments and question on China. Yes, there has been some positive volume in China. If you look overall, volume in China was in the range of 3% volume for all the activities. We have seen positive volume everywhere. One point which is outlying is clearly the electronics, which was close to 10%, a little less than 10% in terms of volume. You can see what the pricing effect is.
Of course, there are some contribution about the ramp-up, of course, and the start-up, but there has been some positive pricing effect in China above 5%, between 5% and 10%, I would say, for the electronics activity. Okay?
Sorry. Yeah, it was up. Yeah, you said that.
All right. I think we have one last, very last question from Georgina. We'll take Georgina, and then we will conclude.
Hi. Morning. Thank you so much for squeezing me in at the end here. Two pretty quick questions, I think. How should we think about the potential for large industries to recover volumes next year, especially in Europe? Second question is, in a lower energy price environment we find ourselves in sequentially, how do you see your ability to hold on to pricing in merchant? Thank you.
All right. Pascal, do you want to take those two questions which are mostly focused on Europe?
Yes, of course. Hello, Georgina. On LI in Europe, in the context of decreasing energy prices or larger availability or full availability of energy, I think we would see clearly a recovery. We know we have customers that have slowed down because of the energy prices. They would be probably quite fast to ramp up their plants. Again, if we see energy prices going down the way they go down actually right now, we should see pretty quickly a rebound of the activity in LI in actually with some of our very large customers in a pretty significant way, I would say. That would be a very positive thing.
In IM, consequences on pricing, I mean, one thing that is important is that energy doesn't have such a huge impact in IM. It's more about, especially in the cylinder business, the global inflation. I think in IM, we'll still see sustained pricing because we are still looking at what's happening with the global inflation. Yes, we may have a decrease of some surcharges in the bulk business, and that will go ahead pretty smoothly, I think. Overall, we'll still see some pricing going on in a fairly effective way in the coming months for IM globally.
Thank you, very much, Pascal. We will now conclude this session. Thank you very much for all your questions. Of course, to summarize, I think you have seen that, we delivered a strong performance again in Q3 with a strong comparable sales growth of 8%. Solid cash flow, we talked about that. A high level of project signing, which position us very well for the future. I trust that you feel the commitment, I would say the discipline and the fighting spirit of the Air Liquide teams. We will continue to deliver growth and resilience, preparing for the future and delivering on our objectives. Thank you very much, and I wish you a good day.
Thank you for joining today's call.