Good morning, ladies and gentlemen, and welcome to the Air Liquide first half 2023 results conference call. All participants are currently in listen mode only until we conduct a question and answer session, and instructions will be given at that time. I will now hand over to the Air Liquide 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. François Jackow and will present the Thank you very much, Aude, good morning, everyone. It's my great pleasure to be with you today to share the highlights of the first semester of 2023. In few words, we delivered a strong performance, and we continued to build the future. Let's start first with Jérôme Pélissier
This is also reflected in the cash flow, growing at +13% at constant exchange rate. The strong performance was delivered despite an adverse environment, which shows once more the resilience of our business model and the commitment of our teams, who I would like to thank very warmly today. At the same time, we continue to build the future, as illustrated by the investment backlog at the high level of EUR 3.5 billion. I will come back to this later. I also want to highlight that we are fully in line with our CO2 trajectory, and more than 40% of our portfolio of project opportunities is directly linked to the energy transition. Slide 4, focusing on the three levers driving our performance in H1. With continued strong execution and delivery this semester. First, +11% of pricing in industrial merchant.
This is a very high level compared to historical average, whilst our data-driven smart pricing management continues to be successfully implemented in all regions. Of course, balancing pricing power, value creation, and customer satisfaction. Second, over EUR 200 million of efficiencies growing +24% compared to last year in an inflationary environment, which is again not favorable to procurement savings. Another strong performance. Third, systematic portfolio management, in line with our strategic priorities. We closed 9 acquisitions since January, made 1 divestiture in Latin America, and we sold our financial stake in Hydrogenics. As you can see, overall, we maintain discipline and determination to execute and deliver performance. Fully aligned with ADVANCE, we are positioning ourselves very well for the future. I am on slide 5. Few examples: In Asia, we have strengthened our position as a leader in electronics.
Indeed, while we started 9 plants representing more than EUR 500 million in CapEx over the last 18 months, it is more than an additional EUR 1 billion of investment that has been decided in Asia over the same period. It mainly consists of 10 major carrier gases projects, as well as the construction of 2 new production centers of advanced materials for $200 million in Taiwan and in South Korea. The objective is to localize the production close to our semiconductor customers in order to accelerate innovation through close collaboration, speed to solution, and ability to ramp up to full production in a safe, reliable, and high quality manner. We strengthen again our unrivaled capabilities among all industrial gas players to supply the semiconductor industry in Asia.
Startups of these projects will be spread out through 2025 and will deliver consistent growth over the next several years. Another great example illustrating our leadership to build the future is shown on slide six. Regarding energy transition, 19 projects involving Air Liquide have been awarded fundings in Europe. This is an excellent track record, definitely one of the best among any company in Europe. Demonstrate the unique positioning of Air Liquide as a key enabler of the energy transition. For 12 of those projects, the cumulative gross CapEx amounts to EUR 2.7 billion. This is a very significant amount. The good news is that project risk is spread over 12 mid-size projects and not a couple of mega projects carrying, of course, higher risk. What is included here?
Eight of these projects deal with carbon capture and CO2 export hubs for a cumulative reduction of 5.8 million tons of CO2 emissions. Four projects are large electrolyzer projects, representing more than 600 megawatts of electrolysis capacity. Our technology leadership has been recognized with seven additional projects, including Air Liquide's technologies, awarded for funding. This is mostly sales of proprietary CryoCap equipment, electrolyzer to the cement, the steel, or the energy industries. Please note that all those projects have off-taker and customers as part of the projects. This is the, I would say, the tip of the iceberg, as several projects under discussion with customer have not yet all been awarded fundings. There is more to come as we will continue to demonstrate our leadership in energy transition in all regions of the world.
On slide seven, looking now at our decarbonization roadmap, the first half of 2023 has been very, very active. Regarding the decarbonization of our customer assets, we have signed MOUs for long-term, large industry contracts with two customers in the cement and in the lime industries. Our carbon capture solutions will help them reduce their CO2 emissions by 2.6 million tons per year. These are new end markets for Air Liquide, representing large opportunities. We have also announced a partnership between Air Liquide Engineering and KBR for low-carbon ammonia production. Air Liquide, in this case, is providing its proprietary ATR and carbon capture technologies to produce low-carbon hydrogen, with KBR being the worldwide leader in ammonia production.
This will also contribute to the development of a global low-carbon hydrogen market, where hydrogen, when transformed into ammonia, can easily be transported over long distance or used in chemical fertilizer applications. Regarding the decarbonization of our own assets, two sets of actions. First, several renewable power sourcing contracts have been signed in South Africa to supply the Secunda site, where we operate 17 air separation units, and in China also, where we sign our first long-term agreement. Altogether, it represents more than one gigawatt hour of renewable electricity that will allow the reduction of close to one million tons of CO2 emissions per year. We are also building an industrial scale pilot plant for ammonia cracking into hydrogen in the port of Antwerp. If and when low-carbon ammonia becomes widely available, we want to be ready to use it as an alternative low-carbon source of hydrogen.
Finally, in the hydrogen mobility market, by going through joint ventures with key partners, we scaled up the development of hydrogen refueling stations and related infrastructure for heavy duty vehicles. One joint venture is now going live in Korea with Lotte Chemical, and another joint venture has been decided with TotalEnergies to develop the European network, with the deployment of more than 100 hydrogen station all over European countries. In addition, and in line with the MOU signed with Iveco, the first high-pressure hydrogen station for trucks was inaugurated in the south part of France and should be followed by other station openings in Europe. As you can see, many projects are now materializing, showing an acceleration in term of decarbonization, be it to decarbonize our own assets, those of our customers, or when developing hydrogen mobility ecosystem.
To conclude with the key takeaways for H1 2023, clearly, we delivered a strong performance in a difficult context. We also accelerated developments in energy transition, positioning ourselves for future growth. I provided several examples, either in terms of business development or action, to decarbonize our own assets or to develop hydrogen mobility markets and ecosystem. Delivering performance while being able to actively secure future growth, once again, demonstrate the resilience of our business model, the relevance of Air Liquide value proposition, and the outstanding commitment of our teams. I will stop here and ask Jérôme to present our financial performance. Jérôme?
Thanks, François. Good morning, everyone. We will now review our numbers in more detail. Coming back to the first half year, I am now on page 10. Group sales have been very solid overall on a comparable basis, excluding energy pass-through, Forex, and significant effects, scope effects. Gas and services sales for H1 are showing a strong +5.3% increase versus last year. Turning now to the much smaller segment, engineering and construction sales have decreased by -17%. In H1, compared to high third-party sales last year, order intake has increased up to EUR 530 million year-to-date, with third-party sales representing half of it.
Global market and technologies are up +3.9%, as a consequence of the small biogas distribution divestiture scope effect, while underlying growth is strong at +17%, and order intake is significantly up at close to EUR 500 million. Overall, group sales are up at +4.9% on a comparable basis for the first half, while published sales are down -1.6%, as a consequence of the high energy price decreased during the semester, which translate into a -4.7% energy pass-through effect. Which, as you know, has no impact on the operating margin in absolute value, + a negative Forex effect at -2.1% and a significant scope effect at +0.3%.
Specific now to Q2, comparable growth is still solid at +3.8%, after a very good Q1 at +6.7%. When we look at gas and services, Q2 year-over-year growth, I am now on page 11. All our geographies posted a solid growth versus last year to reach a +4% comparable group sales growth. This highlights the value of our global development strategy, capitalizing on the complementarity and right balance amongst our geographies and business lines. From a business line standpoint, indeed, Industrial Merchant and Home Healthcare are driving growth in the Q2, while electronics is to be compared with an exceptionally strong basis last year, and large industry being more contrasted. Let us now review the activity for each our main geographies. My comments will be mainly related to Q2. I am now on page 12.
After a very strong Q1, Americas has seen a solid Q2, with sale at +4.6% on a comparable basis. Sales in large industry have been impacted by customer turnaround, mostly in LATAM. In the US, activity was strong in Cogen, and volumes remain relatively solid in the Gulf Coast. Merchant sales now have been strong in Q2, driven by still high pricing at +5.3%. On a volume standpoint, those are growing, driven by bulk and helium, and sustained by demand, notably in the automotive and fabrication market. Healthcare activity was strong, with sales up +16%, supported by positive volume in the US, while home healthcare has been very strong in Canada and Latin America, also supported by pricing.
Electronic sales have been impacted by less demand in advanced materials and specialty materials in a context of a slowdown of the memory market, partly compensated by equipment and installation sales, sorry, that have grown up. Gas vector are stable. In Europe, now, we have seen a solid growth at +4%, supported by still high pricing in merchant, coupled with a strong healthcare activity, especially in Home Healthcare, offsetting lower demand in large industry. Large industry in Europe has seen improved activity this quarter versus H2 2022. That was impacting by energy price increase and is stable versus Q1 2023. Airgas are indeed impacting by lower demands in chemicals and steel, while hydrogen volume are benefiting from stronger demand in oil and gas with refining.
In merchant now, sale growth has been lifted by a still strong pricing effect at +16%. Volume have remained positive, excluding both helium and the liquid CO2 crisis, sorry, hitting Europe, supported mainly by a resilient automotive market. Finally, Home Healthcare sales continue to be very strong, although less so in France, Switzerland, and Benelux, sustained by Home Healthcare, thanks to the development, mainly in diabetes and also sleep apnea. Medical gases sales have been strong, supported by price increase, addressing the inflation context. specialty ingredients have been strong again in beauty care. In Asia now, I'm on page 13. Sales while being more contrasted, have continued to grow. In large industry, sales and volume remain affected by low demand, notably in steel in Japan and chemicals overall.
Sales have also been impacted by customer turnaround, notably one customer stoppage in China that will last until the end of the year. In merchant, we have seen also a strong pricing effect, also sub-sustaining at +8.5%. On a volume standpoint, this is positive, driven by China, in particular in packaged gases. In this geography, we noted an overall improvement in demand and volume in both food and beverage and material and energy. Pricing remains strong in the rest of Asia. Electronic sales, while softening, are still growing against a very high comparative base last year. Advanced materials and specialty materials are impacting by the slowdown in the semiconductor memory market, while carrier gases are strongly growing, supported by startup and ramp-up of new units in all geographies. In Africa, Middle East, we have seen growth in all activities.
In large industry, sales have grown fast in air gases, notably in Egypt and South Africa. Merchant growth is solid despite the divestiture in the Middle East, completed in 2022, thanks to strong pricing and increased volume in bulk and on site. I will now comment our Q2 activity by business line, I am now on page 14. In merchant, pricing has been staying at high levels, whilst volume remained positive. The very good point, again, is that pricing, while softening due to high comparison basis last year, has indeed continued to stay strong at +8.6% in Q2 to address inflation. The other good news is that volumes are still positive overall for the quarter. Our end markets were slightly positive-oriented, notably fabrication, construction, and automotive. On the development side, our good momentum for on-site signings is confirmed.
From a large industry standpoint, activity, although still low, has been stable. Overall, by market, chemicals activity has been staying low, whereas metal is slightly better. Refining is more contrasting with hydrogen volume for oil and gas in Europe, better oriented. Volumes have been also impacting my customer turnaround in U.S., Europe and Asia, while underlying volume is stable overall versus Q1 and improved versus H2, 2022. We had also good contributions from startup and ramp-up. Page 15, in electronics, activity softening in comparison with a very high base last year. Sales have indeed been impacted by lower specialty and advanced materials, while carrier gas are still very strong at +16%, supported by volume startup and ramp-up. Equipment and installation are still growing at mid-single digits. Finally, in Healthcare, we have strong growth in all segments, with softening but still high pricing and volumes improvement.
Home Healthcare is again very robust, with strong sleep, mainly in Canada and Europe, and diabetes. Med gas activity has also been strong, with high pricing and positive volume in all regions, including good volume at Airgas in the U.S. On page 16, the success of our performance improvement plan has been again demonstrated by our operating margin being up by +160 basis points overall, and +80 basis points, excluding the impact of the energy pass-through effect. Getting into the detail, we can see that purchase have decreased following the decline of energy price, mainly in Europe, while personal expense and other costs have increased with activity and inflation. Depreciation is well contained, with D&A growth below sales growth, excluding FX and energy. This has resulted in a group operating margin at 17.7%, with gas and services at 19.3%.
A significant +80 basis point increase, excluding the impact of the energy pass-through, or increase is at +13% year-on-year on a comparable basis. This margin improvement shows both the strength of the business model coupled with our performance mindset acceleration. This margin improvement is supported, as said by Francois, by our structural margin improvement plan that continues to deliver, based again on three pillars. IM pricing is still strong, at +8.6% versus a high comparable comparison basis in 2022, delivering profitable growth. We have also significantly ramped up our efficiencies in H1 to reach EUR 206 million at +24% versus last year, with a strong rebound of industrial efficiencies and in procurement, and this has been achieved despite the significant adverse effect of inflation.
Portfolio management has been further pursued, which was 9 bolt-on acquisition over the period, and executed 2 divestiture, among which was a sale of our stake in Hydrogenics, with a continued focus on profitable and margin accretive opportunities. I said by Francois, we keep a very strong focus on margin improvement, working on all possible levels. As you can see on page 18, our pricing actions continue to deliver, as pricing remains strong in every geography to reach +8.6% overall in Q2. In Q2 alone, Europe achieved a +16% year-on-year pricing impact, while the Americas deliver +5% and Asia increase at +9% year-on-year. Let us now review quickly the bottom of the P&L. I am now on page 19. Non-recurring operating expense have been impacted mainly by 3 exceptional items.
First, we sold our financial stake in Hydrogenics, triggering a capital cash gain of around EUR 175 million. We have reassessed down the value of an intangible asset following a contract renewal, and in addition, we reassess down the value of some of our assets held for sale, in line with our portfolio management, both last item are non-cash. Net financial costs are stable, following the progressive deleverage and the high share of fixed rate funding, with a cost of debt around 3%. On an effective tax rate standpoint, our ratio is down to 20.4%, sorry, mainly due to the reduced tax accounted for Hydrogenics tax sales.
Net profits, as published, is very significantly up at +32% due to our strong performance in H1 2023, due to a favorable comparative basis last year, a consequence of our Russian activities impairment accounted for in H1 2022. Recurring net profit is significantly up at +11%, excluding FX and excluding major exceptional items. Page 20, as mentioned before, cash flow has also been very strong, at +13% at constant exchange rate versus last year, which provided a capacity to more than finance dividend and our industrial and financial CapEx. Net debt is down by -1.5 billion EUR versus June last year, to 10.5 billion EUR, after our CapEx and dividend payment at 1.7 billion EUR.
Our gearing is now at 39%, adjusted for the dividends payment seasonality effect. Due to the strong results and cash management, we have delivered a ROCE still above 10%. Page 21. The 12-months portfolio of opportunities remain at a very high level, at EUR 3.4 billion, supported by energy transition project, above 40% of the portfolio, including several U.S. IRA project. Our industrial and financial decisions for the semester has still been selectively increasing to reach a very strong level at EUR 1.8 billion, same as last year. Our investment backlog is still very solid and has increased to reach now EUR 3.5 billion, representing EUR 1.2 billion of additional sales after full ramp-up.
... I am now on page 22. As you can see, we got about EUR 139 million sales contribution from start up and ramp up during the first half, and we expect to reach a full year start up and ramp up contribution to sales, probably at the low end of the EUR 300 million-EUR 330 million range, as shared earlier this year. To conclude, on the basis of the strong performance in the first half of 2023, we confirm our guidance for this year. Again, thank you very much for your attention, and we will now open the Q&A session.
Thank you very much Jérôme. I think we are going to take the question as usual.
I'm not sure who is the first one, so we'll wait just a few minutes to make sure that everything is connected.
Thank you. To ask a question, you need to press star one and one on your telephone and wait for your name to be announced. Given the time constraint, if you could please limit yourselves to 2 questions, so that everyone is given the opportunity to ask a question. To withdraw your question, please press star one and one again. I will now go to your first question. One moment, please. Your first question comes from the line of Alexander Jones, Bank of America.
Great, good morning. Thanks very much for taking my questions. The first one on those 12 projects you talked about with the EUR 2.7 billion CapEx, how long do you expect it to take for some of those to translate into firm orders and signed contracts? Should we expect it to be in line with what you said at the start of the year, that you'd signed several major projects this year? What are the major hurdles for those getting over the line? Is it the economic environment? Is it permitting or anything else you can highlight there? The second question, just on merchant pricing.
I think when you look at the sort of 3-year price increases you put through there, then roughly similar sequentially in Q2 versus Q1, despite what I imagine is the start of a negative impact from indexation. Could you talk a little bit about whether you're putting through some further increases in packaged, and how we should expect that to evolve in the next few quarters, as indexation continues to have more of an impact? Thank you.
Thank you very much, Alexander, for the question. I will talk about the projects that I mentioned, and then I will let Pascal to talk about the merchant pricing in Europe and Marcelo Fioranelli to talk about pricing in the US, which are the two key regions, of course. As you have seen, I mean, for the projects, I mean, we've been extremely successful in convincing basically, I mean, that the projects are quite relevant. Those projects, as I mentioned, are always with customers and off-takers, and I think they are being recognized as being both innovative and absolutely well aligned with the strategy, either of the different European countries or the European Commission.
We do expect that those project will be confirmed and start construction for some of them in the next few weeks or months. For the rest, it's going to be over the next 12-18 months. We have to say that many of those projects are already quite well developed, both in term of business scheme, but also in term of technology, site, permitting, and so on. That's basically the nature of those very large projects. All those projects are basically in the pipeline, moving from one in that time frame. Now, to talk about the pricing, Pascal, do you want to talk about pricing in Europe and what we see looking forward?
Yes, thank you. Pricing in short, in Europe, has stayed very, very strong in Q2, with +16.4%, H1 being at 19%. Yes, it's a slightly lower percentage in Q2, but that's because of the higher comparison point last year, versus last year. Again, was already 10.7% last year in Q1, and 14.4% last year in Q2. The other reason for that slightly lower percentage in Q2 is because of the energy prices being actually slightly lower now in Europe. All that has been very well sustained, I would say, 3 points maybe, because of the increased underlying inflation.
Yes, we have less energy cost in Europe. We have more underlying inflation. We have the scarcity of some products. I would mention helium and CO2. Francois Jacov mentioned it, we have smart pricing campaigns in some geographies. To your question on outlook, we think that the pricing should remain very well sustained in Europe, again, because of the sustained underlying inflation, also because we intend to continue some of our pricing actions. Be careful, we will have very high comparison points again in Q3 and Q4. Last year, Q3 was 18% and Q4, 15.4%.
Thank you very much, Pascal. Marcelo, can you give us a little bit the tone in the U.S.?
Absolutely, Francois. Thank you, Alexander, for the question. I think very similar to what Pascal has just described it. We did have strong pricing in IM in Americas, as you saw, about 5% in Industrial Merchant and very strong in the healthcare space as well. I do expect that the trend will continue for the second half of the year.
Although again, the days of comparison will be higher compared to the first two quarters of this year. I think the smart pricing, data-driven pricing actions will continue. I do expect that we still see and expect opportunities in terms of pricing, due to still very high inflation in the core of inflation, of the inflation in the U.S., if you exclude the impact of energy and also the impact of food in general. The traditional process of following our indexation formulas for our bulk and inside business in general. Hard goods in general, I do expect a more stable pricing for the second half, but overall, I still, I'm still very confident on the positive impact of pricing vis-a-vis inflation for the second half of 2023.
Thank you very much, Marcelo, for sharing this. Next question, please.
Thank you. We'll now go to your next question. Your next question comes from the line of Gunther Zechner from Bernstein. Please go ahead.
Hi, good morning, Francois, Jérôme, and Aude. The first one is on the balance sheet, please. You don't need to strengthen it, seems, your balance sheet any further, and the business clearly generates more cash than it needs. Can you just talk about, other than the CapEx plan, where you've been very explicit already about capital allocation and what's a good leverage ratio? Maybe added to that, I'll sneak in another question: Would you consider adding inorganically to your Seppic business as well, given assets have come to the market? The second question, maybe more for Jérôme, on the factoring of working capital that you do. I think this is something you started when Airgas was acquired, and we've now seen a 400, 450 BP interest rate increase.
That translate, I think, into something like EUR 70 million additional cost. Can you just discuss how you think about the factoring program and whether you're reconsidering that given the high interest rates, please? Thank you.
Gunther, thank you very much for your questions. On the first one, it's pretty clear. We have in front of us many opportunities to invest in our core business. I think we have never seen as many opportunities, which are good opportunities, which are very well aligned from a strategic point of view, in all the region of the world. I mentioned Europe, I mean, with the Inflation Reduction Act also, we see a wave of project and opportunities coming in North America. We see also in Asia that there are opportunities and in the Middle East. For us, it's absolutely clear. It's very important to get a very strong balance sheet today and to have the financial capabilities to seize the opportunity that we think makes sense for us.
The gearing ratio that we have today, which is lower than what we had before, I think is a very good sign. It's a demonstration of the model, huh? Remember, I mean, where we were when we did the Airgas acquisition. We have been able basically to digest the Airgas acquisition in 5 years, and we are ready now to seize the opportunity. That's what we start to do. You have seen that with the investment decision, and there will be more to come. For us, it's absolutely key to have the financial gain power, I would say, to take the opportunities. Opportunities for new projects, opportunity for takeover, if we see a takeover of assets as a opportunity, as we did for Sasol, for example.
Also, I mean, acquisition in different parts of the business, as usual. We are looking at those very carefully. We monitor the market in every segments where we are. We look at the valuation. Again, the good news that we have today is that we don't need an acquisition. We will take it if there is a strategic opportunity, but we don't need, because of the level of growth and organic growth we can generate. Now, on the factoring, Jérôme, please.
Yep. Basically, you know, on the factoring cost, you know, the volume of factoring increased last year, given the fact that it was very much, you know, connected to the energy cost increase. Basically, when we see the level of net cost of debt, this has decreased by -18% in H1. Basically, like, additional factoring costs have been fully offset thanks of to proceed from early redemption of US dollar loans, and as you know, as well, higher return on cash investment. We have, as you know, 90% of the gross debt, which is at fixed rate, so very well protected, in order to, you know, compensate of that.
The size, the key message of the fact on factoring is quite stable over time, and that's really our objective to continue in that way.
That's it. Thank you very much.
Thank you.
Jérôme. Next question, please.
Thank you. Your next question comes from the line of Martin Roediger from Kepler Cheuvreux. Please go ahead.
Yes, good morning. Thanks for taking my questions. First, on currency effect. At group level, sales were down by 2.1% from FX in the first half, but your operating and recurring income got a drag of 3.4%, and your recurring net profit got a drag of 6.4% from FX. Can you explain the leverage, please? Because your business is normally local, you do not have major exports, and you have a global financing.
The second question is on healthcare Americas, up by 13.5% in sales in the first half.
Is it fair to say that this was two-third of that was price driven and one-third was volume driven? Can you elucidate on that, please? Thanks.
All right. Thank you, very much, Martin. Good morning. Jérôme, please, can you take the first question?
Yeah, on the fact, on the, you know, the impact of the sales, and the fact that there is an impact on the Forex effect and sales versus OIR, is basically, a mix between, you know, a mixed product between the, a mixed bag of currencies, in fact. The Forex effect in sales, you know, is very much impacted by emerging countries that decrease versus EUR, and that was very much aligned with Latin America, RMB and others. That is explaining the fact that is going down.
You know, on the operating margin, we are, you know, much more protected on the fact that because, you know, we have a main part of our large industry, which are, you know, with index, indexation, the Forex indexation protection. That explain the difference. That's basically, you know, a mixed bag between the fact that the mix of, of currencies can be different between, you know, sales and operating income. That's basically what we can say.
Martin, regarding your question on healthcare in the Americas overall, I think you have to look at the different segment overall to understand the dynamic because indeed this is a mix of volume and pricing. The two of them are quite positive for the region. If you take the medical gas in North America and especially in the U.S., the pricing has been the majority of the growth with limited volume. If you take Latin America, for example, for the home care, you see a strong volume growth, and on top of that of the pricing.
All in all, it's a mix of the 2, with probably a higher contribution in the pricing overall than on the volume, if you compound all the different geographies, but again, with dynamic which are a little bit different. I think this leads me to, I mean, the growth of healthcare overall, which has been very significant. I think we are basically in line with some of the trends that we have seen in the pre-COVID period, with volumes which are normalizing in most of the countries for the medical gas, but the new things, which is the pricing, and this is true, I just mentioned North America, but this is true also in Europe, and that's a good contribution.
For Home Healthcare, we see the organic growth, I mean, back in term of volume growth, but also, and there again, that's another good news, the pricing being compounded. This means that the Home Healthcare today is in the range of 8% growth for H1. We do expect this to continue at the same trend for the rest of the year.
Thank you.
Next question, please.
Thank you. Your next question comes from the line of Laurent Favre from BNP. Please, go ahead.
Thank you. Good morning. My first question is around volumes. I think, if we summarize all the comments, like, in Q2, we were stable at a very low level compared to Q1. Are there areas where you would expect further slowdown, e.g. electronics, into the second half? On the other side, are there areas where you are hopeful that we should see an improvement into the second half? That's the first question. The second one around margins. I was wondering if you could talk about margins in the Americas. I think the improvements over the last 2 years has only been 30 basis points, despite all the improvement on pricing in merchants, you've talked about healthcare.
I was wondering if you could talk about what are the drags on margins or the offsets on margins in the Americas? Thank you.
Thank you very much, Laurent, and good morning. I will ask later, Jérôme, to talk about the margin in the Americas, but maybe some comments on the volume, and more specifically, I will ask Marcelo and Pascal to comment on the volume, especially the IM volumes in the different regions. All in all, what we see clearly is that the volume in large industries should basically rebound compared to what we have seen. Taking into account also that we had a quite low comparable basis for H2 last year. You should see something which is back in the positive in H2 for large industry, and maybe Pascal will make some comments on what he sees also in Europe.
Clearly, we see that for the electronics, Q2 was much lower than Q1. We do expect Q3 to be in the same range. This is a slowdown over all of the industry, both in term of memory and in term of device and chips. However, we are getting some confirmation from customer that there should be some pickup in Q4. Let's be cautious, let's also keep in mind that the comparison basis is in, for electronics, very, very high. For the last year, as a reminder, we were at 17% in electronics, and we were at, I think, above 20%, 21%, in Q2 last year.
What we see is that the slowdown in the electronics is mostly affecting the advanced materials and the electronic specialty materials, but the carrier gases remains very strong due to the model with the take-or-pay and the fixed part, but also with the strong contribution of a new startup in electronics in different part of the world. That's for the electronics. Maybe finally, in term of volume, as I mentioned, Home Healthcare, we do expect to remain strong, as I mentioned before, both in term of volume and also in term of pricing. Maybe I turn over to Pascal Vinet for some comments on Europe, IM, and anything on the line.
Okay. Maybe I start with large industries. Clearly, we had a bottom in Europe in Q3, Q4 last year, so volume have improved in Q1, and have remained pretty steady between Q1 and Q2. Right now, to give a bit of color, we only have a small minority of customers that take up a level, not very many. That was slightly different at the end of last year. Visibility is quite low, I would say, but we expect positive comparisons anywhere, given the low level we had last year. Refining is looking reasonably solid. Still seems to be improving in Europe.
We also have the restart of a blast furnace in France that will help us. Chemicals are the biggest question mark. It's difficult to see what trend is really we are really facing in the chemical market. For industrial merchants, as you have seen, volumes have been pretty flat if we expect the specific cases of CO2 and helium. With cylinders slightly up, bulk slightly down. No super specific market differences to comment on either from a geographic point of view or an end user, an end market point of view. We do expect IM to continue to show a positive pricing, as I mentioned before. Volumes were flat in the last quarters.
We don't see any change of this trend coming, but again, visibility can be somewhat limited.
Thank you very much, Pascal. I think it's clear, resilience in the volume, and we do expect this to continue. Marcelo, any comments? I mean, do you see this resilience in the IM merchant in the IM business in the US also?
Yeah. Thank you for the question, and thank you, Francois. Yeah, I see more or less the same as you, Pascal, in Europe. In the U.S., we do see some softening in the manufacturing sector for, in general, for the second half, but it's still a strong activity in the construction market, and our services related market, including food market. I do expect to resilient volumes for the industrial merchant. hard goods, the same.
I think the related industrial hard goods related to the activity in general, we may see some softness as well, but we still see a very strong pipeline and opportunities in terms of industrial automation and related markets that will help to offset eventually some trends in terms of softness in volumes for hard goods in general. I'm very positive for the trending volumes for healthcare in general, not just in Canada and the U.S., in our proximity care, but also a strong performance for Latin America for the second half of the year, in terms of volumes in home healthcare, in healthcare in general. Electronics is, like you said, François, I think applies the same year for the U.S.
A slow advanced materials in general and ESG following the global slowdown of the semiconductor industry, but it's still very resilient on the carrier gases. And good momentum in terms of equipment and installation sales in the U.S. As you know, the CHIPS Act is boosting the activity of the construction of new mega fabs in the U.S. And there are several projects in the pipeline that would compensate partially for the slowdown in advanced materials and electronic specialty materials.
Thank you very much, Marcelo. I think, Laurent, you see and you perceive, of course, very well, I mean, the power of having a portfolio of activities, because we see clearly, ups and downs. Overall, I think we are quite conservative in the way we are looking at the market, and we are ready, I mean, for any kind of softness to make sure that we continue to deliver the performance. That's the picture we have. I think we have to be modest, overall, because in the current context, I mean, visibility, we know that very well, is low for everybody.
Margin in Americas, Jérôme?
Yeah. Thank you very much, Laurent. Overall, you see a very strong margin improvement for the group. You see that a very strong margin growth in Europe, as well in Asia Pacific. In Americas, we also continue to grow. There is basically a few effects. First, in merchant, on the positive side, we still benefit from a strong pricing. We discussed that with Marcelo, but also from strong efficiencies, and that's something that we are very happy with. This time, you know, on the, on the negative side, but it's something that, you know, is very due to punctual, is the fact that on electronics, we have lower volume, you know, on the, on advanced materials. Basically, the increment, incremental part is lower than usual.
To some extent, in large industry, we have costs that were connected to the customer turnaround. As we discussed, we have few customer who took the opportunity to make some turnaround, and those are specific costs also were connected. That's basically.
... the plus and the minus, but as you saw, the margin in Americas continue to grow.
Thank you very much. Next question, please.
Thank you. Your next question comes from the line of Jean-Luc Romain from CIC Market Solutions. Please go ahead.
Hi. Good morning. Thank you for taking my question. It relates to your investments in electronics in Southeast Asia, Taiwan particularly. Given China's increasing assertiveness on Taiwan's independence, how do you take it into account or consider those risks when investing in this country?
Thank you very much, Jean-Luc. I think that's a good question, but, of course, I mean, we are looking at the geopolitics and the trends in the different countries of the world. Keep in mind that our business is local. We are investing for local customers, for companies and for sites which are top tier production facility. That's very important in our assessment. That's the first thing that we are looking at to make sure that we invest in the proper site, with the proper technology and the proper competitive advantage. Of course, I mean, we look at the geopolitics environment.
Our view is that, both, I mean, China and Taiwan, remain growth market with a lot of opportunities, and there is a value for us to continue to supply customers and to invest, and to invest also, as again, as I mentioned, locally. For us, we will continue to support our customer, and, again, in electronics, but also in the energy transition, there are many opportunities to come.
Thank you very much.
Thank you. Next question, please.
Thank you. Your next question comes from the line of Geoff Haire from UBS. Please go ahead.
Good morning, and thank you very much for the opportunity to ask a question. Could you possibly tell us what the comparable growth was in large industries, X, the turnaround impacts both in North America and Asia? Also just on green hydrogen, obviously the sale of the Hydrogenics stake. I just wonder, does that imply that you no longer believe that having access to electrolyzer technology has a strategic advantage within the green hydrogen sort of roadmap?
Thank you very much for those two questions. I will turn to Jérôme for the first one, but I'm not sure he's able or willing to provide the details. Jérôme? What we can say, you know, we do not communicate, Geoff, on the growth in large industry, excluding turnaround. What I just can say is that, you know, we are very well protected by the model, which, you know, with the take-or-pay and the fixed fee, which is, you know, keeping the high level of margin or margin that we have.
Basically, what we see today, there is a customer turnaround in the U.S., some in Europe, in Asia, but, you know, the value of the models of the large industry is very well protected because of the structure of the contract, and you know, that has was always been demonstrating during, you know, difficult times. That is not something that we are very much afraid of, in fact. Regarding your question about green hydrogen and access to technology, I think that's a very important point. As you know, very well, I mean Air Liquide has been leading the way in term of producing hydrogen with electrolyzers.
We operate today on more than 40 electrolyzer units in the world, with a different set of technology being alkaline or PEM type of technologies. The key question is now to scale up. It's clear that the technologies to produce hydrogen by electrolysis are not all mature yet. That's why, as we consider this is absolutely key in our ability to create value, to master the technology or to have preferred access to the technologies, we have, I mean, a different work stream, working on the different stages of the different types of technologies.
In this portfolio, we add financial participation in Hydrogenics, which was basically, I mean, the technology that we used to build what is today, the largest PEM electrolyzer in the world, in Canada, in Bécancour. That was a joint collaboration between Hydrogenics and of course, the Air Liquide engineering entity. What we see today is that really the challenge for the PEM technology is to scale up. 20 megawatt, it's already big. Many people are talking about a couple of megawatts. We are already operating now for more than a year and a half, 20 megawatt, but we are looking at 200 megawatt for the next unit.
As mentioned by Pascal and, mentioned in Europe, I mean, those are the kind of projects we are developing. We have now, partnership, with, Siemens Energy, which we believe, is, the right partnership, to, scale up and to industrialize the technology. This is not something that we could find with the, financial participation with Hydrogenics. We are in a joint venture with Siemens Energy. The new units that, we are designing and we are building now, are actually, I mean, a joint effort between, the know-how of Siemens Energy in manufacturing and industrialization and the know-how of Air Liquide. We will be, inaugurating actually the first, unit, made by this joint venture, in Germany in, October this year.
I think that would be a good demonstration of the capabilities. For us, again, the name of the game today is to be able to scale up industrial units ready to operate for 15 or 20 years, and to supply industrial customer. That's the name of the game.
Thank you.
Next question, please.
Thank you. Your next question comes from the line of Chetan Udeshi from JPMorgan. Please go ahead. Your line is open.
Hi, thanks. I was quite curious in your thoughts on the performance of on-site or large industries versus merchant, especially on volumes, because, you know, we typically think merchant is a more cyclical, macro-driven business. What we've actually seen is the volumes in merchant have held up much better than your volumes in the on-site business, which is quite weird. I mean, I'm just curious how you see that dynamic into second half. Do you still think the merchant volumes will hold up as we go into second half? Especially given the European PMIs, et cetera, have been quite tough in the last 2 months. The second question was, you know, you mentioned improvement in on-site or positive growth in on-site in second half or large industries, sorry.
I remember you had a pretty negative impact from the mathematical computation of the high energy cost impact in your on-site business last year. I think the point being, your comps are just easy because of that mathematical impact, which was negative. Are you saying the growth will be positive just because that mathematical impact might now be positive because the energy prices have collapsed? You actually think the underlying volumes when we compare second half this year to second half last year will also be better in the large industries business? Sorry, last point, you know, you did about 4% organic growth in Q2.
As we think about second half of this year, do you think you can sustain that level of growth, or should we expect some moderation, just given the comps on pricing and merchant is gonna be quite tough? Thank you.
Thank you very much, Chetan, and good morning. On your first point, I mean, reflecting on the growth, and the resilience of large industry and merchant, you're right. This is a little bit counterintuitive. But as a matter of fact, I think there are some elements that can explain that. We have seen that merchant is quite resilient, and large industry has been in terms of volume, less resilient. I mean, the business model is still very strong for us, because we have the take-or-pay. In terms of profitability and profitability ratio, I mean, the model is extremely solid. We have seen some customer, I mean, decreasing consumption quite significantly.
I think you have to relate to the environment and to the weight of energy in many of those large industry customers, being the steel industry, the chemical industry, especially, or the refining. The fact that many of the customers in high-cost regions, like Europe, have been affected, I think has clearly a role to play. On top of that, I think you have to add to the fact that overall, the economic growth has been probably a little bit less than what was expected. China is a big factor on the global scale, which means that some of the entities, I'm thinking about the chemical in the US, for example, were less export driven than they were used to.
I think that's something to take into consideration. Given also some of the soft market, we have seen customer extending the turnaround, maybe a few weeks or a few months more than that, they would do otherwise. I think that's probably the explanation around the large industry, the volumes. We do expect, as mentioned, I mean, some pickup. The ease in the energy pricing is going to play a role. I think it's going also to probably give confidence in some for some European companies, which have been challenging themselves internally, given the price differential between energy costs in Europe and in the U.S. Also given, I mean, the incentive driven by the Inflation Reduction Act, especially.
I think in those conditions, probably we'll see a large industry in Europe especially, I mean, moving up. The good news again, to looking forward, is probably for industrial merchant to continue to be resilient. Again, the exposure to the energy price is less, we see that those customers are quite resilient. I think it's also due to the nature of the relationship that we have with them. The fact that we manage to adapt to their needs, to continue to provide value, I think is a good way for us to maintain market share or to gain market share in merchant in the different region of the world.
The, the next point is about the mathematical effects that we have seen, if I may say so, last year, especially in Europe. Jérôme, do you want to come back to this?
Yes, I can do it again. Basically, it's a good question, in fact, thanks for raising that. You know, you remember last year we had some what we call a combined effect? We had last year, you know, in H2 2022, some -12% in Q3 and -2% in Q4 2022.
We may have this in the coming months, but for different reasons, because the data price of energy is expected at some point to be negative, while the delta volume could be positive. I will not give too much to you. You know, I'm always said a lot, but we can say that it would be maybe at good level around the negative mid-single digit, but it's a bit early to say. On your last comment about the forecast in terms of growth, I mean, you know, that we are not going to give you the precise guidance on the top line for different reasons, including what I mentioned. I mean, the lack of visibility.
We do expect in the second half to be probably softer in term of top line compared to H1. That's clear. We don't expect a cliff. Again, what I mentioned before in term of balance between the portfolio. Electronics, as I mentioned, especially in Q3, is going to be lower, but will be partly compensated or fully compensated also with the healthcare or with the effect on large industry. Let's be cautious. And again, that's the mindset that we have to make sure that we are not over-dependent on the top line, and that's why also we have all the other actions to make sure that we continue to deliver the performance, regardless of the environment.
Thank you. Next question, please. Thank you.
I think we are reaching close to the end of the session, but we have Peter online, I believe. Of course, Peter.
Thank you. We will now take our last question, and like you said, the last question was the line of Peter Clark from Société Générale . Please go ahead.
You made it again. I've got two questions, obviously. Obviously, if I look at the underlying margin improvement now against the ADVANCE target of 160 basis points, plus clearly on an annualized rate, you're going to be over 200 basis points. Just wondering if you're thinking of giving an update to that at some point? Then the second question: I think for the first time, I've read that IM pricing in Japan was up significantly, and obviously there's a bit of a cost element passing through, et cetera. I'm just wondering if anything structurally is improving in that market, which I think historically has probably been a bit of a drag for you. Thank you.
Thank you very much, Peter. I think Jérôm is going to be delighted to answer the first question. It's good to hear you, Peter. We did, as you know, a very strong margin improvement in H1, plus 80 basis points. In this environment, it's a very strong performance. You're totally right. I will say those thing, and don't be surprised, Peter, but performance, of course, remains a key focus for us, as we demonstrated in H1, which again, is remarkable for the challenging environment.
Our guidance for financial year 2023 remains in a framework of ADVANCE, which is, as you know, +160 basis points over the next 4 years, and that's really our ADVANCE ambition. That what today, which is, you know, a framework, and we'll stick on that. On top of that, Peter, you know, that the visibility is low in H2, and this uncertain environment that we talk about, both in terms of energy price, volume. We will, by the way, compare with high comparative last year, as you know. All in all, I will not give you any specific number, but I can tell you that we are absolutely committed to deliver margin improvement.
Thank you very much, Jérôme and Peter, and thank you for noticing Japan and the improvement in Japan indeed. Yes, you're absolutely right. I mean, this is not something that we have seen for many, many years, not only for us, but for the industry in general. We have been able to push for the H1, a double digit, strong double digit pricing impact in Japan. I think this is really an illustration of the change in the mindset within Air Liquide, on how we are approaching, I mean, the value creation. Making sure, of course, that we balance and making sure that we keep our customer satisfied.
We answer the question, we create value, but we are driving for pricing and for performance. Yeah, that's a, that's a good catch, and that's an illustration. It's not the only one, but, of, what we are doing every day in term of performance. I think I will, I will stop here and, this now conclude, this session. Thank you. Thank you all very much for, your question and your participation today. To summarize, we deliver a strong performance, in the first half, while being able to build the future. I think it clearly demonstrates the resilience of our business model and our ability to create value for our customers.
In the months to come, we will remain focused on execution and delivery of our ADVANCE program to achieve our midterm objectives in term of growth, return on capital employed, CO2 emission reduction, and overall value creation for our shareholders. I wish all of you a very good day and an enjoyable summer break if you manage to take one. Thank you very much. Goodbye, and take care.
Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.