Eurofins and Air Liquide Report Strong H1 2023 Results, Focus on Digital Transformation

Earnings call: Eurofins reports robust H1 results, aims for digital leadership By Investing.com

Eurofins Scientific SE (ERF.PA) demonstrated resilient financial performance in the first half of 2024, achieving a 6.5% revenue growth and a substantial improvement in margins and cash flow despite significant investment in digitalization and IT infrastructure. The company, which is progressing towards becoming the most digital entity in its industry, is also actively investing in innovation, particularly in prenatal testing and AI-based biopharma discovery tools. With a strong balance sheet and a leverage ratio of 1.9 turns, Eurofins is poised for further growth, focusing on strategic acquisitions and a commitment to long-term objectives, including a 6.5% organic growth and a 24% margin by 2027. Eurofins remains committed to its strategy of investing in start-ups and acquisitions that complement its business model, while also maintaining transparency and governance in its operations. The company has planned a significant buffer for variations in start-up losses and restructuring costs, ensuring readiness for future challenges. As the company heads into the second half of the year, it maintains a positive outlook on achieving its objectives and delivering value to shareholders. Operator: Ladies and gentlemen, welcome and thank you for joining Eurofins Half Year 2024 Results Call. Please note that this call is being recorded and will later be available for replay on the Eurofins Investor Relations website. Throughout today's presentation, all participants will be in a listen-only mode. [Operator Instructions] During this call, Eurofins' management may make forward-looking statements, including, but not limited to, statements with respect to outlook and the related assumptions. Management will also discuss alternative performance measures such as organic growth and EBITDA which are defined in the footnotes of our press releases. Actual results may differ materially from objectives discussed. Risks and uncertainties that may affect Eurofins future results include, but are not limited to, those described in the Risk Factors section of the most recent Eurofins annual and half year reports. Please also read the disclaimer on Page 2 of this presentation, subject to which this call and the Q&A session are made. I would now like to turn the conference call over to Dr. Gilles Martin, Eurofins CEO. Please go ahead. Gilles Martin: Hello, everybody and thank you for joining our half year conference call. We have a small slide show that is online and you can access and I am going to start on Page 5. So we have had quite strong set of results for the first half of the year. We are very pleased with the results. As those of you who have been following Eurofins for a long time now, the first half of the year is by far the weakest part of the year. That's due to seasonality, mostly in the Northern Hemisphere and clients finishing their budgets in the fourth quarter. Typically, the fourth quarter is usually our strongest quarter. So considering that, the result of the first half are very good. And they are good on many aspects. Operationally, we are achieving a lot. We are making very strong progress in our digitalization initiatives and developing the tools, the bespoke IT solutions to run our labs most efficiently and in a standardized way and the more we look, the more we find the vast diversity of IT solutions everywhere, and we now have a clear path after successful pilots to rationalize a lot of this variety and of course, achieve better service to clients in many areas. So, that's one of our main objectives to be the most digital company in our world, which of course, brings a lot of other benefits, because once we are very digital, we can use AI much more with the large amount of data we have and we can use robotization in our labs to streamline things, very efficiently. So that's very encouraging. And the results are especially encouraging, because we are carrying a lot of cost. We are carrying a lot of costs that will not go on forever. First, we are rebuilding our IT infrastructure in independent zones with the latest security tooling and the most resilient structure we can find deploying a lot of standardized applications also in the finance, treasury, etcetera. And so after things, we have already completed long ago, like standardizing purchasing. So a lot of investments and in spite of all the spend we have in those investments, in spite of all the money we spend on startups, in spite of all the money we spend on building new labs, moving our labs into those large hubs and building many more spokes to be close to customers for the time-critical assays, in spite of a large spend of M&A, in spite of significant share buybacks that we have been accelerating already in the first half, we still managed overall to reduce our leverage. And that's quite encouraging and I see that continuing. So, that's in a nutshell a quick summary of the first half. Of course, we can come back to specific aspects during the question-and-answer session. Laurent will talk more about our financial aspects. On Slide 6, you see the margin improvement. We already had a 120 bp improvement in the second half of '23, this is accelerating. Now we've got a 220 bp margin improvement. Again, in spite of all the costs we have in IT and etcetera, that are not CapEx, and they are really spend that we do to reorganize our IT and a lot of development costs and all the engineers deploying the software, designing the software, etcetera. So quite encouraging. We, for those of you, who wanted more details, I think we are probably on that level, one of the most transparent companies in the world, because we give you not only a full segment reporting by geography and we still feel that geography is the best way to give granularity to our results, because there are two differences across continents between the performance in America, where the economy is still quite dynamic and in Europe where it's also sharing with you the organic growth, the revenues and organic growth performance by type of activity. And so we'll give you two dimensions in that sense. And what you see there is we are doing quite well overall. And you probably - those of you who track other companies like Thermo, Danaher (NYSE:DHR), in other sectors or for example, Charles River will know that the pharma industry is a bit soft, has been for a number of quarters. And actually, we'll continue to grow, so we're positive. So we are fortunate to be in some of the more resilient areas of service to the pharma industry. It has been a bit softer, especially in Q2. And the pharma industry is well funded. There is a bit of hesitancy on project starts and so on. We think this is temporary and will pick up exactly when it's hard to say, whether it's Q3, Q4 or Q1 of next year. But we see - overall, we are still very bullish on that activity. It has been a little bit softer, especially the second quarter. Otherwise, you see the usual higher growth in life, so food and environment testing and consumer products has started, technology has picked up again, nice growth. And the clinical is always low single-digits, low to mid-single digits. So, it's actually clinical that did relatively well in the first half at 4.5% organic growth. And you have more details in the press release. On Page 8, we share what we do on buildings. We continue to do that. We continue to build new buildings. We have had discussions with many of you regarding the buildings that my personal holding owns and we are getting them all evaluated by third-parties and we'll put them up for - we'll give Eurofins the opportunity to buy them should the non-related shareholders to decide. It doesn't have to be all in one go. We don't want to stretch the balance sheet. We can replace some of the things we wanted to do externally by those buildings, if our shareholders want that. Anyway, we will all do that in a very transparent way when all of that is ready. On Page 9, we talk a bit about start-ups. So we continue to do many start-ups. We still feel acquisitions are expensive, but when Eurofins is trading at 8x or 8.3x EBITDA, obviously, looking at external acquisitions that go for 10 or 12 for the good one, 15 is seems a bit as not the top priority. So we would rather buyback our shares in those circumstances. Until this discount is basically what we feel is certainly not justified is gone. We should rather buyback our shares. And by the way, we are doing that. We announced it and we are doing it, but we don't have to give you every details of what we do with conditions. And then acquisitions, we continue to do acquisitions. We have headroom. We will have even more headroom as our profits continue to increase and we are confident that they will continue to increase as per our plans. And so we have a pipeline. We still find acceptably priced acquisition, mostly small. And if they fit well, if they have the right management, we still can find smaller companies that we can buy from 5x to 8x EBITDA or sometimes slightly more. And so we continue to do that. So I think in this quarter, apart from the slight softness in biopharma, which we find is very temporary. Everything is on green or very green and the outlook is quite good. And Laurent will give you a bit more detail, a little bit more color on the financial aspect. Laurent Lebras: Thank you, Gilles, and good afternoon. It's my pleasure to present you with a very good set of results for the first half. As you can see on Slide 12, we had clear improvement on all fronts in the first half. With a revenue growth of 6.5%, a good increase of our EBITDA by 21% year-on-year, reaching €740 million, a very good increase of our adjusted EBITDA margin also 220 bps improvement year-on-year reaching 22.1% ahead of our full year objective, and a decreased SDI to only 6% of EBITDA. So, all this translated in a very strong increase of net profit by 46% year-on-year at €151 million. Moving to Slide 13, you can see that our revenue growth of 6.5% in the first half was mostly relying on a good organic growth of 5.6% and we had a slight negative FX impact of 0.5% and a good contribution from M&A by 1.1% of revenues. On Slide 14, our performance by segment shows a very strong improvement of margins in all regions and especially in Europe, with a plus 330 bps increase year-on-year thanks to volume price and cost control measures. This was particularly strong in the DACH Region, and while France remains accretive to the profitability of the region. In North America, despite a slightly more moderate growth of revenues, the margin showed an improvement also of 190 bps year-on-year, thanks to cost discipline. And in the rest of the world, we had overall a good growth and a good margin progress. Moving to Slide 15. You can see that we had a very strong cash flow in H1. Our free cash flow was almost multiplied by 4 in the first half. It increased by €205 million to €279 million, we had a very good cash conversion at 39% of EBITDA and more than 100% of our net profit. And going forward, we aim at a self-financing all our needs, whether they are M&A, share buyback CapEx or start-ups. On Slide 16, as mentioned earlier by Gilles, we continue to invest to develop a unique positive advantage. So our CapEx level to 7.4% of revenues. We still spent 25% to purchase and build out our own site, 21% on IT and 44% on lab equipment. On Slide 17, we had a better net working capital at 6.3% of revenue, thanks to improvement on both the DSOs by 1 day and the DPOs by 2 days. And to conclude on Slide 18, you can see that we have a very healthy leverage of 1.9 turns in H1, well within our target range. We have no more debt maturity until year-end due to the strong cash generation in the first half and the early redemption of the July bond that we paid in June. And overall, we have a very strong balance sheet, well spread debt maturities and very ample liquidity with over €1 billion of untapped credit lines. And now I turn back the microphone to Gilles for the conclusion of this presentation. Gilles Martin: Thank you, Laurent. Another thing where we spend a lot of money on is innovation. So our labs are our pioneers in many areas in test that will have a big impact in the future. We'll just give you a couple of examples, but we have what we believe is the best prenatal testing test, which covers not only Down syndrome, but many other diseases. And that's also acknowledged by my peer reviewed the Impera Reviews publication. Another area, everybody talks about AI and AI in biopharma discovery is going to be - starting to be actually a very useful tool. And Eurofins has huge data sets being the largest company in this field or really the top companies serving the very early phase discovery phases we generated over the years, a huge amount of data. And we start to have good traction from clients in our AI-based discovery tools to accelerate their development. And of course, when we do those programs, we can benefit from the follow-on work in our laboratories. Another thing where we spend a lot of money is TGI. This is, of course, it is part of our separately disclosed spend per annum of over $10 million or probably more than €10 million in clinical trials to the validity of the unique and proprietary test that we have. And of course, those are things we could stop doing tomorrow if we decided not to but we do them and we invest that money because we feel those the results of those clinical trials can lead to very high and very also profitable markets. So we're not only a lab company doing route in testing like any other labs, we are really developing unique solutions because we believe in the future, they will generate very significant growth and very significant margin. But of course, we cannot talk about all of them because we have many, many such initiatives throughout our group. And on the outlook on Page 22, maybe something to clarify, we wrote it in our press release, but we don't give guidance. We are not in the business every quarter of adjusting what we are going to do or what we are not going to do. We try to be transparent for long-term investors. We try to be very transparent about what we do, what our plans are, [indiscernible] period, of course, to achieve certain things, we have to invest and our - and we do invest a lot of money. But we think considering we are in very good sectors with good organic growth, good sector growth potential and a big advantage to the biggest player in the sector and the most efficient players. This sector offers very high return capital employed on organic developments, slightly lower on inorganic developments because we incur goodwill. But we think it's a very good place to deploy capital. So the main criteria for us is return on capital employed. We have a hurdle rate that we define and as long as the interest rates remain in a certain range, we don't change it. So it was long ago, 16%, then the interest rate came down a lot. We brought it down to 12%. We brought it back up to 16%, and that drives most of our decisions. In terms of doing an inorganic investment, buying a company, we want every investment that we make to achieve the 16% hurdle rate in your - at least in year 3. Then we try to set an objective of organic growth, and that objective depends on the level of inflation and other aspects. So that's why - that objective is not for each quarter. That's an objective that we set as what we think we can achieve all long periods and is currently 6.5%. Probably it's too precise. We should rather revert long-term to what other companies do with high-single digits or mid- to high single digits, etcetera. We might do that at some point once we have achieved those objectives that we have stated. And every year, we set an objective for the year. We're not in the business of setting objectives every quarter, changing objectives every quarter unless something very significant happened, we just keep those objectives. And some of you have observed that we are - we have a very significant margin improvement in the first half by not changing our objectives. We're not saying that we will have a bad in the second half. We're just simply not changing our objectives. Each of you is totally free to set whatever objectives they want for us or whatever resort they think we're going to do in the second half, we are saying nothing about it. So to summarize on Page 23. So we've had, as Laurent explained, a very good half year, and we achieved a lot of things operationally. The financial results are very good. The things we can influence, I think our teams did a good job. We think we will continue to do a good job. We don't know if biopharma will stay a bit soft for much longer or not. But anyway, we can adjust the cost to whatever growth we're going to have. We have this objective of 24% margin, and we're convinced we will get there by 2027 or before. And we have those objectives on cash flow. And those objectives on return on capital employed, and that's what we are sticking to. The second half might be favored by a bit more working days, but that's not the main thing. The main thing is that directionally, we think in the current inflation environment of anywhere between 2% and 3% our overall secular organic growth target of 6.5% is in the ballpark of what is achievable over a long-period. And as we do all those investments and we benefit from the efficiencies from all those investments, we have quite some headroom to improve our margins those and the resulting cash flows. So that's what we can say about the outlook. And I'm sure you have some questions, and I'm happy to turn over the microphone to you for questions. Operator: Thank you very much. [Operator Instructions] Thank you. The first question will be asked by Suhasini Varanasi of Goldman Sachs (NYSE:GS). Please go ahead. Suhasini Varanasi: Hi, good afternoon. Thank you for taking my questions. I have three, please. One on the top line, the softness that was there in pharma, do you get a sense that this softness will continue through the rest of the year? Or do you expect it to pickup in the second half of 2024? Second is on SDIs. They did track a little bit lower year-over-year versus the full year number that you gave of €125 million. So can this be lower than your full year number? Or do you expect it to pickup in the second half? A third question is on margins. I appreciate the color that you gave in the commentary. But just to be clear, there is no reason why we should not expect a seasonal pickup in the second half of the year versus the already strong first half margins? Thank you. Gilles Martin: Thank you very much. The top visibility on pharma, pharma has a lot of money. The big pharma has a lot of money. Biotech is starting to be also better funded. There's a bit of hesitancy in starting projects and reviewing a bit the pipeline. It's very hard to time. I think there are other companies that are in the same boat that are serving the biopharma in a big way. Some of them are saying they see a pickup already, the first sign of a pickup or pointing to Q4 as a pickup. Frankly, it's difficult to predict the future about that. Maybe later part of this year, early 2025 from what we can tell, but predicting the future is always difficult. I think overall, we are doing slightly better actually than other biopharma exposed companies. On the SDI, we made an objective that's what's in our budget. Maybe we're going to come out a bit lower than that. It depends on the ramp-up start-ups. We have many start-ups, they are starting, how fast do they ramp is a question. We have some reorganizations and moving also exactly how they land. So we've - we opted not to change anything on that or not to change anything of our objectives. It could be we land below 125. Margin, yes, we have no reason to think that the second half would be a bad second half. That's what I can say. On the other hand, we will not change objectives because we set objective once a year and unless something really terrible happen, we don't change them. They are already very detailed and very precise, probably too detailed and too precise. But they are like this, and we'll see how to formulate it maybe next year. So that we have a good outlook on the second half but it's still the second half. So we're not going to - otherwise, it's a lot of work to do, to ask our teams to do update their planning on a rolling basis every month or every quarter, we don't want to go into that. Unidentified Analyst: Hi, thank you for taking my questions. I have two, please. So in your recent press release responding to the short seller allegations, you commented on the fact that you might increase the share buyback program quite significantly. So given the good free cash flow performance in the first half, why was this not announced today? And then secondly, given SGS this morning reiterated that they intend to keep their Crop Science business. Could you just confirm please that you still expect the deal to close or whether anything has changed there? Thank you. Gilles Martin: Thank you very much. Well, we already announced that we will increase our share buyback. So I don't see the point of announcing it a second time. And that's all I can say. We're not - we do disclose every 3 days or every 5 days. I don't know what we buy back every 5 days, every week, and you will see what we buy back. Now of course, that depends on share price evolution, all kinds of factors. We - and but yes, we intend to do what we said we would do. But we don't - we have authorization you can look into for buying back shares from the - from the general assembly. We have quite a lot of headroom to do that, depending on share price evolution. And as I said, at the moment, considering the enormous discount that we suffer, I mean it's close to 50% on an EBITDA basis, EBITDA multiple basis. Obviously, this is something that we have to consider. We also have a lot of good ideas to deploy capital at high rates of return internally. So it's not our job to buy back or free float or not - but this is something we obviously should consider in going forward. And we announced that we would do it. And so this is what we're doing and the Crop Science, where we have a difference of opinion of interpreting the contract. We believe the acquisition contract with SDS is still valid, and we're going to pursue our rights to get this transaction to close. And of course, this will have to be decided by the right bodies and we cannot comment, of course, on the details of that. But as we announced in the press release, we will pursue this deal to closing. Unidentified Analyst: That's very clear. Thank you. Operator: Thank you very much. Your next question is coming from Himanshu Agarwal of Bank of America (NYSE:BAC). Please go ahead. Himanshu Agarwal: Hi, thank you for taking my questions. Just one follow-up on the pharma business. I think in the past, you have mentioned that in a weaker macro environment, you benefit from more outsourcing by pharma companies. So isn't that the case in the current environment, if you can clarify on that? And secondly, if you can talk about like given your decentralized structure, and I understand you're trying to build centralized IT infrastructure, digital infrastructure. So how is your difficult it is for you to build that? And also, how do you locate the associated costs to different subsidiaries that you have? Gilles Martin: Thank you. More outsourcing and weaker environment. The environment is not so much weaker for the pharma industry. I think they're doing quite well overall, and they're making a lot of money. Of course, easy and the medium environment were to get tougher, that's usually what they do. They look at internal cost and look at what they can outsource. At the moment, I think from what I hear from our pharma team, it's more which program to prioritize and they are - so overall economic environment is a bit hesitant. It's doing well, but people are a little bit hesitant and it could actually pick up all of a sudden. It's more a matter of mood than a bad economic environment. Yes, maybe some misunderstanding of the centrality. We have independent companies run by indent entrepreneurs who are empowered to take decisions themselves to serve the clients well to decide who they hire, who they fire, when they pay people, what they charge for their test and everything. However, we have clear areas of activities [indiscernible] and within food testing, there are specialties like pesticides, toxins, and they are very different from microbiology. And we develop IT solutions, specifically for each of those activities, Modos IT solutions can be used worldwide. So, all those labs can use the same IT solutions. We have a different level of advancements in the deployment of those IT solutions. In biopharma product testing, we have a very high level of deployments of the identical solution, maybe 80% worldwide for the Central LIMS systems, maybe 60% for the online access for clients. And of course, there are all the tools that we are finalizing, we do think that by the end of '26, we'll have 100% deployment of the whole suite of tools but then those are the same tools everywhere. So the labs can operate completely autonomously, but they use the same IT tools because you're talking 50, 100 million, maybe more for a business line, maybe 200 million to develop a complete suite of IT solution one of those business lines. So none of those individual labs could afford it, and you get from that enormous amount of transparency of also efficiency. And for clients, they get the data in the same format from any lab around the world. So it's very expensive. So to your question, I mean, our IT costs are running now, maybe overall, not even counting what we sort a little bit that is capitalized, something like 6% of our revenues, maybe more. And it's at least double what it should be long-term. So we have we are in the middle of a peak investment phase for these digitalization programs. Not only will that go down when we have finalized this IT segregation of our infrastructure in smaller, more resilient zones and also finalize the bulk of all these developments and the associated, let's say, operational problem linked to the deployment when you change the software for a while, it also reduces the effectiveness of the business that gets in the new software. But once all that is behind us, we expect very significant improvements in productivity, efficiency, quality of service, as we already see where it's already done. And that also makes us very bullish about the future. Himanshu Agarwal: Thank you. If I may just ask one more on the share buybacks. I see that in the last 1 month, you have stepped up the buybacks doing around 12 million every peak, and you have almost used half of the 200 million of share buybacks that you announced last October. And so should we expect and given your earlier comments, should we expect another buyback program to be announced in-line with one of your responses in the future? Gilles Martin: Not possible, we'll see. I think it's quite funny what happens in the market. We see it from inside. We see claims that have been labeled against the company that are completely absurd to claim that we invent cash that's basically claiming that all our accounts are a fraud that we're like, then we should do another job. It's really completely crazy. And I think investors are not stupid. At some point, they will realize that this is just nonsense. And while some of those that are not close to the company might have somehow be scared because the water sometimes got it right. Here, they got it very wrong. And some investors know that. So we're going to have to see how the share price evolves over the next 2 weeks and months, and we react accordingly. What is clear right now is that, we believe that buying back our shares is a very good investment. Himanshu Agarwal: Thank you. Operator: Thank you very much. Your next question is coming from Neil Tyler of Redburn Atlantic. Please go ahead. Neil Tyler: Thank you. Good afternoon, Gill. A couple left, please. Firstly, in your statement this morning, there are numerous mentions of productivity improvements and site rationalizations I know you've never been one for announcing sort of major restructuring initiatives, but it seems as if there's been quite a substantial response to the margin decline. Can you perhaps frame for us how far through those measures you are and whether in terms of both the costs incurred and the benefits derived from those, if you sort of emphasized it all into one bundle. That's the first question. And the second one relating to the investment in owned sites. Can you just sort of help me understand why you see it as a priority to purchase those sites owned by related parties. Is that sort of governance over sort of financial benefit? Because I would have thought that the one of the motivations being to try to avoid sort of egregious rent increases, that would be less of a likelihood for those sites that are owned by your holding company. Thank you. Gilles Martin: Yes, I couldn't agree more with you. I think we have to deal with the market and a lot of people in the market don't have time to do their homework might have opinions that we don't share. Nonetheless, we take into account everyone's opinion, I do think that my holding is working very well. And it's a landlord that's not going to take advantage of the company. And the current situation for me is probably the best for Eurofins and I would agree with you, we should probably economically from a cash for the company, profits of the company, etcetera, point of view, we probably could wait 2, 3 years do as we had planned before, do the external acquisitions of buildings. It's not so many that we need, by the way, to finish our plan, 2027 is not so far out anyway, some of that will happen anyway because it started. We are being - we are already constructing site for both sides that we need to redevelop and so on. So some of that will happen anyway. But yes, it's more governance. It's more, how do you say that appearance. I think for a company of our size, it doesn't look good, and there are related party transaction. We do our best, and there is a special committee in the Board that is tasked with that. We do our best to ensure everything is at arms length and is fair. Well, it's very easy for short sellers to try to make that look unfair to the company and some of our investors think it's a nuisance that's better avoided. And in that sense, if I look at it purely from the volatility of the share price point of view, there is a case to be made to prioritize buying back those buildings. Although economically, I would agree with you, it's probably not the best thing to do. But we have to consider all point of views. And anyway, we'll see what the majority of our investors decide because I don't intend to take the decision myself. We will propose it. We'll - my holding will give you the options to do it. And then your options can decide what a - non-related shareholders can decide if they think it makes sense or not and how fast. Now in terms of your first question on product improvement, we are decentral. So I don't believe in those programs where you say, yes, we're going to cut 10% of our employees everywhere because it's not one size fits all. We have areas that grow very fast, which are adding a lot of people. And what our teams did, there were areas that were built up during COVID, especially in clinical diagnostics where, indeed, they had hired a lot during COVID. After COVID, they might not have been fast enough in adjusting and this is not finished. We also have shared that Europe has been soft overall, and especially in food testing for the last 2 years. It's already picking up a bit. We have some adjustment to do there, and we did it, and it's not completely finished, but it's also part of the program. Sometimes we just need to finish building the hub labs before we can consolidate the local labs. So there are things that take time. So and we break down the amounts in terms of what other cores were structuring because in our SDIs, we have 43 million, I believe the EBITDA level. And the bulk of that is for our start-ups, and TGI is maybe 10 million of it or close to 8 million of it. So a large part is for start-ups in part well lot of structuring, it's only 50 million. I think SGS was 30 million this quarter - this half year or something like that. So we don't have massive restructuring but we have one and related to the leaders of our companies to decide or our countries to the decide if that makes sense. We still have some to go, but it won't be huge. We still have some to go. And we also have some companies that are really isolated in the market that - where we don't see them becoming leaders, we can consider selling them. We did small sells here and there over the last 2 or 3 years. We might continue that. Some we might simply close because we don't see them becoming a leader in their market. So we flagged that over this year, next year. And that's why on the SDI question, I wasn't super specific as to the 125 million because it depends on the judgment of our leaders on the ground, whether they should do it, what solutions they find, if they can pivot the companies to better markets, etcetera. So we have for this year, we have quite we've planned enough buffer for them to do what is required and in doing this streamlining, although we don't think we're going to need all that much money. Sorry that I can't be more quantitative. But next year, we'll be when we said... Neil Tyler: No, that's helpful. Great. Thank you. And just on four of those businesses that are still under review, I mean I presume there's sort of fairly de minimis in terms of their contribution currently. But is there any - do you have a perspective on the percentage of revenues that are still under review? Operator: Thank you very much. Your next question is coming from Arthur Truslove of Citi. Please go ahead. Arthur Truslove: Thanks very much. Good afternoon, everyone. So three for me, if I may. First question, please. On the margin, you've clearly grown the margin really, really well. I guess, biopharma has obviously underperformed growth wise, and I would have understood that, that was higher than the group. North America looks like it's grown organically at high 2s in Q2. I guess my question here is kind of given those things, can you just provide a bit more detail on how you've managed to do this. And if you have done any kind of restructuring when that happened and when the benefit kicked off. Question two. You've clearly done very well increasing the payables days and reducing the receivables days. Are you able to just articulate a little bit more on how you've done that? And then the third question from the P&L in the first half report, you've got finance income of 14.9 million, of which around 13.5 is in separately disclosed items. Are you just able to say what the separately disclosed element of that financing is, please? Thank you. Gilles Martin: Alright. So multiple questions. Yes, but on the margin, we have flagged already last year and maybe after Q1 that we carried a bit too much - too much staff and so on, among others after COVID. And so we indeed our teams and also in some areas of Europe, which were affected by lower growth, and we did - we are working. No, some of it has happened also in the second quarter. And we still have some to do in just adjusting to the slightly lower growth we see in Europe in some areas. And of course, biopharma, if their outlook doesn't firm up very quickly, we'll do the same and so they have some room for improvement further. Payable receivable Laurent can answer the other two questions, I think. Laurent Lebras: Yes, yes. I mean, so the improvement in DSOs was linked to a much better monitoring of collection of receivables and build items. And in terms of DPO, that was also payment terms. Regarding your third question on the finance income in SDI, this is what relates to the income we generate through what we call the excess cash. So the excess cash is basically defined as every cash on top of our average net working capital at about 5%. And we basically allocate to the SDI the income generated from these deposits of excess cash. Gilles Martin: So, on those two questions, just a general remark from the CFO, I don't think we are particularly good in managing our net working capital. I think we have room for improvement there. It's - we build the company from a very small base. We grew very fast, and we are improving in all aspects. We have a large number of initiatives to improve. And indeed, in net working capital, we could do better. Our teams know it and we are going to do our best to improve. It's a daily fight, of course, with everyone. Everyone who has managed net working capital knows that. It's about having the right tools, but also staffing it properly and keeping the focus on it. So, that's there is room for improvement. And also in investing our cash, we come out of a period where the interest rates are very, very low. And maybe we didn't pay enough attention to investing all our cash at the best rates and the centralization is improving a lot with our cash pooling. So, I think also on that, we are improving a lot and can further improve. Are there more questions? James Rose: Hi. Thank you. I have got two, please. The first is on the margin improvements you have had in the first half. How sustainable are those improvements? Could we expect a similar rate of improvement going through to the second half, for example? And then secondly, for cash conversion, we have had an improved cash conversion rate in the first half. Similarly, can we expect a similar improved level into the second half as well? Thank you. Gilles Martin: Thank you. Well, I wish I could answer your question, but that would equate to changing our objectives, which we said we don't want to do. We set our objective once. We have no reason to think H2 will not be good and that we will not have improvements in H2, I can say that. Anyway, I think all of that is a bit of a good point because I think a large part of the market didn't believe in our objectives for this year anyway. I don't know whether this has changed now. And apparently, and even if they believe in it, they don't believe the company really - they can't really exist, and they don't believe we have cash. So, there is no point fighting about that. We have a 50% discount to where we should be trading at if people believe in our numbers. So, splitting hair on H2 and whatever it's going to be or not be, whether it's going to be 21.5% or 22% or 25%, I don't know, this is just, I think not the issue. The issue is that basically people do their homework and we are going to spend a bit of money to get result of some audits, there are some remaining questions, but that's the main thing that needs to happen because otherwise, we can generate 24% margin this year or next year, it's not going to change anything. So, that's the main thing. We have to - we will talk to investors and if investors have legitimate questions, we think we addressed all the questions that they are and that's more important. Yes, I know some companies have the policy to adjust, to give a guidance for each quarter, a very precise guidance on EPS and so on. This is not what we opted to do. Maybe we do that in a couple of years, we will see. I think more likely, we are going to converge about giving objectives in high to mid-single digits and things like that. Anyway, what I can say is there are many things that we are working on to improve. We think the outlook is good and we will be working over the next 2 years or 3 years to improve and we are confident about our objectives for this year and our objectives for 2027. And we will update those objectives when we publish our 2024 results. That's what we intend to do at this stage. James Rose: Thank you for the answer. Operator: Thank you very much. Your next question is coming from Allen Wells of Jefferies. Please go ahead. Allen Wells: Well. Good afternoon Gilles and Laurent. Most of my questions has been asked, but just two quick ones, please. Firstly, I kind if I missed this earlier, but could you talk a little bit about that organic growth number the pricing versus volume component more broadly. I think we heard from obviously SGS today, broad landscape, but it's talking about more like 50% of its growth was pricing. It seems like that's maybe stepping up. Has that been the same for Eurofins, that's the first question? And the second question, I just want to dig into a little bit on the startup losses just to understand exactly what's going on there. So, €25 million in the first half, that's a 35% reduction from what we saw last year. If I look at the numbers in the presentation, like 50 start-ups for last year, 49 blood collection points, the pace slowed slightly in the first half of this year, but given what we have seen over the last couple of years, it's surprising that, that start-up losses has stepped down by so much. And by its nature, I would assume if a lab has started up, relatively recently, more of its profit will be geared towards volume ramp than anything else. So, just trying to understand what exactly is going on behind that big start-up loss movement here, and if that's okay? Gilles Martin: Thank you very much. Yes, I wish I could give you a precise split on growth with pricing and volume. We get a good measurement in the sample-based businesses where we have price list. And there, maybe it's 60-40 volume-price. But the problem is for the project based, it's very difficult to measure price if you quote projects. So, we are still working on it. We are doing some pilots, it's going to get some - take some time until we can really measure price evolution. Startup pluses yes, we have start-ups, but there are various sizes. So, we are going to have big start-ups, small start-ups. And some of those start-ups are profitable already. They are not all loss-making. They might not be at the group target margin. But if we have completely restarted the new activity, sometimes they get profitable after 1 year or 2 years already. So, it's not really linear at all with the number of start-ups. And for H2, it also depends - some of those are very early. So, very early, the losses are also very low. There is not a lot of stuff, then we add the staff to get the validation of the methods and each one has a specific cycle. We could put more controllers. If we wanted to really precisely know what is going to be next quarter. We have the data somewhere. But also an activity we are planning is harder. The visibility on the speed of ramp is, of course not as good as for an established activity. So, they grow well. And of course, some startups don't do as well as we expect. Unfortunately, some do better. Overall, we think it's a place where the capital we invest gets good returns and that's why we continue to do it. And we have planned a significant buffer when we gave this total number of 125 million to do a lower for variations on this as well as on the restructuring side. But we are pleased with the first half. I agree with your comments. Allen Wells: Great. And then maybe just a very quick follow-up on I think Arthur's question earlier on the margin improvement. I think you talked about you are particularly calling out personnel expenses and consumables, but you also talk about pricing attainment and volume. Is there any way you can maybe look at that 220 basis points and maybe split the margin improvement, is it like 50% is the reduction in costs and largely personnel costs. And just to be clear on that personnel cost reduction, is that purely headcount reduction. So, when we see full year results, the 56-odd thousand average FTEs will see that decline year-on-year from that, or are there other measures around payment that you can move around there? Thank you. Gilles Martin: Thank you. Yes, we haven't looked exactly at your question the way you are asking it. So, I would have to really dig into that to answer precisely. Certainly, some of our divisions have activities have reduced headcount significantly, but others are adding some. The startups are adding some. Overall, indeed, our instruction is to be prudent. There is still some level of economic uncertainty. So, it's - I am sorry, I can't be more specific on that. You can see, of course, personnel cost and how it's improved compared to the same period last year. And you can look at it on headcount. I will take the question offline or Laurent, if it's possible because. Laurent Lebras: You can have it, Allen, from the financial statements because our personnel costs grew only by 3.4% year-on-year, the first half, and our top line grew by 6.5%. So, you have a mechanical reduction there and you can also divide it by the FTE after that because we published the FTE. So, there is a slight improvement. But it's sometimes due to mix effects, and you have to be careful with the geographic mix, so the cost... Gilles Martin: Vary. We have inflation on employee costs. So, I have to look at it on the headcount level and so on. Also, we have different prices. I mean employees get paid better in North America than in Europe. It's - I usually look at the numbers, activity-by-activity and its continent. Operator: Yes. We have our last question from Delphine Le Louet of Bernstein. Delphine, Your line is live. Delphine Le Louet: Yes. Thank you very much. Well done on the results first. A follow-up, Gilles, on this one and more specifically regarding this pricing attainments that you mentioned several times in the press release on the EBITDA. So, just wondering if by default, if you can't really talk per division, but if we can get a flavor, it would be very useful. But probably also, if you can give us a flavor regarding what is the evolution compared to last year and how this H1, so I presume you attain this 100% price adjustment versus last year. But how does that compare to H1 last year and H2 last year? Where are we in terms of achieving that? Second question, probably more for you also, Gilles, what about the timing regarding let's say, the consultation and possibly the extraordinary shareholder meeting you are going to hold regarding the related party real estate. Is it something that we can wait for October, November? Is it too early due to all the work you need to be done, but can you give us a bit of an idea of what might be the calendar now for your shareholder to decide? Gilles Martin: Yes. On the first question, I am not sure I understand your question. Do you mind reformulating it? Delphine Le Louet: Yes. Regarding - so we had 220 EBITDA improvement in H1 versus last year, and so wondering specifically on this pricing attainments because you are mentioning that several times, trying to figure out how big it is in terms of contribution. And so as you can't say anything, probably to give us a flavor what was the achievement, and how does that compare to H1 last year? Where you already at 40% of the this price achievement when you talk about your service and contract, was it 60% already? Did you gain this 40% remaining more or less, or can you give us a bit of a sense of how would that develop over the course of '23 and now how we get there to this 100% price attainment? Gilles Martin: Thank you. Yes, I understand. I think I understand what you are referring to. Indeed, in 2022, we have got a big hit because we got caught by surprise. We caught of some in '23. And I think this year, we are going to catch up some more. I don't think it's quite 100%. It will depend - really, the main thing is a gap between the actual inflation of our costs, so mostly labor and what we charge to our clients, how we bridge that gap. And if the second half - if inflation in the second half of this year is very muted, I think will catch up. Whether we catch up 100% this year, it's really hard to know. Again, we don't have all the metrics to measure it across the board. We have it country-by-country. We have it in the activity of sample based. We have to run the analysis. We do it usually at budget time. At budget time people have to forecast in the way that you are asking the question. So, they have to tell us how much they are catching up of the price gap. So, that's when in October, when we - October, November, when we had those meetings that we do a deep dive by activity. And it's still on a consolidated basis, a bit anecdotal evidence because we don't have that for some project-based business line. And we have, again, on the consultation for the shareholder meeting. When we said we would do that, we always said we would do it. There is nothing new. And the intention was more to do it maybe in '26 or 2026, 2027. We are we are happy to bring it forward. But let's keep things in perspective. We are talking 35 million of rent. We disclosed - we have disclosed for years what the rent per square meter is compared to other building, the list of building concern is not a secret. I don't know what this is going to change. It's going to change, I think, in reality, very little. And I don't know - I mean maybe psychologically or governance point of view is going to alleviate some worries or worries that there could be more attacks on using this as a pretext for attack. Economically, it's not going to be a game changer out of the 1.5 billion or 1.6 billion of EBITDA whatever it's going to be next year. To do that, we need to get everything evaluated, maybe even evaluated twice. We need to ask all our companies, which buildings they want to keep long-term because obviously, there is no point for Eurofins buying a building, or Eurofins wants to move out. I would tend to say we will offer Eurofins the opportunity to do it step-by-step, focusing first on the large campuses where Eurofins want to continue to build because that would be trickier in the current situation. And more we don't have timelines for that. We have mandated people to do it. It takes effort and resources because it's, I don't know, 50 or I don't know many 30 to 60 buildings. And reasonable timeline, maybe we can publish that with our results for this year and put it to the vote to the general assembly where we get results approved and do an AG, an extraordinary assembly for that. That could be an objective. Whether we get there and get it done by then remains to be seen. If we have data before, we will published before. We are - and while doing that, we are doing other audits. Obviously, we are not happy with some of the claims that were made that are totally disrespectful and really slandering. But that's a secondary for us. I am not - I don't care what people call me. They can call me any names they want. And there to make sure our investors get a good return on investment, and that's the main thing I am doing. And that's why we are focusing on the real areas of concern for our investors, but we still will get that - to that at some point as part of all those audits. We will get the results of the audit on cash, I hope in the fall. I am not sure exactly when, as early the better, but we have to give the auditors a time to all the investigation they want and access to everything they want. We want them to be really very free to check everything that might be a question. So, they are going to - they are going to need the time, they have been appointed. We have announced that. They need the time to do their work. And same thing for valuing all those buildings and providing all the data again to verify for the - so the end time, the length [ph] nature of everything that should be part of the package. So, I would rather have it done well, but our investors should know well. They know the quantum. They know what it cost to Eurofins. It's more maybe governance and optical than really economically, the impact is nothing. And but that's - we are doing our best. And you know we are going to meet with investors, if they have suggestions, we prioritize. The way we deal with that is we listen to our investors and we prioritize what they see as priorities and we deal with things one-by-one, and we are trying to be transparent about everything we are doing. And I think from what I hear, we have addressed pretty much all the concerns. People will be happy to see a report to say that Pricewaterhouse and Deloitte did a good job in auditing our accounts, okay. We are going to have a third. We are going to have [indiscernible] on the on-go, check the cash. For me, it's totally unnecessary, but okay, we are going to do it anyway. And if there are other things that come up where our investors say it's important, we will do it. And but things take time, because obviously, anything we could do ourselves, like looking at documents and so on, we have done it. The rest, we need external parties to look at it and that takes time. Delphine Le Louet: Okay. Got it. And probably a final one regarding working capital management, just wondering if - that was something that was happening in, let's say, every country, every region, every business or if there is a stronger contribution for one of the business versus another one. Laurent Lebras: No, there was a stronger contribution in Europe for the network capital movement. After that, there is a lot of mix effects overall. So, those are not very significant. But like Gilles said, we have to improve further because these improvements are small compared to where we should be. Delphine Le Louet: Okay. Is that due to a new organization, sorry, or new software or anything specific or just a... Gilles Martin: It's more tuned to me and we are also - it's more scrutiny overall, and we also are putting in place some dedicated functions to look after net working capital in some geographies to get better traction. Delphine Le Louet: Thank you very much. Gilles Martin: Doing things one-by-one, doing things one-by-one. We have a 5% net working capital, 5% of 7 billion, 350 million. If we invested those 350 million, whatever we borrow at 4%, the impact is not enormous. So, we have been focusing on many other aspects that have a much higher financial impact. No, we can - it's not bad 5% net working capital, if you look at other companies, but we can do better, whether we w ill land at 2%, 3%, 4%, I don't know. We would try to do everything we do well and to focus on things that have the biggest impact first. That's what we are doing. But I am always for continuous improvement. So, we are striving to improve on that too, and Laurent will give it a bit more resources, a bit more people in the different geographies, and we think we can improve. I think the time is up for this call. Unfortunately, what I can confirm is we are positive for the rest of the year. We are positive for achieving our objectives. We are positive for achieving our objectives for 2027. And we will be happy to meet some of you in person, maybe tomorrow in London. And we wish you all a nice summer, and thank you very much for tuning in. Operator: Ladies and gentlemen, the call is now concluded. You may disconnect your telephone. Thank you for joining and have a pleasant day.

L'Air Liquide S.A. (AIQUF) H1 2024 Earnings Call Transcript

Aude Rodriguez - Head, Investor Relations Francois Jackow - Chief Executive Officer Jerome Pelletan - Chief Financial Officer Pascal Vinet - Executive Vice President, Europe and AMEI, Industrial Merchant and Group Safety Adam Peters - Group Vice President, CEO of Air Liquide, North America Good morning, ladies and gentlemen and welcome to the Air Liquide First Half 2024 Results Conference Call. All participants are currently in listen-only mode until we conduct a question-and-answer session, and instructions will be given at that time. I would now like to hand over to the Air Liquide team. Please begin your meeting, and I'll be standing by. Aude Rodriguez Good morning, everyone. This is Aude Rodriguez, the Head of Investor Relations. Thank you very much for attending the call today. Francois Jackow; and Jerome Pelletan will present the first half 2024 performance. For the Q&A session, they will be joined by Pascal Vinet, Executive VP overseeing the Europe industry and the Africa and Middle East hub, the Industrial Merchant activity and Group Safety; Adam Peters, Group VP, CEO of Air Liquide, North America is on the phone with us from the US. In the agenda, our next announcement is on October 23rd for our third quarter revenue. Thank you very much, Aude, and good morning, everyone. It is my pleasure to be with you today to share the highlights of the first semester of 2024. In few words, we demonstrated great resilience, delivered a strong performance and will continue to build the future. The first half set of results demonstrate our capacity to be extremely resilient in soft markets, while we are gaining momentum on three fronts. First, the improvement of our financial performance. Second, concrete major announcements confirming the strong investment potential looking forward, and there is clearly more to come. And third, we are gaining momentum in our commitment to perform, not only with stronger efficiencies this semester, plus 13% versus last year, but also several structural efficiency initiatives. I will come back to each of these points in the following slides. Let's move to Slide 4. To start with, we demonstrated our ability to continue to grow in soft markets. A few comments here. First, the solid comparable sales growth of 3% needs to be qualified this semester due to Argentina's devaluation. Nonetheless, even excluding this effect, the sales growth is positive in soft markets. So when I say soft markets. Since, as you can see from most of the macro indicators, there is no clear signs of strong pickup in volume. Clearly, what we see is slightly higher sales growth in Q2, around plus 1% globally versus Q1. This is in line with the sequential improvement we mentioned in the last calls. We are getting more and more of positive signals regarding low levels of inventory, advanced orders, but it is probably still too early to confirm the real pickup in demand. All-in-all, once again, very resilient top line, improving sequentially. Regarding the profitability, we achieved a strong OIR margin improvement, plus 100 basis points and even plus 110 basis points for Gas & Services, excluding energy pass-through. This is an acceleration compared to our updated trajectory for 2024-2025. The fact that we are over-delivering shows our strong focus on execution in terms of efficiency, pricing and portfolio management regardless of the macroeconomic condition. Also, the recurring return on capital employed, ROCE, continues to improve at 10.7% and despite having higher investments under construction, not contributing yet to the results. As a reminder, ROCE remains the main financial KPI of our industry. Again, this strong performance was achieved despite an adverse environment, once again demonstrating the resilience of our business model and the unwavering commitment of our teams, whom I would like to thank here very much. At the same time, we continue to build the future, as illustrated by the investment backlog exceeding EUR 4 billion. Let's keep in mind, as Jerome will explain, that this backlog is conservative as we are, for example, only accounting for EUR 120 million out of the USD 850 million of the Baytown, ExxonMobil project. 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. On Slide 5, our recent announcement of - on major projects have confirmed the investment potential. Starting with the ExxonMobil. As a reminder, this flagship project is a great illustration of how hydrogen can enable decarbonization of the industry. With that size of the hydrogen production by ExxonMobil acquired Air Liquide to develop the largest oxygen production platform in the Americas with the added benefit of being low-carbon oxygen, two-third less CO2 footprint than current production. This project of USD 850 million marks the largest industrial CapEx in the history of Air Liquide. Also, with our Airgas footprint, we will leverage the number one position of our industrial merchant distribution network and marketing capabilities to sell significant volumes of argon and rare gases. Despite this size, let's be clear, we view this as a standard core business project with a long-term LI contract, [inaudible] and pick up equities and meeting our return on investment criteria. Air Liquide will also get access to significant volume of low-carbon hydrogen, which will unlock opportunities to service customers through our extensive pipeline and storage facilities. Being selected for this project by a Tier 1 partner is a tremendous success and a key milestone for the Group. Electronics is another key growth driver for the Group as illustrated by the Micron projects supported by the US Chips Act. It's a major signing with a long-term partner, leading artificial intelligence solutions. We will supply an ultra-pure carrier gases solution through a long-term contract, and we will invest more than USD 250 million. This is a very large scale plan for Electronic business. Innovation, was a key element of differentiation, including a higher energy efficiency. Once again, we have also been able to develop synergies with Industrial Merchant through our Airgas platform. And a key focus was also to develop a sustainable solution with an optimized land footprint and 100% use of renewable electricity within the next five years. This is a major win for a mega project plant to develop electronic business in the US where we see continuous growth momentum. Project development is also progressing well in Europe. In France, we are developing solutions to decarbonize hard-to-abate industries such as cement and lime production in the Dunkirk Basin. The D'Artagnan project I hope you like the name, has taken a major step forward, receiving a grant for more than EUR 160 million from the European Union. This marks an essential milestone towards the implementation of the capture and sequestration business supported by the infrastructure, needed to reduce CO2 emission in France and in Europe. This being said, let's keep in mind, that the vast majority of our investment decision this semester were directed towards more traditional projects, allowing us to maintain a solid and balanced portfolio of growth. The ALbee's announcement that you have seen yesterday is an illustration of those. These three projects exemplify Air Liquide's leadership in energy transition and electronics. These new investments will drive accelerated growth beyond 2025, the next strategic period following our current ADVANCE plan. Moving to Slide 6. I would like to come back to the recently announced simplified organization of the Group as an illustration of our sustained commitment to performance. This new organization, by removing existing management layers, aims at fostering agility, improving efficiency, accelerating decision-making and leveraging the company's scale to deliver competitive advantage. In addition, a single world group industrial direction will be created, replacing the metrics, industrial organization by business lines. The objective is to leverage our knowhow and optimize the Group industrial processes ensuring higher standards of safety, quality, reliability and efficiency for our customers. Regarding global and corporate functions, such as IT and procurement, we are structuring the services to the operation by leveraging our scale and expertise and also by being more perspective engaging directly with operations through more efficient integration. This simplified organization should enable us to better serve our customers and patients, while boosting further the level of engagement of our teams to deliver enhanced value. The streamlining of our organization is one, of course, among several other initiatives to boost efficiencies. On Slide 7, I would like to outline that the strong financial performance also reflects significant progress in our sustainable roadmap. We are making progress in the modernization and electrification of our assets in the deployment of carbon capture solutions, like, for example, to decarbonize the Air Liquide's largest hydrogen production unit in Europe, and we signed new long-term sourcing contract for renewable electricity. In addition to reducing Air Liquide's emissions, our projects will enable the decrease of CO2 emissions of our customers with two recent examples mentioned here. And, as noted on the slide, Air Liquide also successfully issued a EUR 500 million green bond in very favorable conditions to finance energy transition efforts. All-in-all, impressive progress towards furthering our commitment to sustainability. The Slide 8 outlines the key takeaways of this first semester, by actively deploying the ADVANCE strategic plan, we have been able to deliver resilient comparable sales growth, a significant 100 basis point OIR margin improvement, the signing of major projects in energy transition and electronics, two of our main growth drivers and the launch of structural efficiency projects. To conclude, I am on Slide 9, while we are gaining momentum in this semester, we are demonstrating that we can deliver margin improvement at a faster pace than our initial 2024-2025 upgraded trajectory. With this, we have confidence in our ability to deliver on our commitments in terms of performance for 2024 as well as on our previously announced enhanced advanced objectives of doubling the initial margin improvement ambition by 2025. Thank you very much for your attention. I will now ask Jerome to present the details of our financial performance in H1. Jerome Pelletan Thank you, Francois and good morning, everyone. We will now review our numbers in more detail. So coming back to the first half year. I'm now on Page 11. You can see that Group sales have been resilient overall on a comparable basis, meaning excluding energy, pass-through and FX. There are no significant scope effect in the first half. Gas & Services sales for H1 achieved a plus 2.6% increase versus last year and turning to much more smaller segments. Engineering & Construction sales have increased by plus 10% in H1. Order intake has increased up to EUR 557 million year-to-date with third-party sales represented 20% of it. Global Markets & Technologies are down minus 2% due to the divestiture of our aerospace and defense activity, while order intake, which is a solid EUR 416 million. So overall, Group sales are up - plus 2.6% on a comparable basis for the first half, while published sales are down minus 4.3% as a consequence of the continued energy price decrease during the semester that translates into a minus 3.5% energy pass-through effect, which, as you know, has no impact on the operating income value. We'll also take into account a negative FX effect at minus 3.4%, mainly due to Argentina devaluation over the period. For information, the contribution has said by Francois from Argentina on the plus 2.6% Group comparable sales is plus 2.1% in H1. And to be noted, Argentina has no impact on published valuation. Finally, specific to Q2 comparable growth is at plus 3.1%, sequentially improving after plus 2.1% in Q1. So let's now review the activity for each of our main geographies. My comments will be mainly related to Q2. I'm now on Page 12. You can see that after an already strong Q1, sales in the Americas have grown in all business lines to reach plus 10% overall growth on a comp basis. That includes plus 6% from Argentina, mainly because the impact of hyperinflation is, of course, not offset by the devaluation when you exclude the currency impact. Large Industry benefited from a major start-up as well as ramp-up contribution. Base volumes have been growing and were strong overall in North America, both in hydrogen and in air gases, while we faced some customer turnarounds in LATAM. Ind Merchant, sales have been driven by strong pricing effect at plus 8.1% year-on-year, supported by active pricing management and campaign at Airgas, which is 50% pricing impact, and in Argentina, 40% of pricing impact to counter our local hyperinflation. Gas volume at Airgas have been already in overall excluding argon. Growth in Healthcare has been sharp, supported by solid volumes in high pricing in Proximity care in the US with again strong pricing in LATAM, especially in Argentina. Finally, Electronic sales has been strong, supported by growing carrier gases and record equipment and installation activity, while materials remain low. In Europe now, sales are slightly down, with continued strong growth in Healthcare. In Large Industry in Europe, demand from customers on Steel & Refining was overall stable, while hydrogen volume to chemical production slightly improved on a low basis. In addition, as we communicated in Q1, comparable sales were adversely affected by the sale of the Cogen unit in Germany in Q1. Ind Merchant, sales have been impacted, as explained in Q1 by a decrease in price in bulk due to the energy indexation in our contract, in the context of the sharp decline in energy prices. On the other hand, excluding this energy component, pricing has stayed positive and strong, offsetting almost all of the indexation impact. Volume remained soft, but improved sequentially as we anticipated. Finally, Healthcare growth was again very solid at plus 12%, sales have been supported by strong Home Healthcare activity, notably in diabetes and sleep apnea with an increased number of patients. Growth in medical gases remain solid with a sustained price effect in response to inflation. In Q2, in Page 13, activity in Asia has been soft overall. The Large Industry sales and volume remained affected by customer turnaround, especially in China. On the positive side, the activity benefited from a major hydrogen start-up in China in March that fully contributed this quarter. Sales in Merchants have been slightly negative, impacted in China by helium. Activity, excluding helium has been soft in China, especially in bulk, but strong in packaged gases. The rest of Asia experienced improving volume with a positive pricing effect, but slowing down. Electronic sales are getting back to positive, with growing sales with carrier gases and in Advanced Materials. Specialty Materials remained soft, but showing sequential improvement. In Africa and Middle East, we have seen, again, a strong growth in all business lines. In Large Industry, the activity was sustained with solid hydrogen volume in Saudi Arabia and air gases volume in Egypt. Merchant growth was solid, thanks to a strong pricing at plus 10% and robust volumes in bulk and packaged gases. I will now comment on our Q2 activity by business line, I'm now on Page 14. In Merchant, we continue to see solid pricing albeit on top of plus 8.6% versus last year. Volumes overall are still soft. Pricing is strong, especially in the Americas, while slightly decreased - decreasing, sorry, in Europe for the reason I explained earlier. Markets such as Aeronautics in the US, Automotive & Fabrication in Europe and Asia are posting volume growth. In Large Industry, activity also still low, has stabilized on a sequential basis. Activity has been impacted by turnaround and also, as I mentioned, the sale of Cogen unit in Europe. Two start-ups have positively contributed in China and in the US. From a market standpoint, chemicals have improved in the US and in Europe, while Steel has been soft and Refining more contrasted. Page 15, Electronic is back to positive with solid contribution from start-up and ramp-up. Advanced Materials have improved. Equipment & Installation have been at a record level in the US, while overall Specialty Materials have been low. Finally, in Healthcare, we still had strong and well-balanced growth in all segments with high pricing and volume decrease. Home Healthcare sorry, was again very robust with whole therapies growing, especially diabetes and sleep apnea. In Med Gas activity, sales growth was solid with pricing addressing inflation in Americas and in Europe with solid volume and pricing. On Page 16, the success of our performance improvement has been again demonstrated by our operating margin being up by a significant plus 100 basis points, excluding the impact of the energy pass-through effect only for Gas & Services, the only is plus 100 basis points. You can see getting to the detail that purchase have decreased following the decline of energy prices, mainly in Europe, while personnel expenses and other costs have increased lower than inflation. Depreciation is well contained. This again has reduced in the Group operating margin of 19.4% with Gas & Services at 21.2%, again, a significant plus 100 basis point increase, excluding the impact of the energy pass-through. To be clear, there is no impact from Argentina here. This margin improvement demonstrates, again, our commitment to deliver an acceleration in performance. On Page 17, this margin improvement is supported, as said by Francois, by our structural margin improvement plan, that continues to deliver based on three pillars. First, IM pricing is still solid, despite, as you see, a high comparable basis. We have also significantly ramped up our efficiencies in H1 to reach EUR 233 million, up plus 13% versus last year. We are ahead of our annual target with an acceleration of transformation program as said by Francois, while procurement and industrial efficiencies continue to deliver. Portfolio management has been further pursued. We closed nine bolt-on acquisitions over the period and executed three divestitures with a continued focus on strategy, profitable and margin accretive opportunity, as Francois highlighted, we remain deeply focused on margin improvement, working on all possible levels. As you can see on Page 18, our pricing actions continued to deliver as pricing remains strong in Americas and in Africa and Middle East to reach plus 4.7% overall in Q2. As I said previously, the decline in pricing of our bulk activity in Europe was expected because it's very much linked to the energy cost decrease due to the indexation. However, we experienced continued accretive margin contribution. And in Asia, pricing would be slightly positive, excluding helium. Let us now review quickly the bottom line of the P&L on Page 19. Non-recurring operating expenses, which corresponds mainly to restructuring costs stand at minus EUR 87 million in 2024 versus plus EUR 33 million last year, which as you know, in 2023, including a plus EUR 173 million capital gain before tax on the Hydrogenics stake sales. Net financial costs are stable despite the high interest rate environment due to a reduction of net debt given some cash flow and also thanks to our efficient financial policy with this high share of fixed rate funding with a cost of debt of around 3%. On an effective tax rate standpoint, our ratio is quite flat, around 23.6%, thanks to non-recurring item in H1 '24. As you can see, net profit growth is minus 2%, which is a very good performance considering the very high comparable basis last year following the divestiture of Hydrogenics, which is taking to go - going to plus EUR 157 million post-tax capital gain. Recurring net profit, excluding FX is significantly up at plus 5% if we exclude Argentina. As you see, I have highlighted the main impacts of Argentina, and for sake of the transparency you can refer to the appendix of the presentation and a separate Management report, where we have disclosed the summary of the impacts of Argentina. On Page 29, as I mentioned before, cash flow has been strong, 24% of sales. Net debt is down by EUR 0.4 billion versus June last year after our CapEx and dividend payment and our gearing is now at 35% adjusted for the dividend payment seasonality effect. As you can see, recurring ROCE continues to ramp up, illustrating the success of our strategy. ROCE as you know, very significant KPI in our industry. And to make it clear, again, there is no impact from Argentina on these metrics. Page 22 - sorry, the 12-months portfolio of opportunities with one year as disclosed is at a record level of EUR 4 billion including the initial impact of the major like some of the ExxonMobil projects in Texas, as Francois said earlier. This portfolio is very well balanced between Energy Transition, Electronics and Traditional business. Our industrial and financial decision for the semester reached a solid level of EUR 1.6 billion, including EUR 120 million for the Exxon project disclosed a few weeks ago. Finally, our investment backlog remains very strong at EUR 4.1 billion, well balanced by geography and by project. I am now on Page 23. As you can see, we achieved - nearly EUR 10 million and EUR 108 million exactly sales contribution from start-up and ramp-up during the first half, and we expect to reach a full year of start-up and ramp-up contribution to sales of about between EUR 230 million and EUR 250 million this year. This is a bit lower than our initial expectation, mainly due to the slower ramp-up of project in a subdued environment, and few projects started being delayed to 2025. There is, however, no cancellation as the impact is only on delay in the contribution, in it for 2025, we are confident that this contribution of project will deliver more than EUR 250 million. On Page 24, as Francois mentioned in his introduction, we confirm our guidance set in February, we are very much - thank you for your - very much for your attention, and we'll now open the Q&A session. Thank you. Thank you. [Operator Instructions] Thank you. We are going to proceed with our first question. The question come from the line of Martin Roediger from Kepler Cheuvreux. Please ask your question. Martin Roediger Yes. Good morning and thanks for taking my three questions. Regarding the performance in Asia. EBIT margin in Asia was down by 40 basis points reported and minus 50 basis points, excluding energy pass-through effects. What is the reason for this margin decline? Secondly, in your press release, you say that the sales in Large Industries benefited, among other reasons, from the stronger demand from chemical customers in Europe and the US in the second quarter. I understand this is driven by hydrogen volumes in both regions. And here, I have a clarification question. Is the reason for that just lower comps? Or do you see any improving momentum at your chemical customers despite the fact that there is no broad-based economic recovery? And the third question is related to your decarbonization projects. You mentioned the EUR 160 million grant from the European Union for the D'Artagnan project. I have a more general question. When you receive any subsidies either from the European Union or from other governments, will you book them as other operating income in your P&L? Or would you treat them as a cash item without effect on your P&L? Thank you. Francois Jackow Thank you very much, Martin. And good morning. So you have three questions. I will ask Jerome to talk about the margin in Asia. And then your question on Large Industry, both in Europe and US. I think Pascal and Adam will comment on that. And finally, Jerome will come back on the accounting treatment of the subsidies. So Jerome, do you want to speak about margin in Asia? Jerome Pelletan Okay. Your point is right. Martin, good to hear you. Basically, you know we have a negative impact in comparison to last year, but this is very much due to a one-off effect that we accounted for in March last year of customer indemnity payment as we disclosed last year. So that is very much a one-off effect, a non-recurring effect. And basically, when you look, you recruit this specific one-off, the efficiencies and the margin is still very strong in Asia also this year. And I think that's important to notice that the underlying business in Asia is doing well overall. So, one-off effect in Asia. Regarding Large Industry, maybe Pascal, do you want to comment on what we see and the kind of signals we are seeing the different segments in Europe? Pascal Vinet Okay, thank you. So Martin, on the Large Industries in Europe, again, if we exclude the Cogen effect that Jerome mentioned, sales are up, and that's due and you said it well, to an improved chemical market. For us, we see improved hydrogen volumes in the chemical market, both in Benelux and in Germany, where we have significant volumes. So that's the reason why our LI or Large Industries business is performing better. On the other fronts, the Refining market that we see in Europe is flat, but at solid levels. And the Steel market remains quite soft, pretty flattish as well. Francois Jackow Thank you very much, Pascal. Adam, can you give us some color on what we see in the US in Large Industry? Adam Peters Yes. Absolutely, Francois. Thank you, Martin, for the question. So if we look at US Large Industries, what we see is a nice improvement in terms of overall sales growth and overall volumes in Large Industries in hydrogen as well as in oxygen. Some of this is a lower turnaround effect from our customers, and some of it is just overall recovery, some of it affected from the start that mentioned earlier by Francois and Jerome. Francois Jackow Thank you very much. Do you have any sign looking forward? Or what do you expect, Adam? Adam Peters Yes. So overall, we expect that the second half of the year will continue improvement. If you look at the past couple of quarters and what we see in Q2, Q2 is actually a nice rebound in the US in terms of overall growth in Large Industries. We saw a nice above mid-single-digit growth in sales in Large Industries in the US in Q2, and I would expect that to continue in the second half of the year. Francois Jackow Thank you very much. Jerome, can you clarify how we treat the grants, for example, from the European Union? Jerome Pelletan Yeah, of course, that's a very good question, Martin. So, the accounting methodology is the same, and it's quite, I would say, parent. We are not treating them at the cash item in the P&L, of course. We are basically, I would say, making that with CapEx and we did like it in CapEx. So there is an impact in balance sheet, but not as an immediate cash gain in the P&L. That's all. Francois Jackow All right. Thank you very much, Jerome. Next question, please? Sure. We are now going to proceed with our next question. And the questions come from the line of Chetan Udeshi from JPMorgan. Please ask your question. Chetan Udeshi Yeah, hi. Thank you. I have two questions. First, thanks for breaking out the impact from Argentina price changes in your numbers, it's quite useful. I'm just curious why see earnings impact from Argentina on EBIT you know 4%, which is almost double the impact on revenue, which is 2%. Just can you maybe help us understand that? The second question I had was on the start-up contribution. I understand you know there has been some delays, but I'm just curious why for 2025, you're still seeing more than EUR 250 million, because if I look at your start-up contribution over the last four years, is essentially just stayed at these levels of EUR 250 million plus/minus despite the backlog having gone up over that four-year period by almost EUR 1 billion to EUR 1.5 billion. So why is the backlog conversion taking so long? I know you know things are dependent on subsidies, et cetera, but it just feels like it's taking much longer. I mean, next year, in theory, should have been much bigger in start-up, but it doesn't seem like that's necessarily going to happen? So just curious. Thank you. Francois Jackow Thank you very much. I will ask Jerome to speak about Argentina. But maybe just one comment I think clearly, the Argentina business is a small business overall, which is managed well. We wanted to have a full transparency and the impact so that you understand. And you understand also, of course, that the underlying business is performing very well. So to clarify that one more time, Jerome. Jerome Pelletan Thank you, Chetan. Thank you for your comment. We try to be - but you're right, totally transparent on that. So Francois mentioned the - I would say, the marginal impact for the Group in terms of size of Argentina, it's quite well managed. We manage well, I would say, to pass-through the devaluation and manage hyperinflation. Just to remind a thing, which is quite clear, we, as published figures, the hyperinflation, which is having a plus 280% roughly impact during the first half, is roughly compensated by the similar effect from the valuation 250%, which is, of course, Chetan, neutralizing the impact on Group figures. But if you exclude the FX [inaudible] because you get the full impact of hyperinflation with no offset from devaluation. So that's why we're basically excluding FX, the impact of Argentina on half year is amplified 4 times bigger than established figures in H1. So as we mentioned, we are provided with all the figures excluding Argentina. I just want to highlight again, there is no impact on the strong 100 basis point operating income recurring margin improvement in H1, which again demonstrates our continued focus on performance and execution. And just to come back on difference between sales and EBIT is very much the fact that you know is - EBIT in fact effect which impact of the FX, which is very much explaining the difference. And the fact that, again, the Argentina is having a 4 times impact on both items. That basically how we stand. Francois Jackow Thank you, Jerome. I will comment on your point on the start-up. So you have seen that we do expect a little less start-up for this year compared to what we initially had in mind. It's minor at the scale of the Group, of course. And as mentioned by Jerome, it's mostly delayed either in the start-up date or in the ramp-up rate, which in the current market, I think we can understand. We do expect that as the demand will ramp-up for our customer that will accelerate, of course, the ramp-up of those plants. Regarding what we see looking forward, as mentioned, since this is mostly a delay of existing facilities, which are being built and that we have a pipeline also of projects coming online with all of them having a take-or-pay for example. We are quite confident that the start-up contribution for next year is going to be above EUR 250 million. You had also a comment about, I mean, the size of the backlog and the contribution of the backlog. I think you have to keep in mind, what we have in the backlog, we have been putting larger projects, as we mentioned, energy transition projects, which typically take a little bit more time than the traditional project to be completed. We talked about that before with engineering phase and then construction. So it's normal that this backlog is taking a little bit more time to precipitate. And also depending on how you - I mean, the type of projects between the Electronics, between the air gases project and the hydrogen project, the sales contribution is different. All-in-all, we are very confident that this backlog will continue to deliver sales contribution. Let's be careful, and that's also the learning of the past few years. I mean, the energy impact has - is quite - could be quite significant on the sales number. So what is important to look at is the EBITDA contribution and the OIR contribution of those projects. And all those projects are good projects contributing a good return to the portfolio of Air Liquide. We are now going to proceed with our next question. And the questions come from the line of Jean-Luc Romain from CIC Market Solutions. Please ask your question. Jean-Luc Romain Good morning. In the reorganization of that you announced of the - sorry, what's the implication of the organization, what's the cost associated with that? And what's the benefit you expect by, say, 2025 or 2026? Francois Jackow Very good morning and thank you very much for the question. I will ask Jerome to talk about the cost, and I will talk about the benefits. Jerome, if you could share now? Jerome Pelletan Yes, of course. But you know for the reorganization, we have made this announcement that we can come maybe later in the detail. But what basically we consider as one of the lever to continue to deliver on the margin improvement, I would say, roadmap. So we will not disclose a specific KPI for this. It's one of the KPI or it's one of the tool of the action that we are basically setting up in order to deliver the margin improvement. So that's basically the way we can comment on that. There will be cost, but you know again we need - I would be a little bit evasive on that, Jean-Luc, because we cannot communicate on the cost because you know I would say, obviously, that needs to go through a social process as we go, so I will confirm. All right. And regarding the benefit, I think it's absolutely clear. This simplification of the organization will serve the performance of Air Liquide, first with our customers to make sure that we are agile, easy to interact, and we are providing the best of abilities to any customer. So that's, of course, a key driver. This simplification will also help us to be more efficient in a way we are delivering our services to our customers and our patients. So, I think it's quite important, and it will contribute to the performance of the Group, but also, I would say, to the satisfaction of our employees, because by putting together and leveraging the scale of Air Liquide, we will do things better in a more efficient way. So, all-in-all, it's fully aligned with the ADVANCE objective. It's clear that there are several initiatives, which will contribute, which are structural initiatives. We mentioned that we are decreasing the level of management layer. So that should, for example, speed up the decision-making and reinforce the empowerment of our team. We are also creating one single industrial direction for the Group as opposed to having one actual direction in every business line as we have today. We will be able to leverage the scale, of course, and leverage the expertise. And also, we are centralizing and managing globally some functions that we have been managing locally until now, like IT and procurement. And you see clearly, I mean, the type of benefit we can drive by doing that. So this is fully aligned. Again, we contribute to the objective of ADVANCE for 2024-2025. But based on what I just mentioned, you should expect contribution after 2025, because again, those are structural improvement initiatives. Thank you. [Operator Instructions] Thank you. We are now going to take our next question. And the questions come from the line of Peter Clark from Bernstein. Please ask your question. Peter Clark Yes, good morning, everyone. I've got three actually. Price efficiencies in volume. On the pricing, obviously, Airgas, it's still accelerating up 4% again 3% in the first quarter. You're flat underlying 6%. And I presume you're going to say that you're pretty confident with the local inflation that you've still got the momentum on price. So I was going to ask that one. On the efficiencies, just trying to get a feel now for how much of the gross is actually hitting the bottom line? I'm assuming it's starting to go up as you take a stronger look at the efficiencies, the inflation environment does get a little bit better. So I'm just wondering on the efficiency, particularly with taking out things like matrix formed there. And then finally, on the volumes, the Industrial Merchant volumes were down 2% in the second quarter, very similar to the first quarter. You have got softer comps in the second half, but I'm assuming you're not really seeing a great deal on the ground for volume improvement. So the second half Industrial Merchant volumes might still be slightly down year-on-year, but maybe I'm wrong on that, so maybe you could answer. Thank you. Francois Jackow Good morning, Peter. Thank you very much for your three questions. I will ask Pascal to talk about the price and, of course, for Europe, but since you have the IM global view, you will explain also on what we see in other geographies. Jerome, you will comment on the efficiency, please. And Pascal, maybe you come back on the volume on IM after. So, pricing, Pascal, what do we see? Pascal Vinet So on pricing, I think, Peter, you got it perfectly right. We see higher pricing in the Americas driven by Airgas. Why? Because Airgas had a successful pricing campaign last March that is - that has been bringing benefits in Q2. So that's why we have this a sequential improvement between Q1 and Q2. The second big piece is the strong underlying pricing in Europe that we have seen again in Q2 and that we had already in Q1. I think reading the pricing in Europe from Q1 to Q2, the difference going from minus 1.9% to minus 0.5% is due to the lower impact of the energy indexes in our bulk business. But the most important piece is that, the underlying pricing globally on our IM business in Europe stays at plus 6%. And that's a very, very good achievement from our teams, focusing on value creation and smart pricing. For the rest of the world, I would say it's more neutral. We have very positive pricing in Africa, Middle East, India. We have a neutral pricing in Asia, positive underlying pricing, but a bit of pricing decrease in China on the helium business that is contributing the wrong way, I would say. But overall, very good in the Americas, especially in Airgas, strong underlying in the EU, which makes a big difference and neutral in Asia due to pluses and minuses that are small in overall value. Because there was another question, I would say, outlook remains quite positive on the pricing for IM worldwide. We don't see things changing radically. It may moderate a little bit with inflation moderating, but we see things continuing for Airgas and for Europe, the way it's going with. Again, lower impact of energy indexes in the coming months because of the comparison to energy prices a year ago. Francois Jackow So all-in-all, we do expect a positive contribution of pricing for the full year of 2024 globally. Jerome - Yes. Thank you, Peter. So basically, you mentioned on the efficiency was a very good number, plus 13% in H1 versus last year, EUR 233 million, ahead of our, I would say, annual target, which is EUR 400 million. So that's good news. In terms of metrics, I would say that you know we are basically increasing affecting a higher part of the cost base, 2.3% on H1 2023 versus 1.9% last year. So it's basically one metric that we discussed. But overall, what we can say is that, all our lever is in efficiencies are basically delivering. Industrial efficiencies are accelerating. Procurement, you know one of the decision that has been made you know into, I would say, the program that Francois mentioned, is to get very much verticalize the procurement function in order to tackle the bigger contract with the suppliers at a global level. So it's very much contributing as well, and it's only the beginning. And we have also, as we said, transformation program, you know them. You know we have also accelerated our business service center program in low-cost countries. And we are also, of course, having more to come in terms of restructuring and transformation. So that's basically - but you know I would say that the value of the cost base is higher than what we tackled last year. That's basically the metrics we can have. Francois Jackow Thank you very much Jerome. Pascal for the IM volume globally, comments, please? Pascal Vinet Yeah. Outlook is, it's slightly positive, I would say. We expect Europe at this stage to be reasonably stable compared to what we have seen in the past quarters. In China, if we exclude helium, we see positive volumes. We have seen in the last quarter, plus 12% on our packaged gas volumes. So that's very good news for us and is a positive thing for the months to come. Now in the US, since Airgas this year, the very big part we have in our Industrial Merchant business, we see potentially positive news. If interest rates are coming down, immediately, there will be an impact on our hardgoods business but coming from there on our global business as well. So, let's see what happens with the interest rates in the US that can be good news. Francois Jackow Thank you very much, Pascal. I think we have one last question. No? Okay. The last question has disappeared. All right. Well, so this mean that, this will now conclude this session. Thank you very much all for your questions. To summarize, we delivered again a strong performance in the first half, while being able to prepare future growth through successful development of major projects. This clearly demonstrates the resilience of our business model and also our ability to create value for our customers. In the months to come, we will remain focused on execution, including implementation of our simplified organization and structural efficiency projects to deliver our advanced mid-term objectives, of course, in terms of growth, return on capital employed and CO2 emissions reduction, and overall, create value for our shareholders. With this, I wish all of you an enjoyable summer break and great Olympics game for all of you. Thank you very much. This concludes today's conference call. Thank you all for participating. You may now disconnect your lines. Thank you.