AIQUY - L'Air Liquide S.A. (AIQUF) Full Year 2022 Earnings Call Transcript
L'Air Liquide S.A.
Full Year 2022 Earnings Conference Call
February 16, 2023 04:30 AM ET
Company Participants
Aude Rodriguez - Head of Investor Relations
Francois Jackow - Chief Executive Officer
Jerome Pelletan - Chief Financial Officer
Pascal Vinet - Senior Vice President
Conference Call Participants
Andrew Stott - UBS Investment Bank
Alexander Jones - Bank of America
Laurent Favre - Exane BNP Paribas
Chetan Udeshi - JP Morgan
Peter Clark - Societe Generale
Presentation
Operator
Good morning ladies and gentlemen, and welcome to the L'Air Liquide 2022 Results Conference Call. All participants are currently in listen-mode only until we conduct the question-and-answer session, an instruction will be given at that time. I will now hand over L'Air Liquide team. Please begin your meeting. I will be standing by.
Aude Rodriguez
Good morning, everyone. This is Aude Rodriguez, Head of Investor Relations. Thank you very much for attending the call today. Francois Jackow and Jerome Pelletan will present the full year 2022 performance. For the Q&A session, they will be joined today by Mike Graff on the phone from the US and Pascal Vinet, Senior VP In Charge of Europe Industries and Africa Middle-East is in the room with us in Paris. In the agenda, our next announcement is on April 27 for our first quarter review.
Let me now hand you over to Francois.
Francois Jackow
Thank you, Aude, and good morning, everyone. It is my pleasure to be with you today to share the highlights of 2022 which was another very good year for L'Air Liquide.
So what are key takeaways of 2022? First, a strong performance, the increased attention and discipline that we have put on bottom line contributions is paying off. We were able to adapt quickly to unprecedented situations in terms of pacing agility, strict cost control, rigorous synergy management, to name but a few key achievements. Some indicators that we will see next are demonstrating this clearly. Second, in 2022, we successfully deployed ADVANCE our strategic plan. Having a structure on map well rooted in key market trends help us in turbulent times to stay on track. It provides clear priorities and reinforces the resilience of the business model. Third, our value creation strategy encompasses all stakeholders. In that context, we strengthen our leadership with significant progress in energy condition, while being firmly on track to deliver on our ambitious ESG commands.
Let's look at numbers on page four. In 2022, we have achieved a strong comparable sales growth of plus 7% but also a 70 basis point margin improvement, excluding energy pass-through impact and despite an inflationary context. If you recall, we delivered 50 basis points in the first half and we accelerated our efforts in the second half of the year. We are demonstrating our strong commitment to steadily improve our overall profitability, regardless of the environment. We also achieved 17% of recurring net profit at constant exchange rate, a good performance and a strong leverage. At 10.3%, our advanced objective of having a recurring ROCE above 10% is achieved one year ahead of the plan. And last but not least, the operating cash flow on sales, excluding the Energy Impact, improved by 110 basis points. This strong performance was delivered despite an adverse environment, which shows, once more, the resilience of our business model and the agility of our teams.
On page five, as you can see, we are delivering on our commitments. We are ahead of ADVANCE trajectory on two of the three main objectives; first, comparable sales growth and then return on capital employed, and the third objective on Co2 emission is on track with the plan. This achievement was possible thanks to the highly engaged teams worldwide that I would like really to praise here this morning. And thanks also of course to a strong business model delivering resilient growth.
As part of our strategy, we are positioning ourselves very well for the future. I am now on page six. We seized significant growth opportunities in 2022 with an outstanding 4 billion of decided investments. Keep in mind, it's a record level. Over the last five years investment decisions were between 3 billion, and 3.7 billion of Euros. This is fully in line with the 16 billion investment plan for the four year ADVANCE plan. Electronics projects represent more than 1 billion of the signed investments in 2022 and a significant share of the backlog. These projects will provide recurring cash flows and will fuel the future of the growth. Innovation also plays a key role in project signing. In particular, among all industrial companies, we have been at the very top in terms of European funding for energy transition, demonstrating the quality and innovation content of our projects. And also, for example, we've been recognized worldwide as the number one international patent holder for hydrogen production and distribution. These demonstrate the fact that we are one of the companies which has the potential to create value through innovation in the energy transition. Energy transition projects, by the way, are already a high share of the project decision in 2022.
And on slide seven, let me recall just a few tangible business successes last year. So first, as already mentioned, seven major European projects either linked to CCS, or hydrogen production by electrolysis, and representing more than 1.8 billion Euros committed investment have been approved for European fundings and are underway. On top of these projects, we signed more than 40 oxy-combustion projects, typically [indiscernible] small on site contracts. Here we provide proprietary solutions to reduce our customer consumption of natural gas in the context of the search of energy prices. We pursued the development also of biogas activity in Europe, in the US, and we have signed our first unit in China last year.
2022 was also a year of major flagship projects. For example, we are creating the first industrial pipeline systems with all would say shade of hydrogen, by adding blue and green hydrogen production units on three of our existing pipeline systems in Germany, France and Benelux, Netherlands. Another example is the first of its kind, large quantity biohydrogen production for Total Energy new bio refinery in France, producing sustainable aviation fuel in a circular economy scheme. We also signed seven partnerships and operational joint venture with major industrial actors in hydrogen for mobility, aviation, or Co2 transportation. These show that L'Air Liquide is a recognized leader in the energy transition by trusted partners. The introduction of the Inflation Reduction Act in the US is now creating new opportunities. As in Europe, L'Air Liquide is well positioned in the US to pick the best projects being number one in the industrial gas market with an extensive pipeline network. Additionally, our in-house technologies are very well adapted to the specificities of the projects in the US.
On slide eight now, I would like to emphasize that L'Air Liquide is on track with a Co2 emission trajectory, defined as major objective in ADVANCE. Indeed, we delivered a stable Co2 emission trajectory for the second year in a row. The slide is a recall of what was presented during the Sustainability Day in 2021 with the three levers of our plan, each of them weighting around one-third. We highlighted here a few actions we took in 2022. First, under the umbrella of asset management, investment have been decided, with customers to switch from steam driven to electricity for some of our asset production units in China. This will contribute already to the reduction by 1% of the group Co2 emissions. So again regarding action taken to decarbonize our existing assets, we have been selected for subsidies to equip three of our hydrogen steam methane reformers with carbon capture units. The third category is low carbon electricity sourcing, we signed for major PPAs in 2022, and made great progress in sourcing more than 400 megawatts of renewable electricity at the second site in South Africa. All together, actions decided in 2022 will deliver a reduction of more than 1.5 million tonnes of Co2 per year. Our efforts are recognized by external rating agencies and through the first validation in the industry by SBTi have our Co2 emission trajectory.
We show a global leadership in ESG. Indeed our ESG commitment in ADVANCE go beyond Co2 emissions trajectory. I am now on slide nine. Regarding employees, safety remains the first priority and we have encouraging results here with more than 10% reduction in lost time accidents. Also more than 40% of our employees benefit now from a common basis of care coverage, well on track to reach 100% in 2025. We are acting also for global society, providing access to medical oxygen to 1.8 million of patients in low and middle income countries, reaching 800,000 more people compared to last year. Finally, we put in place a new governance splitting the role of Chairman and CEO. Please note that the call dedicated to sustainability achievements and objectives will be held on March 24.
I would like to conclude by reinforcing our commitment, commitment to value creation for our shareholders on slide 10. We proposed to the vote of the General Assembly a dividend per share of 2.95 euro in 2023. It's an increase of 12%. That takes into account the rise of the nominal dividend amount and, of course, the free share attribution in 2022. It compares with the 8% average EPS growth over the past 20 years. The total shareholder return over 20 years reaches now 12%, showing our commitment to shareholder value over the long term.
I will stop here and ask Jerome to present our financial performance. Jerome?
Jerome Pelletan
Thanks Francois, and good morning, everyone. So I suggest we now review the details of our Q4 activity and fully performance.
So coming back to the full year, I'm now on page 12, group sales have been stronger, including on a comparable basis meaning excluding a fixed energy pricing and significant scope effect. And this is despite the very challenging environment described earlier by Francois. Gas & Services sales for the year are showing 6.1% increase versus last year. Engineering & Construction sales have increased by plus 21% compared to last year. Order intake has reached over 1 billion euro for the full year, also a bit coming from either electronics or energy transition project. Global Markets & Technologies are again seeing very strong activity with plus 26% growth boosted by our biogas business. So overall, compatible sales are up 7% for the full year, while published was significantly up by 28% supported by a record impact of energy power price pass through coming for LI business, which translates into a plus 15% impact on sales for the full year. On top of an overall positive FX effect of 5.8% and a limited scope impact of 0.2%.
On given services sales I am now on page 13, Americas and Asia geographies are posting very significant growth. While on a business line standpoint, merchant and electronics are the two main goals driver with sales growth both above 14%.
Let us now review the activity for each of main geographies. My comments will be mainly related to Q4. I am now on page 14. So I felt very good Q3. I mean we just have seen another strong growth at plus 9% in Q4. Merchant sales have been very strong in Q4 driven by strong pricing at 14.5%. From a volume standpoint, they've been positive excluding helium and this is despite the specific extreme freeze event in the US in December impacting package gases distribution. In term [indiscernible] volume have also remained steady.
For large industry, cycle activity for refining has been robust in the US during Q4 whereas air gases volume to steel have been softer with chemical cells impacted by the softer demand due to low export activity, the freeze event at the end of Q4 and by several turnarounds. So despite high comparison bases in Q4 2021 due to COVID-19 impact, especially in the US, healthcare sales have been very solid with strong proximity care activity in the US, driven by pricing. LATAM has also been strong, thanks to both med gases and home health care, mostly driven by strong pricing. Finally, electronic sales have been impacted by lower equipment and installation in the context of high comparable sales last year. Carrier gases and specialty material sales have been steady during the quarter.
In Europe now, we are seeing strong sales in merchant and healthcare, while large industry has been low. To be nearly noted again as well that Russian operations are no more consolidated since September 1, 2022. In large industry, volumes were down minus 16% overall as L'Air gases demand in steel and chemical has been weak impacting volume, while ICO has also suffered from a low refining activity, and chemicals with major turnarounds. In merchant, despite a strong base last year, as pricing started to accelerate last year in Q4, sales have been strongly supported by a very strong base pricing at plus 23%. Volume have been resilient and flat, excluding the specific impact of LCU2 shortage mainly impacting in the UK. Healthcare sales have been very solid. Home healthcare sales have been indeed strongly supported by diabetes activity. Med gas volume has been softer due to strong convertible base last year due to COVID-19. Finally, sales in specialty ingredients have been outstanding, notably in Asia. To be noted that pricing overall in healthcare has continued to improve during the quarter.
I am now on page 15. In Asia, first, merchant activity has been strong despite slow activity in China due to COVID-19 surging in December, impacting bulk and packaged gases, partly offset by higher sales in the rest of Asia. Pricing has again been strong at 7.5% in China and the [indiscernible] in the rest of Asia. Electronics now at 17% has been again buoyant with growth in carrier gases supported by one startup this quarter and the ramp up of all investment. Equipment and installation and specialty materials have seen high growth throughout the regions. Pricing was also strong in rare gases and helium. Finally, large industry has been impacted by low activity in China in the context of COVID-19 surge. In the rest of Asia activity was soft, mainly in Singapore and Japan, in line with the soft metal and chemical activity seen worldwide.
In the Middle East and Africa, growth has been driven by large industry with strong demand in India and Egypt and by a scale supported by home healthcare and that are not hindered anymore by COVID-19 high comparables in 2021. Merchant has been impacted by small divestiture intermediaries offsetting good prices.
I will now comment on our Q4 activity by business line. I'm now on page 16. In merchant, we’re seeing strong growth overall with sales of plus 13%. Pricing has continued to stay strong in Q4 in all geographies to reach about plus 16% to counter the spike in energy and inflation. To be noted, iron prices already started to increase significantly by 7% in Q4 2021. Volumes were resilient, excluding the impact of the shortage in helium, which has been partly shifted to serve electronic customer and bundled with carrier gases contract. By end market, materials and energy have been robust, while automotive and fabrication were most resilient.
In large industries, sales have been lower year-on-year Q4. Americas and Asia have been softer impacted by low demand as well for export of metals and chemical as well as just enough turn-arounds, whereas Europe volumes were lower except in refining that was more resilient. We nevertheless saw a steady contribution from start-ups and ramp-ups.
Page 17, electronics has been very strong again during the quarter. Carrier gases and specialty metal have been the two growth drivers, supported by startup and ramp-up contribution and by strong pricing in specialty material and Helium for carrier guesses. Finally, healthcare was very robust, as you see, supported by a very good activity in diabetes that has supported the growth in home healthcare. Medical gases has seen normalizing volumes after COVID-19 with a positive pricing impact, especially in the US, while specialty ingredients continue to deliver outstanding goals. On a pricing standpoint, we saw overall increase in all regions.
On page 18, our performance improvement trend continued to deliver as we posted an operating margin up 70 basis point for both group and gar and services, excluding the energy pass through impact in large industry. This margin improvement shows the strength of the business model in a very challenging environment reinforced by our advanced performance brand, and this is despite, as you know, the mechanical dilutive effect of the overall efficiency increase, especially in our merchant sales. So for the third year in a row, group operating margin has indeed improved by at least 70 basis points, showing our commitment to deliver stronger performance year-after-year.
On page 19, this margin improvement is again supported by our structural improvement plan that continues to deliver. As you can see, pricing in IM is still significant in origins at a fast pace. I'll come back in more detail in the next slide. We are [indiscernible] that our efficiency to reach close to 380 million euro in line with our strategic plan and this is despite the very significant adverse effects of inflation on our procurement reduction effort. As you know, [indiscernible] in efficiencies and were significant again this quarter, those have contributed to the performance for the year. Portfolio management and streamlining have been further pursued. It has a relative contribution to the margin. If you take merchant, we divest businesses where we don't see an improvement in terms of density, and we make acquisition in other geographies where we see potential to increase both density and therefore profitability. Performance improvement is again of key focus points and we continue to work on those.
As you can see on page 20, our pricing action in merchant had been again very powerful, and this in every geography to reach plus 15% overall in Q4 after plus 18 in Q3. Our pricing campaign have been again executed in a very efficient way with record impact, many in bulk and packaged gases, leveraging on our escalation from surcharge and pricing action to address inflation and pass through a spike in energy costs to customer. In Q4 alone, Europe achieved a record nearly 23% year-on-year pricing impact comparing to pricing acceleration already in Q4 2021, while the Americas delivered plus 14.5% and with a notable Asia at plus 7.5% year-on-year for the quarter.
Let us now review quickly the bottom of the P&L. I'm now on page 21. Non-recurring operating expenses that amounts for the year at minus 570 million euro have been impacted mainly by two exceptional non-cash items; as you recall during the first semester, we took a company stake in one of our large generator in China, which triggered the revaluation of the asset with an exceptional non-cash book gain around plus 200 million euro. Then we adjusted down the value of our Russian assets and recorded an exceptional non-cash provision amounting to approximately minus 400 million euro. In the second semester, we further impaired our Russian assets by approximately minus 180 million euro non-cash exceptional charge following the deconsolidation of Russian activity as of September 1, 2022. We set our Russians asset to zero in our books, following the deconsolidation of Russia activity from September 1.
Net financial costs are very stable despite interest rate increasing. Cost of debt is indeed close to 2021 level at 2.97%. As a reminder, 90% of our cost of debt is at fixed rate. On an effective tax rate standpoint, our ratio is also stable at 25.7%. As a result, while net profit as published is up by 7.3%, recurring net profit excluding FX is significantly up to 17%, excluding major exceptional items that have no impact on the operating income or recurring line with our guidance.
Page 22, as I mentioned before, cash flow generation has also been very strong at 12% at constant FX rate. Now 20.8% of sales, excluding energy, which is plus 100 basis points versus last year and around to a set more than high industrial and financial CapEx at 3.2 billion euro together with dividend payments at 1.5 billion euro and this despite an unfavorable currency effect. As a consequence, net debt reduced last year to 10.3 billion euro and gearing stands now at 42%.
On page 23, the 12-month portfolio of opportunities remained at a very high level of 3.3 billion Euros. This despite the variable level of decision for the year supported by energy transition project that will be more than 40% of the portfolio to [indiscernible] mid-term USA opportunity in IRA come on top of this portfolio of opportunity, as a demand for decision is mostly beyond 12 months. Industrial and financial decisions for the year have reached a record level of 4 billion euro of which 3.9 in industrial decision, which is plus 30% versus last year. This is fully aligned with our ADVANCE roadmap and include more than 1 billion euro deciding on electronics project. Finally, our sales backlog is also at historical high level at 3.5 billion euro, supported by electronics and large industry project in Asia, Europe and America that represents the 1.3 billion euro of additional sales after full ramp-up.
Page 24, the level of start-up and ramp-up contribution has reached a very high level at 293 million euro. And you can add 120 million related Sasol air separation unit contribution reported in significant scope. This is at the top of the range of our initial guidance. For 2023, the contribution should be in the range of 300 million euro to 330 million euro, which is a higher contribution than in 2022 when you exclude the Sasol contribution.
Last year, I am on page 25, was a very important landmark, as the group recurring retail and capital employed, meaning excluding 2022 significant non-recurring item, Russian impairment mainly, got back to double digit at 10.3%; first time since the acquisition of Airgas in 2016 and one year ahead of the commitment we made during the ADVANCE commitment -- ADVANCE announcement.
To conclude, on the basis of our excellent performance in 2022, we're very confident in our ability to continue to develop and to improve our performance, even in a more -- in potential difficult context. We have set our guidance for the year and L'Air Liquide is now confident in its ability to further increase its operating margin and to deliver recurring net profit growth at constant exchange rate.
Again, thank you very much for your attention and we will now open the Q&A session.
Question-and-Answer Session
Operator
[Operator Instructions] We're now taking the first question. The first question is from Andrew Stott from UBS. Please go ahead. It is open.
Andrew Stott
Great, thank you. Good morning, everybody. Couple of questions, can start with the sort of high level state of play on subsidies for some of your thinking about your energy transition strategy. Any early thoughts on the European Union Green Deal plan that was unveiled both [indiscernible] but more importantly, as importantly for your customers, so appreciate your thoughts on that. Second one was more specific on your targets, to some extent, your victims or your own success here but mathematically you've done almost two years of your margin target in one year, and you're already above your return on capital target. So do you start to rethink what you can achieve in the next two or three years on margins or are there very specific challenges for this year, for example, that we may or may need to think about? Thank you.
Francois Jackow
Thank very much, Andrew. And good morning. For the first question. I will ask Pascal who is in the first line on those European project to speak about the momentum and what we see overall in terms of environment and subsidies. Pascal?
Pascal Vinet
Thank you and thank you for the question. I guess what we see is a very positive environment and we see Europe moving, we see the regulations being clarified and that's, I think, a very important point for us and for customers. We see the rules being clearer. We see the push for hydrogen and we see the push for de-carbonization, and that gives us a lot of opportunities. You have seen already successes that we have had to have some of our projects, some of the projects we also have with our customers getting subsidies from the European Union, or from the different countries they are in. I think this is only the start and the clarification that is ongoing, the regulations that are being put in place will help us going forward.
Francois Jackow
Thank you very much Pascal. Regarding the ADVANCE and the target that we set for ADVANCE, so the very good news is that we had, I would say, a very strong and great starter for the plan, in spite of the environment, which was quite adverse. I think we stay fully committed to ADVANCE. Today ADVANCE is fully valid. In terms of strategic direction, I think it's very powerful to have clear directions and the environment is basically supporting the trends and the strategic direction that we are focusing on, so I think that's very good. De-carbonization, the growth markets, the electronics are bringing value, I think all that makes a lot of sense, the financial and extra-financial performance.
So we are at the beginning, it's a marathon. Of course, we are running like a sprint, but it's a marathon, okay, so it's too early to revise the objective of the ADVANCE plan. We must focus on the two pillar, which are improving the performance and delivering year-after-year, the performance and improvement in the performance and investing for the future. Again, for the time being, we have been very successful in doing both. However, the environment and especially when you talk about energy prices, inflation, geopolitics may bring surprises. We have shown that we can go through them but we need to continue, so it's too early to revise. But be sure that we have ambition and whenever it's time, we will update if needed the ambition.
Andrew Stott
Thanks, Francois. So just to clarify, no specific challenges that you see for 2023 that you didn't see in 2022, as things sit today?
Francois Jackow
No. But again, we had a lot of surprises in 2022, so I think we need to be nimble in that regard. But again, I think we have demonstrated the resilience and we will continue to, I would say, apply the recipe to our business models in large industry, in industrial merchant, regarding pricing, regarding the strong contacts and business model that we have and the investment strategy that we have. So I think all that will continue, of course. And we do expect, based on what we are seeing, that the environment may be a little bit more favorable in terms of volume and in terms of growth compared to what we have seen, especially at the end of the year. But, okay, let's be cautious on this.
Andrew Stott
Thank you.
Operator
Thank you for your question. We are now taking the next question. And the next question for Alexander Jones from Bank of America. Please go ahead. Your line is open.
Alexander Jones
Great. Good morning and thanks so much for taking my questions. The first is on pricing. Clearly, energy prices in Europe have started to fall under some indexation in your portfolio. But can you give us an idea of how you would expect merchant pricing to evolve and whether you think this can remain positive, even as energy prices fall, which could potentially help margins? And then the second question on the IRA opportunities. You mentioned in the prepared remarks that a lot of those are beyond 12 months in terms of timeline, could you just give a bit more color on sort of the exact timelines for many of those projects and what the key hurdles are, whether it's just the case of doing all the engineering and site planning or whether there's specific regulations, you're hoping clarified by the US government. Thank you.
Francois Jackow
Thank you very much, Alexander. So on the pricing, I will ask Mike first to give some color on what we see, especially in the in the Americas and then Pascal will talk about the European situation where we have seen the greatest pricing power overall. And Mike will come back on the opportunities in the US following the IRA. So Mike, do you want to talk about item pricing for America's?
Mike Graff
Thanks, Francois and good morning, Alexander. Sure, you know, in 2022, from a pricing standpoint, we saw two major price campaigns and we continued beyond that with a very targeted approach for certain markets as well to continue to drive price. And while energy prices may have mitigated a little bit, as you know, there's other inflationary cost drivers that go well beyond energy, so we plan to continue to move forward with our focus on pricing to continue to be very strategic and scientific in our approach, and we will continue to drive pricing through the year.
Francois Jackow
Thank you, Mike. Pascal?
Pascal Vinet
Thank you. For the item pricing in Europe, I want to say that our pricing efforts will continue, we do not expect pricing to turn negative, we’re expected to remain positive in the next month. We'll be now passing through the general inflation we face and we'll also have some lag effect anyway on the energy indexes, so all that will help pricing efforts. Of course, in percentage terms, since we will now compare with 2022, which already had very significant price increases in terms of percentages, again, we will not see the same high percentages going forward, but we have been asking, that's the important point. We have been in a permanent pricing campaign mode in Europe since the end of 2021 and this will continue in 2023.
Francois Jackow
And I think one of the key point when we talk about item pricing is of course to be able to pass through, I mean, some of the costs, energy and inflation, but also to create value for customers. And clearly that's where L'Air Liquide is making a differentiation by bringing solutions to help customer cope with the situation and we talked about the Oxy condition, for example, we talk about many of the applications which are bringing value. And I think we are entering into this phase where for the long term, we need to be in a position to create value for customers to make sure that they stay competitive and, of course, we are in business with them. So let's talk now about the US and Mike can you tell us how we see, I mean, the opportunities being supported by the IRA?
Mike Graff
Sure. And to that point, Alexander, I think that first of all, as you know, the IRA accomplishes many things. Two very core drivers for us are the de-carbonization, de-carbonization of industry as well as the de-carbonization of the transportation sector or mobility. If we focus in on the de-carbonization of energy intensive industries, just for example, on the Texas Gulf Coast, the US Gulf Coast, in general, you've got likely 15 world scale crackers, that in some period of time, like they will look at de-carbonization. They won't all happen at once, there's not a direct requirement for that, but, clearly, there's enormous potential there. In addition, you've got the opportunity to use low carbon or renewable hydrogen in the actual production process itself, that is, as a core component, of what is produced like blue ammonia.
So these bring significant opportunity but there's a lot of complexity to this because in almost every case you're dealing with large scale production of low carbon, hydrogen, potentially, the large scale capture of Co2 and sequestration, and then also large quantities of oxygen that are necessary to make this work. We're fortunate because we have all of the technologies necessary to do that. We do not need to license from others, like some of our peers do in the industry, but we have the ownership of all of those technologies. So where we are today is we're looking to leverage our existing infrastructure, meeting our customers’ needs while simultaneously reducing the carbon footprint of our own assets, which results in very large complex projects.
And to the point that Francois and Jerome made earlier, because of the size and the complexity, there's multiple options and multiple solutions to be considered, which really push a lot of the decisions of our customers out beyond the 12 month period into 2024 and potentially beyond for some of these large opportunities. So it creates enormous potential for us. Clearly, besides the number of projects and the complexity, we're also in a position to be selective on what makes the most sense for us to leverage our capabilities, to leverage our infrastructure and to move forward.
Francois Jackow
Thank you very much, Mike. Let’s not forget also that there is a stronger momentum around the semicon industry in the US, there is a dozen of fabs, mega fabs, which are being built or developed currently. And there again, I mean, those are significant opportunities, probably less located on the US Gulf Coast, but we are very well positioned again, leveraging our number one position in electronics worldwide with key companies. So that's another opportunity for North America for us. Thank you.
Alexander Jones
Thank you.
Operator
Thank you for your question. We will now take the next question. The next question from [indiscernible] from Citi. Please go ahead, your line is open.
Unidentified Participant
Hi, thank you for taking my questions. Just one little bit on the near term and then one coming back on to this the potential opportunity on the IRA. The first one, are you able to compete on the large industries and the development since the end of the year on a global basis and how they're developing with almost six weeks into the fourth quarter? So if there is some comments around that would be helpful. And then more specifically, in China as well, any early observations post the Chinese New Year in terms of large industries demand there that'd be helpful.
And then secondly, I think, Mike, you mentioned that you're being very selective on or you are in the opportunity position to be selective on projects is done as opposed to the IRA. Should I understand that as being your usual hurdle rates need to be met or are you baking in some sort of margin of error or contingency within that, given this is an energy transition, and there's some new technologies to be played out. So I'm starting to understand when you say selective is at a higher hurdle rate that you're applying to these products or are they similar to what you normally do for your existing products. Thank you.
Francois Jackow
Thank you. Thank you very much [indiscernible] for your questions. So maybe to give you an overview of where we stand and how we see, basically, I mean, the trends globally, I think I would challenge anybody to give a definitive answer for 2023, for sure. But, overall, if we look at the beginning of the year, we see a stronger numbers in January, overall. Of course, we need to keep in mind during the year for inflation, energy, to some extent, also geopolitics, as they will be, I mean, key external KPIs. If we talk about just some things to keep in mind for the year-on- year trend on the different segments and geographies, I think clearly, for large industry in Europe, we believe that the demand has bottomed up at the last quarter. We start to see, I mean, some positive discussion about increasing the operating rate and restarting some of the units with some of our customers. And I think, of course, I mean, the evolution will depend on the energy price but overall, it's a positive trend, more globally, by the way, large industry and in all the region of the world will benefit from a solid startup and ramp-up during the year.
If we take industrial merchant, both in Europe and America, was the key driver. As we just mentioned, I mean, we are confident that the prices will remain high even if the comparison effect, of course, will probably will be less than what we have seen. But volume, clearly, I mean, should resume the growth in the different parts of the world. Specifically, I mean, when we talk about China, we had a year of 2022 in China, which was impacted by many events from an economic point of view, from a political point of view, also, I mean, with the COVID at the end of the year, but we start to see positive numbers, we can come back to this. But overall I mean in industrial merchant and in large industry, we are confident that we should expect them in some kind of picking up. Clearly electronics in China has remained strong and solid. This is true for electronics in Asia overall, and continue to be a driver.
Finally, I think for the healthcare activity, it's clearly coming back to historical growth level, stronger, especially in the homecare business, and again in North Armenia, but also in Europe, strong pricing. So, that's overall what we see.
Maybe for the IRA selectivity, we have no intention, basically to change both our business model and the order rate that we are using. So, overall, I think that's part of the value creation that we're able to bring to the energy transition by leveraging technologies, as mentioned by Mike, but also synergies with existing assets, and economies of scale, so regrouping certain needs and customer, we are able to create value and to have projects which have a similar return profile as what we have in large industry or in electronics. And that's really what we want to do. The fact that we see many opportunities is for us a good sign because indeed, we can be selective and pick the best project in terms of return but also in terms of strategy.
Unidentified Participant
Very helpful. Thank you.
Operator
Thank you for your question. We will now take the next question. And the next question is from Laurent Favre for Exane BNP Paribas. Please go ahead. Your line is open.
Laurent Favre
Yes, good morning, all. I’d like to go back to the IRA. You've talked about the potential, you’ve talked about your strong footprints and capability, I was wondering if you could talk about your appetite to invest in significantly larger projects. I think your two peers since last summer, they announced projects above a billion worth of capital. Is this something that we should be expecting from L'Air Liquide and, more broadly, who would you expect to sign new projects or announce new projects by the end of this year? Thank you.
Francois Jackow
Thank you, Laurent. So this is true that we see more projects and we see some projects which are becoming larger projects. The very good news is that we have not only the ambition, but the capability to seize any type of projects that we see fitting with our long-term view of value creation. Today, L'Air Liquide is a very strong position from a financial point of view to take any opportunity that we see. We have a very strong balance sheet. We have a gearing, which allows us I mean to take any projects that that we see. So far, the approach has been clearly to focusing on the projects, which are concrete project where we can identify a clear business model and very important to find customers which are ready to commit and to pay for those new solutions. That's why you see that we have several significant projects, many of them are in Europe, which actually fit those criteria. And each of those projects when we talk about the equalizer, carbon capture, basically have a very strong business model and fit perfectly with our strategy and with our objective in terms of financial targets.
I mentioned the number of seven projects, which are large projects on the European level. And if you take the cumulative investment, it's more than 1.8 billion euro of investment. If we step back, I think there is a value in having those large project but not those mega projects in terms of risk management, because we know that energy transition is also a new area that some of the market may take a little bit longer time, some of the counterparty may be new counterparties. So in terms of managing overall, the risk profile for the company, we do believe that having a strong portfolio of large project as opposed to one or two single mega project is a much better way to progress in that in that field. This being said, I mean, we have a few large projects we are working on and whenever it's due time, and when we think that makes sense, of course, we'll announce some of them if we decide to go forward.
Laurent Favre
Thank you and if I may ask you the second one. It's related to the efficiencies, I guess for Jerome. I think the targets within ADVANCE is 1.6 billion, which I guess over four years is 400 million per year. You were slightly below that in 2022, should we assume that you'll be slightly above in 2023?
Jerome Pelletan
Thank you very much, Laurent. Efficiency has been has been very, very strong at 380 million euro in the context of very high inflation. You know Laurent, we do not report avoiding cost but avoiding cost also has been very strong and has contributed to the performance. We talk more about margin -- our commitment to improve margin. And you know we have been doing that, again, we've done seven plus -- above 70 BPs for the last three years and this year we have delivered plus 80 basis points in the second part of the year only. So efficiencies -- also just for you to bear in mind, efficiencies were 380 million euro and we achieved 211 million on the second part of the year, so we accelerated very much in the second part of the year, which meant us also improving our vertical ratio. Now, our objective is to be able to deliver 1.6 billion over the ADVANCE period and so far, it's our objective. But again, 380 million euro in the specific inflation environment is a very strong a very strong achievement.
Laurent Favre
Thank you.
Operator
Thank you for your question. We will now take the next question. And the next question is from [indiscernible]. Please go ahead. Your line is open.
Unidentified Participant
Good morning. Thank you for taking my question. I have two. The Co2 shortage you mentioned in Europe, do you expect it to be a short-term phenomenon or to improve longer term? Second question is more about carbon capture and Co2. I was wondering if this could become an opportunity as large as hydrogen opportunity for L'Air Liquide?
Francois Jackow
Thank you very much, John Nick [Phonetic]. So Pascal will take the first question and I'll come back for the second one.
Pascal Vinet
So thank you John Nick. On the Co2 shortage in Europe, as we have mentioned, it has been more acute in the UK than in any other country. And the global reason, I think we mentioned it in previous calls, is basically the fact that fertilizer plants, ammonia plants have stopped producing when they were facing a very, very high energy prices. And those ammonia plants are some of the big sources for the Co2 we sell in our merchant activity. So what is the near future in our views? I think we are going to see less and less of shortage because we start hearing from more suppliers in this case of Co2 that they may restart some units. There's still a question mark on the UK. We see on the -- in continental Europe things improving. So the jury is still out, it will depend on energy prices but we are reasonably optimistic that this will solve itself. Again, jury is still out but positive trends. The UK being the only very difficult case we face right now.
Unidentified Participant
Thank you.
Francois Jackow
Thank you very much for your question on Co2, because indeed, we see a very significant market opportunity in Co2. We have been talking all -- a lot about hydrogen, but the topic of taking the Co2 out of the existing manufacturing sites is becoming more and more present, and is being more and more accepted, especially in countries like European countries. So for us, it's an opportunity because we are very well positioned. We are well positioned because we are already, I mean, supplying many of those industries in the industrial basins in the world, but also because we have a clear lead in terms of technology on the capture front in the higher cap and all the technologies around that. So we see that as an opportunity for sale of equipment from an engineering business but more important on the OTF type of concept and we have already been successful today in managing to develop a new innovative [indiscernible] business based on the carbon capture either on our own unit or on the customer units. We see clearly, I mean, the business opportunity on the capture part of the CCS chain, not so much into the transport or in the storage, which are not our core business. So the Co2 opportunities around the world will become a reality, probably at a scale, which is going to be a large scale before we see a larger requirement for hydrogen for industry, for example, because the Co2 the technologies are available, the economics is already viable, even without subsidies. And also, the Co2 management concerns many industries, which for us are sometimes new customers. For example, the cement industry is a big emitter of Co2 and you know that we have announced already two projects with the cement company to capture Co2 out of their processes. So, with the development of Co2 hubs in some key basins, and they again, we are taking a leading role on several of those Co2 hubs, we see opportunities coming into fruition.
Unidentified Participant
Thank you.
Operator
Thank you for your question. We are now taking the next question. The next question from Chetan Udeshi from JP Morgan. Please go ahead. Your line is open.
Chetan Udeshi
Yeah. Hi, thanks. I have three quick ones. One, just looking at one of the slides at the front talking about proprietary technologies that L'Air Liquide has, whether it's ATR or carbon capture, I'm just curious how is that sort of helping you if at all in terms of contract wins, especially in some of the energy transition projects? Is there any sort of qualitative or quantitative data you can share to help us understand the upside for L'Air Liquide from having those proprietary technologies in house versus some of your competitors?
The second question, probably more related as well, we saw one of the US peers, your US peer, talk about cost inflation on the project side. I'm just curious, given the lead time sometimes on projects can be two to three years, when you sign when you deliver, or startup, how are you protecting the returns and margins, given the cost inflation dynamic in general for lot of materials?
And last question, I'm just looking at the slide 30, which shows margin improvement by regions, it seems all the margin improvement last year has come from Europe with no good margin improvement in Asia or very small in America. So can you maybe shed some light why we didn't see any margin improvement in the US and Asia? And it seems Europe has been held primarily by very high merchant prices because clearly the large industries volumes were weaker through to 2022. So any color on the regional margin development will also be helpful. Thank you.
Francois Jackow
Thank you very much, Chetan. I will answer the first question and Mike will talk about the project in the US and more globally, the projects and Jerome, probably, can talk to the margin. So the first one, clearly adding proprietary technology is, for us, clear competitive advantage, especially in the field of energy transition where you need to invent a new solution, both in terms of technology but also in terms of business model.
I think a clear example of that is what we have done with Total Energy in concrete now, we are basically -- thanks to the portfolio of L'Air Liquide technologies, we have been able to invent a new solution using biofuel as a feedstock, but also being able to produce hydrogen, which is biohydrogen, and to capture Co2, which is biogenic Co2 for the merchant market. And this was done, thanks to the integration of the steam methane reforming technologies, but also all the cryo cap technologies and to find a solution which was meeting, I mean, the market objective, but also making, overall, the solution much more competitive.
So I think, for us, it's extremely important to invent the solution or to open a new market with new technologies. Hence, the joint venture with Siemens Energy where we collaborate very closely to do the industrialization and the scale up of those technologies. So this will be key because the main differentiation is going to be not to make some nice slide show about the energy transition and the new scheme, but to be able to build and to operate those large new units and adding the proprietary technologies a clear benefit for all those integrated schemes. Mike, do you want to talk about projects and how we manage inflation?
Mike Graff
Sure. And if I could maybe just to add slightly to what Francois said and build on his comments, when we look at the benefit of the proprietary technologies recognize that many of our customers, typically when they build a project, or when they're looking to add capacity, they pretty much understand what it is they may need from us. In this particular case, they are actually in a state where because of all the complexities we mentioned earlier, they're not really sure what the best approach is. And to Francois point, because we own all of the various technology bricks, we are able to quickly develop without getting third parties involved a variety of different options for solutions.
And so we are, to Francois point, the solution provider that can help them understand what to do, and then help them do it and I think that creates a real benefit. I think on the cost, inflation piece, clearly, we've seen acceleration in costs. We've talked about inflation, we've talked about a variety of other things, and what we have worked to do with many of our large projects, in recent time, is either upfront in the agreement on the contract to include inflationary context, already built into the construction piece or, as always, in our large industries contracts, we have inflationary terms that are built into those long-term contracts as well, and the trade-off between the two help mitigate the overall inflationary costs we may see.
Francois Jackow
Thank you very much, Mike. Jerome?
Jerome Pelletan
Yes. All right. Thank you very much, Chetan, for your question. So we'll come back on the margin improvement in Europe and America. So you're right Europe has a significant margin improvement, there are basically four explanations for that, first, the pricing and you saw the pricing has been very strong, even on top of a larger base effect last year, so that’s the first explanation. The second explanation is efficiency, most of the efficiencies also accelerate in the second part, including in Europe. The third item was also something that you know very well, it is L'Air complex culture in the context of lower volume, you that the fixed path is very much -- and the value is very much in the fixed path. So mathematically and mechanically, when you reduce volume and sales, you basically make your margin more relative. And there is also a specific item on the project activity that was good, so that is for Europe.
For Americas, it's also the same story in terms of [indiscernible] and good efficiencies and as well as [indiscernible] impact. But you remind us, you know that very well Chetan, we have the major part of our business in the Americas, which is still higher in merchant. And even though we have been able to deliver a significant pricing, mechanics gets diluted to the margin. So that's why explaining the fact that, I mean, Americas would not at the same pace as in Europe. But all in all, again, very strong margin improvements at the group level, especially in the second part.
Chetan Udeshi
Thank you.
Francois Jackow
Alright, thanks you very much, Jerome. Thank you, Chetan. I think we have just time for one last question and I guess this is Peter.
Operator
Yes, it is Peter Clark from --
Peter Clark
I've got three very quick ones and if I am the last one. I got cut out, but I just want to clarify on the 8 billion target by 2035 is your US IRA projects, or anything like the sort of things we see being signed, and you're not going to leverage the pipelines, etc, you're going to go beyond that. So that was the first question. The second one, the corporate charges, I'm assuming the corporate charge is not the R&D seems to come down significantly in the second half. Just to comment on that, because that's an encouraging trend, if that's right. And then finally, just very quickly on Mexico, I must have missed the announcement, I can't see a press release on it. Is this a little bit of a retrenchment from some of the merchant operations where I know it got very tough for you. Thank you.
Francois Jackow
Thank you very Peter. So just to come back on the investment opportunities, again, for the time being we have ADVANCE, which is the framework for the next four years, but in this framework, you remember that we have a 16 billion of investment plan, which is 50% more than the previous period. Of course, I mean, we are looking and adapting to the opportunities. We see more opportunities, so it's possible that in due time with the right project, we will invest more, but again, L'Air Liquide has the capabilities to do that, so if we see good opportunities, we'd be in a position to seek them. Regarding the R&D cost and the charges, Jerome, you want to comment?
Jerome Pelletan
Yeah, I will not comment too much. We can have some time, which can be different in terms of the way that we are charging the R&D, but that's basically something that it's functional, so we cannot make a trend of this specifically, Peter.
Francois Jackow
And basically, I mean, our commitment to R&D, I mean, remains the same. We are within the industry, I mean, the one, which is investing the most in innovation, and we want to keep it that way, we see that it's making a clear difference today in the current environment and with the energy transition, so that will remain. Mike, do you want to make a quick comment on Mexico?
Mike Graff
So, Peter, there have not been any direct press releases or anything regarding the investments in Mexico or anything like that. I think that the government is looking at its overall positioning in terms of Pemex [Phonetic] in terms of those types of opportunities that they had looked in the previous term, to go ahead and leverage third party suppliers. And there's a lot of discussion right now with the government, with some of those third party suppliers as to whether this is the right structure going forward but there hasn't been any announcement on anything.
Peter Clark
Thank you very much.
Francois Jackow
Thank you very much. So this will now conclude this session. Thank you very much for all your questions. Just to summarize, we delivered again a strong performance in 2022 in a challenging environment. The record level of project signing position us very well for the future and we remain extremely focused to deploy our ADVANCE program and achieve our mid-term objectives in terms of growth, our Co2 emission and value creation for our shareholders. So thank you again, I know that we will be meeting some of you in a few hours in London, we will continue probably the discussion and I wish to all of you a very good day. Thanks you.
Operator
That’s it from the conference for today. Thank you for participating. You may now disconnect.
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L'Air Liquide S.A. (AIQUF) Full Year 2022 Earnings Call Transcript