Earnings Call Transcript - APD Q1 2022

Operator, Operator

Good morning and welcome to the Air Products First Quarter Earnings Release Conference Call. Today's call is being recorded at the request of Air Products. Please note that this presentation and the comments made on behalf of Air Products are subject to copyright by Air Products and all rights are reserved. Beginning today's call is Simon Moore. Please, go ahead.

Simon Moore, VP of Investor Relations

Thank you, Ali. Good morning, everyone. Welcome to Air Products' first quarter 2022 earnings results teleconference. This is Simon Moore, Vice President of Investor Relations, Corporate Relations and Sustainability. I'm pleased to be joined today by Seifi Ghasemi, our Chairman, President and CEO; Dr. Samir Serhan, our Chief Operating Officer; Melissa Schaeffer, our Senior Vice President and Chief Financial Officer; and Sean Major, our Executive Vice President, General Counsel and Secretary. After our comments, we will be pleased to take your questions. Our earnings release and the slides for this call are available on our website at airproducts.com. This discussion contains forward-looking statements. Please refer to the forward-looking statement disclosure that can be found in our earnings release and on slide number two. In addition, throughout today's discussion, we will refer to various financial measures. Unless we specifically state otherwise when we refer to earnings per share, EBITDA, EBITDA margin, the effective tax rate and ROCE both on a company-wide and segment basis, we are referring to our adjusted non-GAAP financial measures, adjusted earnings per share, adjusted EBITDA, adjusted EBITDA margin, adjusted effective tax rate and adjusted return on capital employed. Reconciliations of these measures to our most directly comparable GAAP financial measures can be found on our website in the relevant earnings release section. Also, as we shared with you on our last call, this is the first quarter we reported our results with our new Middle East and India and our new Corporate segments. Now, I'm pleased to turn the call over to Seifi.

Seifi Ghasemi, Chairman, President and CEO

Thank you, Simon, and good day to everyone. Thank you for taking time from your very busy schedule to be on our call today. I am proud to say that despite significant challenges including unprecedented energy cost increases—especially in Europe—supply chain disruptions, and the continued adverse effects caused by the pandemic, the talented, committed, and motivated people of Air Products continued to deliver excellent results, including earnings per share this quarter in the top half of our guidance range. This quarter we closed on Phase 1 of the Jazan project, which is the single largest project in our company's history and will create significant value for many years to come. As always, I want to thank our more than 20,000 employees around the globe for standing together, working hard, staying agile, and delivering for our customers and shareholders. Let me start this presentation with our highest priority, which is obviously safety. Please take a look at slide number three. Although we have made significant progress in this area since fiscal year 2014, our first quarter safety performance was slightly behind last year. That is not acceptable. Our goal remains zero accidents and zero incidents. We are committed to drive towards that goal across the organization, knowing that the right attitude and constant attention to safety is absolutely necessary and required. Slides number 4, 5, and 6 include our goal, our management philosophy, and our Five Point Plan. We have shared these slides with you before so I'm not going to go through the details. But these are the principles that we follow every day and they will guide us in the future. Now please turn to Slide number 7. We are focused on making Air Products a leader in providing solutions to today's significant energy and environmental challenges through gasification, carbon capture, and clean hydrogen. I am proud to say that we have continued to create and win projects that help customers and countries meet their growing needs for cleaner energy and environmental solutions. Last year, we announced two landmark blue hydrogen projects—one in Alberta, Canada, and the other in Louisiana, USA—adding to our slate of broad scale mega projects supporting the energy transition. At the beginning of our fiscal year, we successfully closed on Phase 1 of the $12 billion Jazan gasification and power project, fulfilling one of our major commitments. We continue to expect Phase 1 of this project to contribute $0.80 to $0.85 per share on a full-year basis consistent with what we have committed to you before. We also continue to make great progress on our significant project backlog. Now please turn to Slide number 8. Creating a cleaner future requires experience, investment, and innovation on a broader scale. At Air Products, we have the technology, the track record, the capital, and the ambition to execute our bold strategy in bringing people around the world together to collaborate in an inclusive environment and help solve sustainability challenges. We are living our higher purpose as a company. Now please turn to Slide number 9. It is clear that at Air Products, sustainability is our growth strategy. Sustainability creates our growth opportunities, and our growth opportunities support our sustainability goals and focus. We are very proud to help drive the energy transition, particularly through our world-scale hydrogen project. Our new project in Saudi Arabia, Alberta project in Canada, and Louisiana project in the United States represent almost $10 billion of direct Air Products capital to create the zero and low-carbon hydrogen needed to drive decarbonization and accelerate the energy transition. These projects will significantly reduce CO2 equivalent emissions for our customers, for Air Products itself, and for the world. As a first mover, taking real action through these real projects, we can bring a portfolio of experiences and technologies together to provide lower carbon forms of energy, improve our customers' sustainability, and help solve significant energy and environmental challenges. As I said, this is our higher purpose as a company. In addition, it is important that our commitments are aligned with our strategy. We introduced our Third by '30 carbon intensity reduction goal more than a year ago. And I'm very proud to say that the major projects we have announced, along with our day-to-day focus on operational efficiency, puts us in a great position to meet or exceed this goal by 2030. But as a company, we are never satisfied with our current performance. Therefore, we are taking another look at our opportunities to make even more meaningful progress toward higher environmental growth. Under the purview of our Sustainability Leadership Council, we are reviewing additional areas of opportunity, which could include a Scope 3 emissions goal, the benefits of avoided emissions and/or other potential scenarios. I expect to share more with you on these exciting topics by mid-year. Now please turn to slide number 10, which shows our EPS growth. While we focus on our strong long-term prospects, we remain vigilant and motivated to deliver excellent near-term results consistent with our strategy and what we have already promised to investors. As you can see, we have delivered on what we promised you in 2014 and achieved an 11% annual cumulative EPS growth on average since 2014, while building a strong foundation for our future growth. The excellent results and key projects we have executed represent the initial stages of our strategy to advance the world toward a cleaner energy future. I am very optimistic about our company's prospects to capitalize on these growing opportunities by being a meaningful player in the energy transition. Now please turn to slide number 11. As a reminder, we do share our earnings growth directly with our customers through our dividend, while we continue to invest in growth opportunities. The whole team at Air Products is very proud that we just announced our 40th consecutive year of dividend increase. This tremendous long-term record is a testament to our people and the strength and consistency of our business model. The most recent increase is 8%, which increases our dividend to $1.62 per share per quarter, which we expect to translate to directly returning more than $1.4 billion to our shareholders in 2022. And as Melissa Schaeffer, our Senior Vice President and Chief Financial Officer, will share with you in a moment, we have significant remaining cash flow to support our many project opportunities. And finally, please turn to Slide number 12, still my favorite slide since it captures in one chart the progression of our business since 2014. We continue to deliver strong underlying results, but our margin declined in recent quarters, primarily driven by higher energy pass-through, which increases our sales but doesn't impact profit. Two-thirds of the margin decline from our peak is due to the impact of this higher energy pass-through. But as I indicated last quarter, we are continuing to take action to improve our margins through controlling costs and increasing prices to cover cost increases. Now I'm happy to turn the call over to Melissa to discuss our results in more detail. Melissa?

Melissa Schaeffer, Senior Vice President and CFO

Thank you, Seifi. Now, please turn to Slide 13. Before we discuss the details of our first quarter results, I would like to highlight a few notable items in our reported financials for the first quarter. As we previously announced, we reorganized our reporting segments starting this quarter. To provide more visibility to our regions, we separated the previous EMEA segment into Europe and a Middle East and India segment. The new segment is made up of our business in the Middle East, which includes the new Jazan joint venture in India. Additionally, we combined Global Gases with the Corporate and Other segment. The historical re-segmented financial information is available in a Form 8-K, which we published in December. We are proud to have completed Phase 1 of the $12 billion Jazan joint venture in late October. This milestone has led to two separate but related events, which impact our results favorably this quarter. First was the start of a new joint venture known as JIGPC's ongoing financial contribution consistent with the contract between the joint venture and Saudi Aramco. On an ongoing basis, our portion of the Jazan joint venture's net profit isn't included in equity affiliate income since we don't consolidate this joint venture. We also recognized interest income on the shareholder loans associated with our $1.5 billion investment, which is included in the non-operating income line of our income statement. To be clear, these are loans from Air Products to the joint venture and are a mechanism for us to efficiently fund our contribution. Together, these two income streams drive $0.80 to $0.85 of annual Phase 1 EPS, exactly what we expected and committed to our shareholders and consistent with what we recognized for two months in Q1. We remain on track for closing Phase 2 in 2023. Second, a non-reoccurring event of approximately $0.20 involved the transfer of the air separation units supporting the gasifiers at Jazan from our previous ASU joint venture to the Jazan joint venture. This transfer required the final settlement of our ASU joint venture, which previously owned and operated these air separation units and enabled us to recognize a portion of the profit that was deferred when Air Products sold the ASUs to the joint venture. This profit was recognized as equity affiliate income. Partially offsetting this and also in equity affiliate income recorded a loss associated with the ASU joint venture settlement. Our joint venture partner's share of the settlement loss is reflected as a favorable non-controlling interest item. Now, please turn to slide 14 for our first quarter results. Compared to last year, sales increased 26% to nearly $3 billion. Volume and price were strong and together account for 13% of the increase, while the remaining half was driven by higher energy pass-through. Rapidly escalating energy costs continue to negatively impact our business across the region this quarter. The situation was especially challenging in Europe and Americas as natural gas and electricity costs surged even higher from the already elevated levels we saw last quarter. Simon will share more details, but in Europe natural gas costs were almost six times higher and power costs are almost four times higher than at the beginning of the year. Our on-site business, which comprises about half of our total company sales, has contractual protection from the energy cost increases. The costs are passed on to the customer. The energy cost pass-through drove sales 14% higher but did not impact our profits. In our merchant business, our teams around the world have quickly executed price actions to help offset the escalating energy costs. For this quarter, prices improved compared to last year and last quarter in all three largest segments; Asia, Europe, and the Americas. We are able to recognize a 10% price increase across the merchant business, which translated to a 5% increase in price for the total company. This is our best pricing results in many years. I would like to thank all our teams for the excellent work they have done in response to such a significant challenge. However, we still have more work to do. We are actively executing against price actions across the regions to recover the unprecedented cost impacts. Volume improved 8%, driven by new assets, hydrogen and merchant recovery, and stronger sales of equipment activities. EBITDA increased 8%, again exceeding the $1 billion mark for a quarter, as favorable volume, prices, and equity affiliate income more than offset higher costs. EBITDA margin declined 570 basis points, mostly due to the higher energy pass-through which negatively impacted our margins about 450 basis points while higher costs net of price increases contributed to the remaining shortfall. Sequentially, volumes were down 3% primarily due to the strong sales of equipment in the prior quarter. The 2% price increase was a direct result of our ongoing price action. EBITDA was 4% lower sequentially as better price and equity affiliate income were more than offset by higher costs and lower sales of equipment profit recognition. ROCE was 10.3%. We currently have significant cash on our balance sheet, which will support the major projects we have announced. Adjusting for this cash, our ROCE would have been 13.9%. We expect ROCE to improve as we deploy the cash and bring projects on stream. Now please turn to slide 15. Our first quarter adjusted EPS was $2.52, which is $0.40 or 19% above last year. Volume was favorable $0.19. And price net of variable cost was modestly unfavorable at $0.04 as our price actions were able to offset most of the unprecedented energy cost increases. For the quarter, our price actions alone before netting against variable costs contributed about $0.40. Costs were up this quarter. Similar to prior quarters, our growth strategy has us continuing to invest in additional resources. The very high and dynamic energy prices in our three largest segments also impacted our supply chain, as we incurred higher operating and distribution costs to keep our customers supplied. We had additional discretionary compensation this quarter and a positive settlement of a supply contract last year, neither of which will continue in the future. The ongoing EPS contribution of the Jazan joint venture this quarter represents two months and is consistent with our commitment, adding to both equity affiliate income and non-operating income. Equity affiliate income increased by $0.29, including the ongoing Jazan results, the deferred profit recognition, and the unfavorable ASU joint venture settlement which I mentioned earlier. Non-controlling interest was $0.07 favorable versus the prior year, representing our partner’s portion of the ASU joint venture settlement. Non-operating income was flat, as the interest income from the shareholder loans associated with the Jazan joint venture was offset by higher pension expense. Our first quarter effective tax rate of 17.1% was 220 basis points lower than last year, including the favorable impact of Jazan. It is seasonally lower primarily due to the additional share-based compensation, and we still expect our tax rate to be 19% to 20% this year. Now please turn to slide 16. The stability of our business continues to allow us to generate strong cash flow despite the challenging energy environment. Over the last 12 months, we generated about $2.8 billion of distributable cash flow or about $12.50 per share. From our EBITDA of almost $4 billion, we pay interest, tax, and maintenance capital. Note that our maintenance capital is a little higher than usual, driven in part by the spending on our new global headquarters, which is now essentially complete. From the distributable cash flow, we paid over 45% or $1.3 billion as dividends to our shareholders and still have about $1.5 billion available for high-return projects. This strong cash flow, even in uncertain times, enables us to continue to create shareholder value through increasing dividends and capital deployment. Slide number 17 provides an update on our capital deployment. We continue to make great progress in developing and executing our major growth projects. In fact, we see potential opportunities significantly greater than the investment capacity we show here. With the closing of Jazan Phase 1, we see a reduction in cash on hand and an increase in capital spent. As you can see, our deployment potential is over $33 billion through fiscal 2027. The $33 billion includes over $8 billion of cash and additional debt capacity available today, over $16 billion we expect to be available by 2027, and over $9 billion already spent. We still believe this capacity is conservative given the potential for additional EBITDA growth, which generates additional cash flow and additional borrowing capacity. We will continue to focus on managing our debt balance to maintain our current targeted A/A2 rating. So you can see we've already spent 27% and have already committed 70% of the updated capacity we show here. We have made great progress and still have substantial investment capacity remaining to invest in high-return projects. Now to begin the review of our business segment results, I'll turn the call back over to Seifi.

Seifi Ghasemi, Chairman, President and CEO

Thank you, Melissa. Now please turn to Slide number 18 for our Asia results. Sales were up 9% compared to last year. Volumes grew 4% due to strong on-site volume as a variety of the small to medium-sized new plants came on stream across the region. The Lu'An facility continues to operate at full capacity under the interim supply agreement. We continue to recognize that reduced fee in quarter one consistent with this interim supply agreement. We expect this to continue through fiscal year 2022 before returning to the full fee in 2023. We saw the best price performance for Asia in nearly two years. The 3% overall price increase improvement for the region equals about an 8% price increase for our merchant business. Our team has implemented price action in response to higher power costs and general inflation. China's government has also relaxed its power tariff program to allow local power costs to fluctuate. This market-oriented approach may result in more variability in our power costs going forward. We are monitoring this situation very closely. In addition, China's effort to reduce energy usage and intensity through its Dual Control policy continues to impact customer demand and caused isolated disruptions of our plants. This had a very modest negative impact on our plant efficiency and supply chain costs. This impact was more prominent earlier in the quarter and seems to ease in December. Costs were also unfavorable due to resources that we needed to add to support our new project start-ups in the region and higher without the COVID-related government incentives that we received last year. EBITDA was up 2% as better volume, price, and currencies more than offset higher costs. Sequentially, sales and profits were up as strong price more than offset higher costs. Now, I would like to turn the call over to Simon to talk about our European results.

Simon Moore, VP of Investor Relations

Thank you, Seifi. Now please turn to slide 19. Before I get into our Europe results and to build on Melissa's comments earlier, I wanted to share some details related to the unprecedented energy cost increases this quarter. Energy costs climbed throughout the quarter from already elevated levels. Natural gas costs were almost six times higher, and power costs were almost four times higher than at the beginning of the calendar year. While the energy costs have been elevated all year, this quarter saw energy costs more than double from the previous quarter. As Melissa mentioned, our on-site business has contractual pass-through of the higher costs. For the merchant business, our team has delivered significant price actions to partially recover the recent cost increases. I also would like to thank our European team for their extraordinary efforts. Although we are very proud of the work done by our team, our price actions have not fully recovered the cost increase. And as Melissa said, we have more work to do. We do believe we will be able to recover this shortfall by the end of the year. Now please turn to slide 20 for a review of our Europe results. Sales increased 37% versus last year. Volume and price were strong and together grew 14%. However, our profit and margin were unfavorable this quarter due to the dramatic energy cost increases. The energy cost pass-through increased sales by 27% but did not increase profit. For the quarter, our price actions resulted in a 9% price gain for the region, which corresponds to a 14% improvement for the merchant business. Prices were higher across all major product lines and sub-regions. Volume increased 5%, primarily driven by improved hydrogen and merchant demand. Currencies were unfavorable 4%, primarily due to the weaker euro against the US dollar. For this quarter, other costs also increased. The very significant energy cost increases also disrupted our supply chain, negatively impacting both plant operating and distribution efficiencies. We also saw inflation, higher maintenance, discretionary incentive compensation, and COVID-related costs while we continue to invest in additional resources needed to support our growth strategy. EBITDA was down 19% as higher costs were partially offset by price increases. Volume was positive in sales, but did not contribute significantly to profit due to unfavorable mix. EBITDA margin was down 1,500 basis points. About 700 basis points of the decline was due to the significant energy cost pass-through increase, while the remainder was mostly due to higher costs, partially offset by price in the merchant business. Compared to the prior quarter, EBITDA was 19% lower due to unfavorable business mix, higher costs, and lower equity affiliate income. Higher energy pass-through also negatively impacted margin by about 350 basis points sequentially. Now, I would like to turn the call over to Dr. Serhan for a brief discussion of our other segments.

Samir Serhan, COO

Thank you, Simon. Now please turn to slide 21 for a review of our Americas results. Sales increased more than 30% versus last year. Volume and price together were up 11%, while energy cost pass-through accounted for the remaining increase. Volume grew 8%, primarily due to hydrogen recovery and strong merchant demand. Although our hydrogen business has improved, it has not yet fully returned to its pre-COVID levels. Similar to other regions, the Americas also experienced significant energy cost increases versus last year. Our team has done an excellent job raising prices to cover the energy cost increase in this quarter. The 3% gain for the region is equivalent to 9% on our merchant business. Costs were favorable despite inflation and supply chain-related challenges and partly due to lower maintenance costs this quarter. We expect planned maintenance activities to pick up next quarter. EBITDA posted another double-digit gain, 14% ahead of last year, as better volume, price, and equity affiliate income more than offset the higher energy costs. EBITDA margin was 560 basis points lower than last year. Higher energy cost pass-through negatively impacted EBITDA margin by about 700 basis points. In other words, EBITDA margin would have been up excluding the energy cost pass-through. Sequentially, EBITDA was lower due to higher maintenance costs. Higher energy costs pass-through negatively impacted EBITDA margin by about 300 basis points. Now please turn to Slide 22, our newly created Middle East and India segment. Again, as I stated before, this segment is composed of our businesses in the Middle East, including the Jazan joint venture and our business in India. Sales and operating income in this segment are modest since our Middle East and India wholly-owned operations are smaller in size. However, the segment's EBITDA is significant since it includes the equity affiliate income related to the Jazan joint venture and our India joint venture. The roughly $70 million increase in equity affiliate income included our share of the Jazan joint venture net profit for two months, and the net impact due to the finalization of the ASU joint venture that Melissa previously discussed. Sales and operating income are up compared to last year due to a new facility on stream in India, but are down sequentially due to a favorable contract settlement in the previous quarter. Now, please turn to Slide 23, which addresses our new Corporate segment, which now includes our previous Global Gases segment. This segment includes our sale of equipment businesses as well as our centrally managed functions and corporate costs. Over the past few years, our non-LNG sale of equipment businesses have grown considerably and are now contributing most of the sales in this segment. However, the margins of these businesses are typically below our company average. Sales were higher in this quarter, driven by increased project activities, but the profits were lower due to higher corporate costs and without last year's settlement of a supply contract. At this point I would like to return the call back over to Seifi to provide his closing comments.

Seifi Ghasemi, Chairman, President and CEO

Thank you very much, Dr. Serhan. During my nearly five decades in business, I have learned that the world changes all the time, sometimes in very unpredictable ways, as we have seen in the past several years. Therefore for an organization, the ability to anticipate, plan, and react to change with speed and resiliency is key to success. I have also learned that all challenges can be addressed by staying focused and united and calm, and by working towards a common goal. That is why I'm proud that despite the continuing adverse effects of the pandemic, the rising costs, inflation, supply chain disruptions, and all of the challenges facing us, our people at Air Products have done just what we expected them to do. That is they have adapted to the change and are acting accordingly. This is why we delivered strong results despite all of these challenges. Our volume, price, and profits all grew this quarter versus last year even as they stayed the course and added resources to support our opportunities and world-scale projects for the cleaner energy future. I truly believe that our company has become even stronger in the past two years and fully expect to deliver significant earnings growth as the economies around the world normalize and our new projects come on stream. Now, please turn to slide number 24. As I said, I remain highly confident in Air Products' resilient business model, our strategy, and our execution. However, I do have some concerns about the economic backdrop driven by continued COVID challenges, the impact of supply chain constraints, inflation, energy costs, and geopolitical tensions. Therefore, for quarter two of fiscal year 2022, our earnings per share guidance is $2.30 to $2.40, up $0.11 to $0.15 over last year. For fiscal year 2022, our earnings per share guidance remains unchanged at $10.20 to $10.40, which is 13% to 15% better than last year. We continue to see our capital expenditure in 2022 to be around $4.5 billion to $5 billion, including the approximately $1.5 billion for Phase 1 of the Jazan project. Now, please turn to slide number 25. The opportunities created by the energy transition are immense. That is why through our mega projects in gasification, carbon capture, and hydrogen, we are acting as a first mover. We are taking real action through real world-scale investments in projects that address significant energy and environmental challenges. We have the portfolio of experiences and technologies that we can bring together in an optimal configuration for a project. Working with customers and countries around the world, we will deliver low carbon forms of energy and improve their sustainability. In addition to investment and technology, we know that as always, the real enablers of this transition are the people who work alongside our customers and bring our opportunities and projects to life. At Air Products, we have consciously increased our talent and resources to take on these urgent challenges, adding over 3,000 people over the past two years. As we drive toward a clean energy world, we need talented people to help us accelerate the progress. We are continuing to build a diverse and inclusive culture that our people feel they belong and know that their contribution matters. As I always say, our long-term competitive advantage is the commitment and motivation of our people. I know that through their hard work and contribution, we will continue to succeed. Now, we are pleased to answer your questions. Operator?

Operator, Operator

Thank you. And we'll go ahead and take our first question from P.J. Juvekar with Citi. Please go ahead.

P.J. Juvekar, Analyst

Yes. Good morning, Seifi and the team.

Seifi Ghasemi, Chairman, President and CEO

Good morning, P.J. How are you this morning?

P.J. Juvekar, Analyst

Yes. A couple of questions. First, can you give us an update on the NEOM project, especially on the downstream side where you will be executing on your own? Is there any update on contract signings? And then the significant disruption that we are seeing in energy pricing in Europe, does that create uncertainty for customers to commit to long-term contracts on that side?

Seifi Ghasemi, Chairman, President and CEO

Well, P.J., thank you for the question. The new project with respect to the downstream side, obviously, we are working in developing the infrastructure needed to bring in the green ammonia, crack it, and then sell it to our customers. So those projects are underway. In terms of any contract signing and all of that, we have said from the beginning two years ago that we are going to be very cautious about saying anything about that, because that is an issue of competitive advantage. And we certainly don't want to give all of our secrets away. With respect to the question that you asked about energy costs, obviously, the significant fluctuation in energy costs, especially them going up, is going to make it more competitive for green and clean products. So from that point of view, the level of interest in Green hydrogen and Blue hydrogen has significantly increased around the world.

P.J. Juvekar, Analyst

Okay. That's fair enough. And a quick question for Melissa. On Slide 13, you mentioned interest income from loans to Jazan. Can you just give us more details on that loan?

Seifi Ghasemi, Chairman, President and CEO

And Melissa will address that, but that's a very, very complicated transaction, and I'm not sure she will be able to answer all of your details of your question on the call. We can always have another call with you on the side to give you the details. But I'll turn it over to Melissa to say what you can on this call. Go ahead, Melissa.

Melissa Schaeffer, Senior Vice President and CFO

Yes. Thank you very much, Seifi. Thank you, P.J., for the question. So as Seifi mentioned, it's very complex, but just a quick highlight. So as we mentioned during our statements, one-third of the contribution from the JIGPC joint venture is in non-operating income. This is the interest income on our investment as a shareholder loan. So this is just our efficient way of funding the joint venture.

P.J. Juvekar, Analyst

Thank you.

Seifi Ghasemi, Chairman, President and CEO

Okay, P.J.

Operator, Operator

We'll go ahead and move on to our next question from Steve Byrne with Bank of America. Please go ahead.

Steve Byrne, Analyst

Thank you, Simon, for your comment regarding the European segment and the expectation to recover costs through price adjustments by year-end. I would like to delve deeper into this. Can you share what percentage of your merchant business includes this pass-through? It may be a small portion, but do you have it implemented in some areas? In order to achieve cost recovery by year-end, are there additional price adjustments that haven't been announced yet? Is there a lag effect, or do you anticipate costs decreasing? I would like to gain a clearer understanding of this situation.