Good morning, ladies and gentlemen, and welcome to the Air Liquide Q1 twenty twenty Revenue Conference Call. All participants are currently in a listen only mode until we conduct a question and answer session and instructions will be given at that time. I will now hand over to the Air Liquide team. Please begin your meeting, and I'll be standing by.
Good morning, everyone. This is Audrey Rodriguez, Head of Investor Relations. Thank you very much for joining our conference call today in this special context. Fabienne Lucor Vivi will present the 1st quarter revenue. She is joined by Francois Jacob, executility, supervising Healthcare, Africa, Middle East, and European hubs.
And on the phone from Houston, my graph executive VP, supervising Americas and Asian hubs and the electronics business line. They will both participate in the Q And A session In the agenda, our next announcement is on July 30 for our half year results. Let me now hand you over to Fabienne.
Thank you, Ed, and good morning, everyone. Thank you very much for attending this call. I will start with a short of the highlights of the Q1 activity, but I will also try to share with you our views for the months to come. Then we will answer your questions together with my graph and Francois Jacob. Before presenting our Q1, I would like to start by recognizing our teams as well as our customers, patients and suppliers whose dedication and courage in the current context have submitted the continuity of operations.
This 1st quarter has clearly demonstrated again, if needed, the of our business model and business mix. After progressive industrial slowdown in Q4 and despite a very difficult context in China, but also the degradation of the environment at the end of the period in Europe and then in the US. We have been able to slightly grow our sales by hope 6% for the group and 1.1% for gas and services. Of course, our various business lines have been impacted in different manners, and I will spend a little more time on the contribution of the health care business sign into the fight against the virus. To be noted, we have implemented immediately strong crisis management measures on top of our ongoing commitment to pursue a performance improvement plans and we are adjusting our guidance, taking their effect into account.
Bruce, I would like to remind you what factors of resilience are embedded in our business model. I believe this is pretty important for you to be in a to better evaluate the future impact of the crisis and the group performance. In large industry, all of our active are protected by long term contracts, including take or pay closes and monthly fees, covering a minimum volume commitment and our investment. In case a customer has to stop its operations for a reason out of its control and declares force majeure we are still entitled to the Montecfe in most of the contracts. In Merchant, which is clearly the most exposed to industrial production, we hear again as a part of fixed sales linked to cylinders and tanks rentals, And we also have a good balance between cyclical markets and defensive market.
All in all, more than 50% of sales are for then health care is, of course, responding to completely different dynamics, and this is very visible in the current fundamentals are not sensitive to economic cycles. In electronics, volatility is now more or less reduced to equipment and installation, representing less than 20% of the business, thanks to the refocus on carrier gases with long term contract similar to Large Industry as well as on Advanced Materials. Our balanced geographical footprint on extended presence all around the world as well as the diversity of our end markets, together with our commitment to a sustainable growth are also strong factors of resilience. Let's now move Gas And Services comparable sales were up 1.1% in Q1, thanks to the element adjustment And Engineering And Construction sales are visited sales and of the mandatory closure of our engineering construction facilities in China for more than 1 month. Total sales for engineering are only decreasing and biogas and that's the result, group sales are up 0.6% when published sales are slightly down at minus 1.3% penalized in particular by the energy price decrease.
If we now review the various geographies, Americas were only impacted it at the end of the period. The 1% growth results from a modest progression in all business lines, in line with the Q4 performance. Largely was supported by Hydrogen demand in the U. S. And new contracts in Latin America.
In merchant, price remains solid despite modest volumes and a good decrease in North America. Healthcare was strong, thanks to Latin America and to meet graces and proximity care in the U. S. Europe impacted a little earlier, benefited from solid volumes from Mining. Solid merchant in the Benelux, the Nordics and Eastern Europe, and from the surge in health care, driven by hydro, I call gels and medical You need to remember that Healthcare now represents 39% of the European business.
Asia did well. Time to the resilience of the Chinese large industry contracts and to the very strong demand in electronics throughout the zone. At the point of reference in China, Merchant Silvoir down 11% for the quarter due to the local confinement measures. To be noted, other countries China, Singapore and Korea only started to be more impacted at the end of the period. The decrease for Africa, Middle Eastern, India sales is mainly you to the plan maintenance stoppage on our large hydrogen site, yangbo in Saudi, but also in a lesser extent to the confinement mail, taken in the Gulf Countries and in South Africa.
Regarding business lines, industrial merchant showed limited decrease mostly due to hardgood. Gas sales were slightly up globally despite the decrease in Asia and pricing remained solid at plus 3% in particular in Americas with a continued helium effect. Large Industries sales were more stable. The weakness in up gen volume for the steel industry in Europe and Asia, and the young boot turnaround being compensated by strong hydrogen volumes in Europe and America electronics was strong with 4% growth and even close to 10% if we exclude equipment and installation, as nearly all of our customer fabs pursued their operations in China and elsewhere. Advanced Materials the ramp up and grew more than 20%.
Healthcare is, of course, another story, which stands up 10% Every year in the world, our teams have been increasingly mobilized over the period to deliver more medical oxygen to hospitals, which volumes multiplied by 5 in average at the very end of March in Italy, for example. We have also accelerated strongly the production of hygiene products at Chukka in Germany and the production of ventilators in France with plants working 24 hour a day, 7 days a week. In some countries, we are also starting to treat COVID 19 patients at home, while continuing to accompany our regular As mentioned at the beginning, we have pursued our efforts for performance improvement. Pricing remains solid in Q1 with annual increase being implemented before the beginning of the crisis at Airgas and active price mix management. New efficiency delivered amounted to EUR 91,000,000 and are up 18% to last year.
Demon tracking that we've not lost the focus. In terms of portfolio management, we have announced the timing for the divestiture of check car and LoverCare Thomas there. For the sale of PDP Courier, a small company involved in controlled temperature sample transportation and also for the divestiture project of Schulkemaier in Germany. We have several other projects going on that we try to pursue. We also closed a few bolt on acquisition in Merchant at Airgas and in China and in Healthcare.
The good news is that investment activity remains strong for most of the quarter. The portfolio is still very high and the backlog is stable. Investment day decisions amounted to more than 700,000,000 as a result of industrial decisions being 40% higher than last year. With a very strong momentum for electronic projects at historical high. To be mentioned, the cash flow was also strong at 20 point 3 percent of sales.
Regarding startups, we still managed to new units in Q1. However, from now on, a number of projects are likely to be delayed due to the closure of our Homezhou Engineering workshop China for more than 1 month and to the mandatory stoppage of construction projects in several regions. At this stage, we approximately 25% of the project to be started in 2020 being affected. As a consequence, we now the contribution of startups and drop ups to be between EUR 150,000,000 118,000,000 in 2020 to be compared with the 1,000,000 we forecasted initially. This new crisis of this magnitude, the priorities, of course, to act immediately on what under our control and we did.
Let's talk about the specific measures we have immediately implemented to face First, measures aimed at keeping our employees safe and staying close to our patients and customers without compromising in any way with safety. All employees who can work from home are actually at home, and it works pretty well, thanks to the robustness of our IT systems. As in most of the countries, our activities are deemed critical. We also have a lot of provision still in the field with the adequate protections, of course, to ensure the continuity of our operations wherever possible and they clearly deserve special thanks for their dedication and effort. We have also launched an additional cost containment plan to adjust our fixed cost to the reduced activity level, which will progressively ramp up over the year.
Focus has been reinforced on collections and selectivity of CapEx with the aim to secure long term and profitable projects contributing to the performance. We have reinforced liquidity and access to financing with assurance of a 1,000,000,000 bond late March. Let's now move to the outlook. Integrating our crisis management additional plans, we have tried to build scenery for the full year outlook. 1st, let me share with you what we in our various businesses reduced in most of the other countries in the world, in particular in the steel industry and in a lesser extent for chemicals.
However, our contracts are holding strong and we have a limited number of significant force majeure. Industrial Merchant is the most affected with volumes decreasing 30% in bulk and more than 50% in packaged gas and our goods in is where the pandemic is still rising. This is in line with what we've seen in China in February. Of course, drop in the Manufacturing sector is much more significant than in the consumption market as non critical facilities make closed temporarily. Conversely in electronics, activities run close to normal, except, of course, for equipment and installations, which require customer interface and startups are confirmed.
We have no stress signals from our customers. Then in healthcare, as discussed before, the activity is far above normal, in particular in hygiene, medical gazes, and equipment and installation, Then in the post crisis phase, it is particular that things will only come back to normal progressive We can expect chemicals to resume benefiting in many countries from the low energy pricing. In refining, those inventories are extremely high and this will delay the recovery when steel is facing structural challenges again. The contrast will certainly remain in Merchant in industrial markets and consumption markets. In electronic, we may expect supply chain disruption for a while, which may affect Q3.
We a return to pre crisis trends in Q4. Healthcare should remain strong, even if home health care can be penalized by the absence of new prescription during the peak of the crisis. Avily impacted. However, thanks to the resilience of the model and to the measures implemented, And on the assumption that lockdown could be fully lifted by the beginning of Q3, we are still confident in our ability to grow the operating margin even if the top line is significantly penalized in Q2 and in a lesser extent in Q3. In terms of net profit, we should be able to maintain net profit close to a preceding year level.
Also for your information, we confirm that our general shareholders meeting will be held as planned on May 5th, behind closed doors, of course, but broadcast in real time on our website. We also confirm that our dividend will be paid on March 13. So this concludes my presentation. Thank you very much for your attention. We will now open the Q And A session.
Thank
If you're using a speaker phone, please make sure your new function is turned off to allow your signal to reach our equipment. And our first question comes from Martin Rodica from Kepler Cheuvreux. Please go ahead. Your line is open.
Hello, good morning, and thanks for taking three questions, if I may. First question is on operating cash flow, which has been rather strong in Q1. Can you elaborate on that? Secondly, on your take or pay contracts, Do you help your suffering, do you help your suffering clients by modifying the contracts, I. E.
Extending the duration by a few years while lowering the monthly fees. I think you did that also in the in the crisis 2008, 2009. And finally, on engineering, is it fair to say that today in Q1, the majority of total sales is internal business and the $52,000,000 external sales is just a fraction. And in this context, is it therefore fair to say that you still will generate a positive operating recurring income in engineering this year.
Well, thank you. I will respond, up onto the cash flow question and the E and C question. And maybe I will hand over for the large industry situation to Francois for Europe and Mike for the U S. Regarding the cash flow we are 22.3 percent of sales to be compared to 20.3% last year. So it's a it's a clear improvement.
Actually, we, of course, reinforced our collection teams and really focus on, customer credit, but the cash not been affected that much so far. We had a pretty good level of collection. Of course, we are watching that aircraft but we have no alerts on this stage. Also, we said that we would continue to improve the performance. And of course, the increase, the increase in the cash flow to sell reflects that as well.
Then to be very clear. We expect some slowdown in the collection in Q2, although for the moment, it remains pretty solid. In terms of engineering it's true that the real decrease is is less concerning that what we publish, and yes, we still expect to be positive It's not going to be enormous for sure, but for the moment, we still expect to be positive in E and C for the year. Francois for a large industry in Europe.
Yes, thank you very much Fabienne. Good morning, everybody. I take this opportunity to hope that everybody on the call is fine wherever you are, and we appreciate definitely your time this morning. So regarding the large industry, definitely, this time is the time to be closed and even to be closer to our customers. And that's what we are doing.
We are in a very constant exchange with our customers. Some of them are facing a difficult situation, but we have to look at this from a long term perspective because we have a long term relationship. So we are working with them to find, I mean, ways to create value for them and for us. So it's time of close interaction. It's time also of creativity, but I should say that most of our large industry customer are basically in a situation where we do the full implementation of the normal contract at this stage.
Okay. Thank you, Francois. Mike, do you want to elaborate on that for the US and maybe Asia?
Sure. Thanks, Baby. And good morning, everyone. And I would echo franchise sentiments. I hope you and families are safe and healthy in this time.
I would just build on what Francois had to say. I think we stay close to our customers we continue to go ahead and work with them. In reality, as we look at where we are today, for the Americas, oxygen volumes as we get deeper into the crisis are down maybe 15% or 20%. So We have not seen anything very dramatic in terms of a downturn. Hydrogen volumes are down 10, maybe in some areas closer to 15%.
But again, all of our customers are running. Things continue to operate in our facilities run as well. Similarly with what we saw in Asia has all evolved. We clearly saw, as we talked about, on the call a few months ago, a decline in activity in Airgas volumes maybe down 20 to 25 percent and also on hydrogen down 10% to 20%. But overall, we still maintain about 70% of capacity and that aligns very well with our minimum take or pays.
So we stay close to our customers. We work very hard with them to make sure there's reliable safe supply to them. In a few circumstances where there were some issues we have dealt with them. But again, like Francois says, we work hard first to meet their needs and then to make sure if there is an unusual situation that there's a recognition of value for both parties.
Thank you, Mike. Next question.
We will now take our next question from Gunther Zechmann from Bank time. Please go ahead. Your line is open.
Hi, good morning, Fabienne, Francois, and Mike, but one on pricing and one on demand, please. I saw that 10% of out of global demand for helium is for party balloons, which of course are down quite sharply. Are you seeing any impact
on I'm sorry, sir. We can't hear you. Can you maybe talk closer to the microphone?
Can you hear me better now?
Much better.
Great. Good morning Fabienne. Hi, Francois and Mike as well. I've got one on pricing and one on demand. I saw that about 10% of global demand is from party balloons for helium, which of course is down sharply.
Are you seeing any impact on price given lower helium demand currently? And the second one is on April volumes. Air Products said that European packaged gas volumes were down 40% in 8 grow. Can you give us any idea in terms of the quantity of the impact on your merchant and packaged gas business, please? Thank you.
Okay. So, Adrian, for party balloons is a U. S. Market. It's clear that It's around 10% of Airgas, helium sales, and that, of course, has stopped.
We've not seen so far any impact on the annual pricing, which has been significantly up compared to Q1 last year on the Elysium effect on pricing is still one third of the total pricing effect on IAM. Are exactly the same thing that we saw for the 2nd part of last year. So that that does not change. For the packaged gas volume in Europe, maybe Francois?
Yes, thank you Fabienne. So, in Europe, actually, we started see the drop, I would say, mid March with a sharper decline and in some countries, especially in 1000 part of Europe, a drop coming very quickly in days, couple of weeks. We have seen for packaged gas is a drop up to 50 sometime for 2 days, 60%, but now more close to indeed 40%. For bulk, the drop was less for be in the range of 30% to 40%. But again, stabilized in most of the countries.
This is mostly for the Southern part of Europe because, clearly, when we look at the Northern part of Europe, the drop was far less than that. If we are looking at Eastern Europe, also, we have seen a very limited impact. That's probably what we can forecast also for April. And what we see is probably April is going to be low, but I mean, providing that the situation will not get worse. We are at a plateau and we see probably a stabilization in April.
It's not a pick up in some countries.
Great. Thank you so much, both.
Next question.
Our next question comes from Laurence Alexander from Jefferies.
Good morning. A few quickly. Can you just characterize with the 40% of electronics that is protected by take or pay, is that 100% protected or is there a variable component in those contracts. Secondly, in China, can you characterize if any end markets are backed to 100% of pre crisis levels? And then thirdly, can you discuss how price trends in merchant CO2 in the U.
S?
Michael, do you want to take over the question for the take a pay in electronics and the on the uh-uh China situation?
I will. Thanks, Fabienne. Good morning, Lawrence. I think first of all, on the question regarding the structure, I think, you're speaking to the carrier gas business and the carrier gas business is is well reinforced, with, with monthly fee structures. So we're pretty much back to back there.
And, so the structure is such that everything is basically built into a monthly fee. And for the majority of the facilities, the customer also pays for the utility or the power needs. So that's the 40% that is determined that Fabienne referred to earlier. In terms of the Chinese markets, as you're aware, when we spoke about the markets back on the February call, We saw obviously a dramatic downturn, both in packaged gas volumes for merchants and also for bulk. I mean, at one point, clearly for China, we were down 50% in packaged gas volumes and bulk was down about 30%.
I would say today, that we're back to roughly 85 percent of normal across the markets. So clearly manufacturing automotive and some of the Craftsman business was down significantly. Some of that has begun to recover, but it's not back fully to where it was. And I think the reinforcement of rent and food and pharma and our on sites as well in China have really brought a lot of stability to the business. So I would say that in general, the markets have a much stronger recovering by 85% and continuing to strengthen.
And I think when you look at the Chinese market today from an industrial standpoint, with their ever growing domestic economy in the merchant space, you're looking at about 80% of that going to more domestic needs as opposed to, supporting export I think finally, you asked a question about CO2 in the U. S. And specifically in the Airgas business. And I think as most are aware, there's been a supply disruption to some extent in CO2 supply, both the combination what's happened with the demand for transportation fuels and decline in certain areas, whether that's for ethanol production or for refineries, it had some impact on those sources of CO2. Those sources likely represent about percent, five-0 percent of the supply in North America.
So as we have to go ahead and work across supply chain working with our suppliers. We're actually working with the government, the U. S. Government as well to assure we can meet the needs for essential businesses. Think about food pharma and water treatment as well.
We're working hard to make sure we maintain those supplies and pricing will be impacted for those areas where there may be have to have some incentivization for additional supply, but I can't say there's an overt impact at this point.
Thank you.
Just to complete Mike's answer, a huge see, in the U. S, our relatively modest now is $200,000,000 a year or so. So it's not, it's not, really significant.
Our next question comes from Tom Wieglesworth from Citi. Please go ahead. Your line is now open.
Jim's. We've talked about European Packaged Gases. Could we get an update on the U. S. Merchant kind of moving parts where's the exit rate from the first quarter in terms of U.
S. Levels, noting obviously that there's kind of varying levels of across the country. So that would be super helpful. And then secondly, you've indicated that underlying IX Suka sale net profit would be flat year on year for 2020. Can we assume within that that what you're implying is that the pickup in or any collection on health care, improvement in health care will be enough at a net profit level to offset the slowdown fundamentally in the merchant business?
Is that how should we interpret that communication?
So the first question is for you, Mike, Can you give us an update of the merchant situation in the U. S, please?
Absolutely. Good morning, Tom. You know, for the first quarter, you know, overall, revenues were flat, compared to Q1 of 2019. I think that's important to recognize because Actually, Q1 2019 was a fairly strong comparator. It was a fairly strong quarter, compared to the rest of 2019.
And we saw in 2020 here in the first quarter, fairly solid performance beginning of the quarter and then we began to feel the impacts of COVID-nineteen later in the month of March. So overall, I mean, gas was up about 2%, hard goods down about 5%. We had strong pricing. By the time we look at the comparator with the impact on the COVID crisis at the end of March. Gas volumes are slightly off.
Hard good volumes are down, more so. But on a sequential basis, we really saw very similar, I would say activity levels in the industrial sectors is what we saw in Q4. And some modestly improved. So obviously manufacturing metal fabrication and construction are off a little bit in as we get into where we are with the crisis, construction was already down and manufacturing had been down in the 4th quarter. Compared to prior years with some softening in the industrial markets.
The consumption services and services really were driving the market. So I think food, pharma, life sciences, even the cold chain logistics as well as research and laboratory services were very strong in actually for Airgas. Not a surprise. Healthcare was very strong in the quarter as well, continuing where we were with hospital and proximity care. And further penetration of the innovative cylinder offers.
So I think that's where we are. As we sit today, in April, we see an impact similar to other regions. I mean, volumes are down 25% to 30%, a little bit less in gas, a little bit more in hard goods. We've seen the shutdown of non essential businesses that are impacting demand in some markets in construction as well. Not just the industrial end of metal fabrication and manufacturing that you might imagine construction is down.
As you're aware, automotive factoring closed across the entirety of the country, although now there are signs that some facilities will begin to restart in some of the less impacted regions of the country. And again, the demand and consumption markets has really remained strong, whether that's food, pharma, or cold chain logistics. So I'll stop there. I think that that's kind of where things sit.
Okay. Thank you, Mike. Some precision on the guidance So when we said that net profit should be close to the level of letter, we do not take into account the capital gain that we could realize if we finalize the divest off should come higher. To be very clear, if we close this divestiture, the net profit as published is going be strongly up. No questions.
So we are talking here about the normal activities. So clearly, we will have slowdown in industrial merchant, a limited slowdown in a large industry given the solid of the model, then electronics should be okay. And Healthcare is going to be strongly up. So the balance of all that will allow us to maintain the net profit level. But when we said that, we clearly do not take into account any capital gain that we could make Hope it's clearer.
Thank you. Next question.
Our next question comes from Andrew Stott from UBS.
Yeah, good morning, everyone. Thanks for the presentation. I've got a couple, please. So first of all, just a clarification that I heard, packaged gases in Europe down around 40% and then Mike, I think I think that's what you said Franco. And Mike, you said minus 25 to 13 Airgas.
Can I just check those two numbers?
Okay. So Francois on Europe?
Yes, I do confirm. So this is what we have seen on average, end of March. And in April. And again, this is mostly for the region, which are the most impacted Spain Italy, France, Northern part of Europe and Eastern is, above that. Yes.
Okay. So the question then is, how do you think about the difference there between the U. S. And Europe. Is that end market specific, or is it just that the lockdown has been more severe?
In terms of mobility restrictions, etcetera. How do you think about that difference of 15% or so?
Well, if I could, I think that, in the Americas, the 25% to 30% specifically in the U. S, given the size of the country, we have not seen the same level of impact across all fifty states. And so there may be some parts of the country where things are more heavily impacted in some areas where it's not. And so I think that's likely one of the biggest differences that you see between what what's going on in Europe and what's going on in the U. S.
And we already see in the U S. In certain markets, certain states are trying to reopen. And as a result, if automotive manufacturing picks up and those types of things begin to evolve, we hopefully will see that stabilized going no lower than 25% to 30%. And candidate is a bit deeper than that. And in Latin America, it is not as steep as that.
So I think it's the balance that we see.
Perfect. Now that's very helpful. Thank you. Can I steal the second question? Probably one for Fabienne.
The the move down in the portfolio of opportunities 2,700,000,000 number you highlighted. Are you at liberty to say which end customers by, sort of, by end market you're seeing that, that shift and are they straight cancellations or are they delays?
Well, in the portfolio, we have, for large industry, we have mostly project. And we have a, still a high number of electronics projects. And also a project which are, focused on on energy transition. And Hydrogen Economy. For the moment in the project that we discussed, with our customers.
We have not seen any process being stopped, in terms of construction and startups. There are delays you know, because, some construction sites had to slow down or even to stop completely, But in the commercial discussion, we've not seen a customer yet saying I want to I want to stop to stop discussion for a while. And you've seen that in Q1, the, the investment decision have been very, very strong. So, we don't see that for the moment.
And sorry, I can't say anything about that. Of your order book, today, how big is oil and gas?
Oil and gas in the in the for you is less than 15%.
Less than 15%. Perfect. Thank you everybody. Appreciate it.
Andrew, just to complement the point of Fabienne, what we are seeing also our opportunity for taking over existing assets, modernization and some expansion. But definitely, as you know, well, is a time where we can see such opportunities.
Absolutely. Next question please.
Go ahead. Your line is open. Good morning Fabienne. First one, Mike. I have three questions for me.
The first one is on your receivables, what a, if there has been already a default on the receivables, in particular, maybe at your oil and gas customers, And just also do you feel a significant effects there as oil and gas and also refinery customers in the that there are reports out that suggest that the majority of them might be at risk to go into chapter level. Second question is related to this. Could you remind us of how big the exposure of those customers in the oil and gas and your final industry is the general for the group. And then lastly, of this cash flow improvement, how much was from net on capital or less net on capital outflows, please?
Sorry, can you repeat your last question? We did not hear it well, Marcus, please.
How much of the cash flow improvement came from network and capital effects?
From? Sorry, I'm with you. In terms of customer defaults, you know, in large industry, we are mostly working with tier 1 customers, so we don't have any issue for the moment. And as I said, a little bit earlier, we still have a pretty good rate of collections with our industrial merchant customers. So, of course, we are watching that very carefully, but for the moment, it's it's pretty it's pretty stable.
You had a question about the debt maturity. So the only maturity we have this year is a 2 bond ish used to be redeemed in June for a total of 1,000,000,000. And we have already anticipated is reimbursement with the new issue that we've launched in March. The the exposure to oil and gas customers is relatively, relatively limited in large industry, oil and gas represent approximately 1 4th of the activity, 28% to be very precise. How much the cash flow improvement from less CapEx, but not at all for the moment.
We expect a progressive reduction in in CapEx over the year, compared to our initial budget because, as we said, some of the project, we be a slightly delayed, but we did not see that, during Q1. Actually, CapEx were relatively high and we were pretty close to 13% of sales. So the cash flow improvement is not due to a reduction in CapEx. Okay.
Thank you.
And Fabienne, if I could on the oil and gas impact, I think the other part of this to recognize is from a refining perspective, while obviously part of the decline in oil price has to do with supply issues, a lot of it has to do with a lack of demand. So demand for transportation fuels globally is down 20%. But you noticed when we talked about the decline in hydrogen demand for refineries, we're talking about 10% down maybe 15% in a few areas. And I think that what's happened here is that the mix, the transportation fuel mix, for example, in the U. S, clearly there's a demand for less gasoline and jet fuel demand is down as well.
But from a logistics standpoint, there's a very strong demand for diesel to keep the food chains and other essential areas operating well. So while you may see some reduction in crude run the line with what you see globally, there's got to be a demand for an increase in hydrocracking for diesel production. So that kind of creates some buoyants to the demand for hydrogen in that piece.
Okay. Thank you.
Thank you.
Next question. Our next question comes from Jean Luca from CIC Market Solutions.
Good morning. Thank you for taking my question. In the French press, yesterday, I saw some articles of doctors questioning the usefulness of some of the equipment which is manufactured Could you elaborate on that?
We can't hear you. We can't hear you. Can you include, can you talk closer to my please?
Yes. Sure. Okay. Can you hear me now? Hello?
A little bit better.
Okay. I will try now then. In the French press yesterday, there were a lot of seconds a questioning this for less of some of the respirators which are made, though, I think the OCREASE model Could you elaborate on that? And the second question is more general on health care. Do you expect on the longer term an increase in SKF pending to maintain in, OECD and and globally, more preparedness for what kind of, pandemics.
Okay. So I think the the 2 are are for Francois?
All right. So, you are referring to the initiative that was led by Air key to, I would say, produce 10,000 ventilators in 50 days, which is basically to boost another order of magnitude. Our current collection of the escalators in France. This was the request of the French government. This is something quite exceptional, and that was possible due to the combination of the trends of several large companies led by Air Liquide and also more than 100 smaller companies.
So that is ongoing. We have actually produced this week the first 1000 ventilators. And supply that to the hospital. So I think that's really well in line with what we wanted to do. You are referring to one article, which was published yesterday questioning the use of some of the ventilators, because we producing 2 models, and that was a there was a question about 1 of the 2 models.
And I think there was a mis understanding which has been clarified since by the government and by several doctors and 2 French societies for, respiration and, for hospitals, which clarified the fact that those letters are very useful. They are made to, allow the French healthcare system to go from 5000 beds, to 14,000, which was the plan in case of an epidemi going out of control. So that's exactly the plan. Those are not the heavy super sophisticated ventilators, which cost 50,000 Those are the type of machine which are more in the range of 1,000 to 1,000,000, but which are made and very useful for COVID patients. So that has been confirmed.
There's been several articles since, confirming that by experts. Regarding the health care and the long term demand, think, clearly, we think that, 1st, in spite of the magnitude of the crisis and the exponential increase of the needs, we work to some extent well prepared. We have been able to do exceptional things to supply countries, which were in difficulties, I would say. There has been a lot of exceptional actions, in Italy, in Spain, in Brazil, in France and in the U. S, for example, to be able to cope with the demand.
So I think that's possible. Thanks to, I mean, the strengths of the industrial system, for health care, but also supported by the industrial operation whenever it's What we see in term of long term demand, we see probably some kind of increase for the medical gases, but definitely not to the extent of what we see at at the peak, I would say, of the epidemic. This being said, if it lasts in some countries for a few months, there will be a continuous oxygen demand for COVID patients, still for a few months. What we see also is that more and more we are taking care of COVID patients at home to be able to provide the care when they go out of the hospital, which is also a way to free up some space in the So we have specific programs which are being put in place. Again, we don't see that as a long term trend, but that could last for a few months.
The rest of the duration of that. We have seen both in mature and in developing economies, growth of home care activities and that will continue probably at the same pace. If not more, because the solution that we are developing are clearly, value proposition for the healthcare system and at a time where we want better care and less cost, probably there will be a price even more.
Our next question comes from Jean Baptiste to Holland from Bank of America.
Good morning Fabienne. Good morning, Mike. Morning, Francois. Just a couple of questions. Could you give us an indication about the exit rate of Healthcare in Europe.
Then on I'm, could you give us like maybe the main differences in terms of end market between I am Asia, I am Americas and I am Europe, and maybe also a sense of how the proportion of, take or pay contract can vary between regions. And, 3rd question on I am pricing. If I understood correctly, you're saying that on the 3% pricing, benefit pricing increase that you had in I'm overall, a third of it was related to helium. Can I ask, when the other two percentage points, when this price increase had been agreed and in which regions? And last question on Schulke, could you give us an indication about the profitability of that business, maybe whether this is a business which is, higher than group average margin or, or maybe relative to the rest of the health care segment, please?
Thank you very much.
Chavez, your first question was about the weight of health care in Europe. Is that right?
The exit rate, please.
The exit freight, what do you mean?
I mean, sorry, I mean, the growth what sort of, because obviously the your healthcare business, the average 10% that we see is for the quarter. I'm just wondering what sort of growth you're seeing year on year towards maybe the rather towards the end of the quarter rather than the average?
Okay. So it's true that we had even stronger growth Healthcare at the end of the period. In March, we were around 20% growth. We've a peak in medical oxygen in some countries in Italy, in particular, still very strong rate in normal care. And of course, the surge in the sale of hygiene product and equipment and installation However, in the New York region, we are currently having more demand for medical oxygen.
The stop of the regular surgery procedure is also impacting the other way around. So, we're not telling you that we will maintain percent for the full Q2, probably not. In terms of merchants, is the situation different country by country? I would probably let, let Mike and Francois respond One thing to have in mind, which is important is that in China, the, proportion, the percentage of on-site equipment is higher than in the rest of the group. This has been protecting the merchant, Chinese, during the peak of the epidemic, because for those on-site, you have fixed fees and and similaring that and the and most of them are continued to run.
Of course, we want to give a an idea of the reputation maybe a bulk package in Europe and then Mike in the US?
Yes, to your point, first, on on-site, the portion of Insight is around 10% for Europe. Then we have a strong package gas overall in Europe and the rest being the bulk of the business. Regarding the take or take contract that's mostly for the on-site. What we have, is contracts for the bulk business for most of it, for all of it, actually. And we have contracts also for some of the packaged gas business where, of course, we have the rentals.
Mike, in America,
Sure. So I think, just in general terms, if you look at Airgas specifically or the Americas in general, there is a heavy weight to the packaged gas business and a strong weight as well to the bulk business. Airgas did not have access to the typical on-site model, prior to the acquisition. And that is a model that is growing in Airgas, but it's not grown to the same extent you might find in other geographies, especially what you might find in Asia. I think in terms of end use markets, whether it's manufacturing or construction or metal fabrication, all those markets, are strong in both the Americas and also in Asia, especially in China.
But obviously, there's a heavier weight on the industrial side, especially in China, thinking about heavy manufacturing, fabrication, and certainly a good amount of construction today versus what you might see in some of the consumer related businesses of food, pharma life sciences. It's there, but the weight to that business in the Americas has continued to grow significantly over time. And so I think that that balance is a bit different as well. The bulk business is strong. The liquid business in China and the packaged gas piece of the business continues to grow.
I mean, recognize Airgas has 16,000,000 cylinders in operation today.
In terms of Asian pricing, you may remember that the price of medium as been increasing progressively all along 2019, but in particular in Q2 and in Q3. So we see progressively a reduction of the comparison effect and this comparison effect will really, try to start to vanish in Q4. Regarding Schulke, Actually, the profitability of Schulka is pretty well aligned with the profitability of the group. However, it was a slightly dilutive to healthcare activities. As you know, healthcare activity have global profitability, which is above the group average.
But that's what I can say on the sugar situation.
Our next question comes from Peter Clark from Societe Generale.
Yes. Good morning, everyone. Just a quick one on the definition of resilience within industrial merchants. I'm presuming there what you've done is you've taken the rental income in particular with these resilient end markets, including life sciences on food and beverage. As a main.
And then if I look at that and of course, if I look regionally from comparing Europe with North America, I presume because of the mix the higher hard goods, lower rental income. There is a difference in Europe would be significantly or materially above the 55% maybe North America would be below. Thank you.
So in merchant globally, the rental and fixed fees for on-site, etcetera represent approximately 35% of the revenues. Then if you look at what we call the resilient market, being food, beverage, techno, research, pharma, etcetera, it represents 25% of sales. So that's why we said that you take the rental plus the resident market, we have approximately 50% of sales, which are relatively protected.
And regionally? The difference. Europe versus North America, particularly. Europe versus North America.
No. I don't think so. I don't think so. You have differences with the percentage of on-site, bulk, etcetera, but I don't think it's very different because in packaged gas, the rental price is also, is also quite significant. So, no, I don't think you have a major difference year.
Okay. Thank you.
You're welcome.
Our next question comes from Andreas Heine from MainFirst.
Hi. Thank you for the only minor ones are left. The the first is in, just for clarification, should we be in part of these recurring net earnings as long as the deal is not closed. Is that right? Or will you restate numbers when that is out and, have it only being compared to 2020 to 2019, completely excluding sugar.
That's the first question. So the second one, if industrial merchants stays we can. Do you have flexibility in your CapEx budget, dedicated for industrial merchant so to spend less potentially on that, in the second half? And how much could that be? That's basically the second question.
And the third one, the medical gases, hospital has probably have also tanks, is, that that one hospital has, let's say, an exclusive contract with Air Liquide and you have also given amount in rental fees for this tank on-site. And the gases is only a smaller part of the delivery just to understand the dynamics was a higher deliveries of gases means to that business? Maybe some qualitative comments, please.
So for Schulke, Schulke is still part of the group. And then the P and L of Schulker is consolidated into the group consolidated P and L And that is going to be the case for all of H1. Then if the project continues to move forward, as we expect, we will deconsolidate Schulke on July 1st. In terms of CapEx, yes, of course, is the activities lower? We will have less CapEx in I'm.
You always have a proportion of logistic CapEx, you know, new tanks, new trucks, new cylinders that we may not need this year or not in the magnitude. We thought We will also have a slowdown of the large industry CapEx because of the Diddeh, we will experience on some construction projects. So globally, we expect CapEx to be 20% lower than the initial budget for medical gases. So Troy, can you take over, please?
Yes. So for the medical gases for the hospital, indeed, we have mid term contracts, which could be 3, 5, 7 year contracts. It depends a little bit it's public or private, it could be, most of the cases, those are tenders for the public hospitals. In most of the cases, vast majority those are exclusive contracts. We are the only one to supply a given hospital.
We have rental fees for the tanks, but also the a significant part of the business, which is cylinders where we have rental fees for sure. And we have also a very often service fee because we do manage some of the turnaround of the cylinders, for example, for the hospitals.
So in a normal excuse me, maybe if I add in a normal situation, is Zendes these fixed fees like rental and service and exchange of cylinders. Is that also in this magnitude of 35 percent you mentioned for industrial merchant, is that kind of comparable or is that different for me?
Have to be very careful because the pricing structure is different from one country to another one. But, you can probably take that on average, something similar to this. Yes.
Thank you. Very helpful.
Okay. Thank you, Francois. Next question. We may take 1 102 more.
Our next question comes from Chetan Udeshi from JP Morgan.
Yeah, hi, thank you. Just a couple of questions. First on, the flat net profit guidance for 2020. Are you willing to break that into how you think the comparable sales growth look like within that? And how much is the margin expansion baked into that guidance?
Just maybe any feel for those two numbers. And the second question is just to understand the modalities of your take or pay stock sure within, within large industries. So from what I heard previously, I think typically the minimum load is 70% is what you charge the monthly fee based upon. And what is the volume component of the revenue that you get in large industries about the minimum. And is that something which can, which can be impacted in the downturn?
For the guidance, we is we'll do that. We are confident that as indicated initially in February, we could to grow the margin, but you know that we don't give a precise margin guidance. Our commitment since now nearly 2 years is to accelerate the improvement of the margin. It's going to be more difficult in current context, but we are still committed to do that. And, thanks to the red of our fundamentals will be able also, under the assumption that the lockdown will end at the beginning of Q3.
To maintain the net profit. I think it's difficult to, to tell you more at this stage. The take or pay structure in large industry was Sean?
Yes. So typically in our large industry contract, we have some 6 parts. There is one which is the monstriefing first. And that's fixed basically with some indexation course. And then you have a volume requirement, which is the take or pay.
That's another part, which is fixed. And then you have the volume, which the variable part. So typically, I mean, the, the minimum load for the take or pay, it depends on the at, but it's between 60% 90% typically of the volume. So that could be did impacted by the downturn. Now depending on the contract, you have more or less profits, which are the variable part, again, it's a contract specific, but those could decrease up to the take or pay level for the volume cost.
And is there a number you guys have in mind at the moment on what could be the total volume consumption about the minimum take or pay levels in the large industries as a whole, just in case if you have that number?
We have never in our portfolio of customer, everybody being at the take or pay, I mean, it's first, it's unusual that the customer is at the. And then given, I mean, the geographical mixed and mixed in terms of industries, we don't have all the customer are going to the tech or pay. So there is a balance, as mentioned by Mike, before, we see customers, which are holding very well, even some which are increasing their consumption So we don't see anybody going to the tech update.
Thank you, Francois. Next question.
Our next question comes from Alonso from Exane. Please go ahead. Your line is open.
Yes, good morning, and thanks for taking my question. It's on efficiencies. I was wondering if you could send us, if the excess versus the guidance will be represented by temporary measures that could reverse into next year. Or whether you are putting forward some measures that you had in mind in your Neos plan. And in relation to that, in the guidance for recurring net income, from memory include those one off restructuring charges.
I think last year it was about 1,000,000 was wondering if you could give us a sense of what the number could be this year, similar, lower, higher.
Okay. So, we remain focused on our 400,000,000 a year target for SEH on top of that, there will be a temporary measures, and and temporary cost cut to flee the crisis and that will come on top of the regular efficiency to protect the margin and the net income. Regarding the exceptional expense, we foresee around sharing, this year and the exceptional expense and total exceptional expense. Excluding the, the COVID non recurring cost, more or less the same level of last year. Do we have a very last question?
Okay. Let's take the last one then.
Our last question comes from Peter Heydinger from Goldman Sachs. Yeah, hello, and thank you for taking my questions. I have 2 quick ones, if I may. Firstly, on health care, do you see meaningful costs involved in servicing that higher demand? And finally, on large industries, do you see refinery closures impacting base growth and how do you see utilization rates by region?
Thank you.
Francois, do you want to answer an additional cost in health care due to the current Yes,
there may be some additional costs, but we do believe those are going to be limited because whenever we had to, for example, do something exceptional and to supply, either a piping or a new in most of the cases, we were able to leverage our industrial merchant presence and use, for example, the people which were not fully low So at the perimeter of the healthcare, there could be, but at the perimeter of the group, that should be well maintained.
In terms of refining, so we don't have any customer who have closed our facilities for the moment. However, it's true that the inventories are in the 2nd part of the year, but we have no signal that any of our customer could close its facility for the moment. Francois, yes.
Yeah. And if I may also on this part, I mean, keep in mind that a large part of the volume supplied to refineries is nitrogen, which is used in any cases. So, I mean, we do expect, I mean, quite a stability in the nitrogen volume, even for the refineries, regardless of their output production.
I think the last question was about the loading rate by region in Large Industries. Is that right?
Yes, correct. Thank you.
Well, of course, right now, we see a better loading in China than what we had, let's say, 1 month ago. I think the most affected in terms of loading right now is Southwest Europe. When the US art but as as Mike explained in a lesser extent. So I think we can say that globally for the moment, we have an average of 70 percent loading or so when we were more at 85% prior to the crisis. I hope that, does answer your question.
Thank you very much for participating. At the conclusion, I would like remind you that our Q1 was pretty solid that demonstrated again the strong resilience of the, Air Liquide Business Model. We remain really focused on our performance improvement plans We have not stopped anything before the crisis. And on top of that, of course, we adapt to the current situation. That's why we are confident that we will still deliver margin improvement in 2020.
All the teams are mobilized in Alice care, but not only to ensure the continuity of the operation, to remain close to our customers, to our patients, and they really deserve a lot of recognition and and congratulations for that. So that will end our call. Thank you very much again, and we'll talk to you soon. Goodbye. Have a good day.
Thanks, everyone. Be safe and stay healthy.
Thank you very much. Bye bye.