Good morning, ladies and gentlemen, and welcome to the Air Liquide Q1 2019 Revenue Conference Call. All participants are currently in listen-only mode until we conduct a question-and-answer session. Instructions will be given at that time. I will now hand over to the Air Liquide team. Please begin your meeting. I will be standing by.
Good morning, everyone. This is Aude Rodriguez, Head of Investor Relations. Thank you for joining our conference call today. Fabienne Lecorvaisier will present the first quarter revenue, and Mike Graff will focus on our electronics activity, its transformation, and strategy. Yves Alibert is also attending the call, and will participate in the Q&A session. In the agenda, our next announcement for half year 2019 results is scheduled for July 30th. Let me now hand you over to Fabienne.
Thank you, Aude. Good morning, everyone, and thank you very much again for joining the call. We are happy to report another strong quarter for Air Liquide. Our sales growth remained high at +9% and 5% on a comparable basis. The market environment remains supportive, with inflections in some segments. Continued solid demand in others. I will try to give you more color on this in a minute. Our reinforced action plans for increased efficiencies and performance are launched, and will ramp up progressively throughout the year. Cash flow is strong at more than 20% of sales, and we pursued our business development initiatives in a very dynamic environment. Let's come back to the context. Thanks to the strengthening of the U.S. dollar, we now benefit from a ForEx tailwind close to 3%.
Conversely, the energy impact is softening, thanks to a slowdown of natural gas pricing, mainly in Europe, which has certainly been beneficial to some of our customers. In terms of markets, compared to what we presented to you mid-February, we see an inflection in construction, notably in the U.S. Apart from that, most of our markets remain well-oriented. If we look more precisely at the figures, gas and services are up 8.4% as published, and 4.8% comparable, despite one less business day in Q1 compared to last year. Engineering pursues its progressive stabilization in terms of sales and margin, with EUR 150 million of additional order intake. Global Markets and Technologies continue to be strong, supported by techno sales and by a 50% increase in our biogas sales, with an order book, which is also slightly above last year. The period has been very active again for Air Liquide.
I already mentioned the focus on performance, we also inaugurated our new innovation center in Tokyo, together with our electronic customers. In terms of growth initiatives, we completed the acquisition of Tech Air in the U.S., which is very good news for the development of Airgas, we extended our relationship with Severstal in Russia by signing a new long-term oxygen contract. Last, but not least, in line with our climate objectives, we decided to build the world's largest electrolyzer in Canada, following our equity investment in Hydrogenics at the end of last year. Our businesses still show very solid growth, with Merchant at 3%, remember, we have one less working day. Large Industries and Healthcare at +5%, Electronics double digits.
In terms of geography, the strongest performers of the quarter are again Asia, supported by the strong restart of China after Chinese New Year, notably in Merchant and Electronics, together with developing economies at large, in Large Industries mainly. The growth of our base business, excluding the contribution of startups and ramp-ups, remains solid at 2.9%, despite one less working day, as most of our units are well loaded. The contribution of the new units is close to 2%, slightly higher than for previous quarters. Let's now go around the world. Americas at 2%, are penalized by a high 2018 comparison basis in Large Industries and by the missing working day at Airgas. However, volume demand remains strong, in particular for hydrogen, Merchant continue to be supported by solid metal fabrication market and pricing.
Healthcare progression is high, above 7%, notably in the U.S. and Latin America, while Electronics are up 15%, thanks to gases and equipment. Europe at +3%, benefits from strong hydrogen demand in Benelux, startups in Turkey and Kazakhstan, as well as from growing cylinder volumes and further reinforced pricing effect. Healthcare, above 5%, continues to be supported by high Home Healthcare, with rapid growth in diabetes in particular. Asia is up 13%, thanks to ramp-ups in Large Industries in China and solid demand in Australia and Singapore, notably. Merchant is strong again, with higher volumes everywhere, except in Australia, positive pricing. Electronics continues to post record growth in connection with new carrier gases contracts, advanced materials progression, equipment and installation deliveries. China alone is progressing double digits in the four business lines. Africa and Middle East is back to steady growth, post Sasol startup impact.
Industrial Merchants is progressing very well in the Middle East, Egypt, and India. In terms of business line, the performance of Industrial Merchants is really reassuring given the fact that we have one less business day. It is driven by oxygen and acetylene cylinder volumes and high pricing at 3.3%, driven by Americas and Europe. Large Industries is, of course, benefiting from startups, also from high hydrogen volume at +12% on solid oxygen and nitrogen. Healthcare growth is above 5% driven by Europe and Americas. Home Healthcare is up 8% despite a -1% price effect, supported in particular by respiratory therapies and diabetes. MedGas is solid, notably in the U.S., thanks to proximity care and to the launch of the liquid small cylinder offer in the Airgas network. I would like now to stop for a moment on Electronics.
You asked us numerous questions about the growth in this business line and about its sustainability. For that, I will hand over to Mike Graff, who is supervising electronics.
Thanks, Fabienne. Over the last 15 years, as you can see, we've transformed our electronics business, increasing our value to the industry through the introduction and growth of innovative offers and advanced materials, in larger, more efficient and reliable plants that produce the ultra-pure gases, which are really a lifeblood for our customers' fabs. Our services, specialty materials, and equipment businesses also provide critical products and services for the industry and enable more touch points to strengthen the relationship with our customers and drive greater value for them. Overall, our business has more than doubled over this timeframe, with a clear and intentional focus on growing our offer in high-value, differentiated products, which enable customer technology advancement and positioning Air Liquide as the leader in electronics.
Our business is diverse across Asia, the U.S., and Europe, with strong positions in the integrated circuit market as well as in the flat panel display industry. The mid to long-term forecast remains very promising. 2018 was another strong year with a record level of investments to support new production that will enable our customers' growth and continue to expand our technologically advanced offer. This clear and intentional focus on innovation is driving solid growth along with strongly enhanced and sustainable margin improvement. We continue to leverage our core strength in advanced air separation technologies and industrial operations to provide large, efficient, and reliable plants to meet the ever-growing needs of the industry.
Our know-how and global presence provide a strong backbone for project execution and operational support to ensure continuing safe, reliable, and consistent supply to each of our customers. On the advanced materials front, we leverage our strong technical capabilities and our growing network of material scientists and chemists to work within the semiconductor industry to drive innovation in a time of technology advancement that relies ever more on materials and our highly specialized gases offer. Over time, we have developed a strong collaboration and partnership with Tier 1 customers and OEMs to drive winning solutions that benefit the entire ecosystem. Looking forward, the advances in the electronics industry impact our lives more and more each day.
Connected devices are now common and impact not only our personal lives, but access to big data is driving the digital revolution in all sectors of the world, from healthcare to basic industry, to transportation, to education, to the financial sector. The proliferation of new applications, along with the maturing of the industry, has reduced the historic cyclicality seen in the early 2000s, especially in the integrated circuit market, which accounts for almost 90% of our electronics business. In many respects, this is really just the beginning. The digitally connected smart society will become even more of a reality with 5G enabling enhanced connectivity in the next few years. Artificial intelligence will drive new ways of working, new ways of learning, and new ways of communicating.
All of these key industry drivers and more are enabled by technology advancement in the electronics industry, Air Liquide helps to enable this. Fabienne, back to you.
Thank you very much, Mike. I hope that following this short presentation, you now better understand what the growth levels of our electronic business are and why we are pretty confident in its future development. Let's look now about the performance. As mentioned at the beginning, additional action plans are mostly launched to be able to deliver more efficiencies and to strengthen the performance, will start to deliver in Q2. Our efficiency program are also on their way at Airgas. For Q1, we have delivered EUR 77 million of sustainable cost reduction aligned with the planned seasonality. Climate-related initiatives continue to represent approximately one-third of those efficiencies and include energy optimization, logistic management, and reduction of cylinder leakage for helium in particular. Remind you that our newest objective is now to reach EUR 1.5 billion cumulative.
This will, of course, enable us to improve our margins and return on capital employed, also to finance increased digitalization and innovation efforts to secure our future. Cash flow also remains very solid at 20.3% of sales. Business development continues to be extremely active, as shown by the 12-month portfolio of business opportunities, which has slightly increased again with new projects more than replacing the awarded ones. Signings were also strong with significant investment decisions driven by energy transition in Canada and Norway and regain momentum in regional M&A. The acquisition of Tech Air closed in March will reinforce Airgas positioning and generate high synergies. We started up seven new units in Q1, of which three in electronics. The contribution of startups and ramp-ups at EUR 103 million is driven, as usual, by large industries, but also by electronics, and once again, by energy transition.
Startups for the full year are confirmed. Therefore, we maintain the initial forecast for more than EUR 300 million sales contribution, including Fujian in China, for 2019. In a few words, as a conclusion, we enjoyed another strong quarter in terms of activity. We reinforced our focus on performance while continuing to be very active on new investment opportunities. On this basis, we, of course, confirm our outlook, which is to deliver net profit growth in 2019. This is what we wanted to share with you this morning. Thank you very much for your attention. We would like now to open the Q&A session.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We will pause for just a moment to allow everyone the opportunity to signal for questions. We will now take our first question from Andrew Stott of UBS. Please go ahead. Your line is open.
Good morning all, to Fabienne and Mike. I had a couple of questions. First of all, on industrial merchant, pricing was up 3%, organic was up 3%. Obviously, volumes were flat, and I hear you on the trading days, that is probably what, 1.5%. It still seems a bit light relative to how you are traveling through Q4. I guess the question is to you, Fabienne, you mentioned that you had seen a sort of inflection point in construction. I just wonder if you could elaborate on that, and whether there are any other softer spots that you saw in Q1 relative to February comments. That is question 1. Question 2, simple one. Is there an update on the Fujian contract? Thank you.
Well, thank you. For IM first, it is true that the sales progression and the pricing are more or less aligned. We have the missing working day, which is accounting for approximately 1% of sales. If we had the same number of working days, the progression of IM would be 1% higher. Another point to be taken into account is that in the pricing component, you have a medium component. You know that, globally, the helium market is relatively tight. We have a strong helium pricing as the other competitors. This is also at play on the pricing. Apart from that, I assure you the volumes are growing. The pattern is a little bit different from one geographical zone to another. Maybe I will start with Asia and then hand over to Mike and give a few words about IM in the other region.
In Asia, we have a strong volume growth. The pricing is positive but clearly lower than last year. In China particular, we continued to grow high double digits. We deploy our cylinder offer and the sales increase is very significant, but this is also true in most of the zone. We had a positive growth in Japan, which is not always the case. Only a slight slowdown in Australia, but apart from that, Asia is strong and Asia is strong in oil markets. Maybe, Mike, a few words about Americas? No.
Sure. I think in the Americas, first of all, I would say that metal fab continues to be strong. Whether that's Airgas, whether that's Canada, I think throughout the Americas, industrial markets continue to drive growth, especially more in the long investment cycle businesses, the machinery and heavy equipment. Even though automotive is slightly off peak, it still remains at very high sustained levels of output. We continue to see factory investment with a continued focus more on automation, whether that's automated cutting, welding or in parts positioning. Fabienne mentioned construction, and I think it's really a mixed bag here. There's a good backlog of projects. I think spend on the Gulf Coast, especially for petrochemical plants and LNG terminals, continues to be quite strong and it continues to grow and evolve.
I had mentioned before that we had a number of pipeline projects, power plant projects and infrastructure projects and geographies that were outside the Gulf Coast, they've really come to a close. There's other projects that are being considered, but they're not sanctioned yet. That's where I think we see a bit of a difference in the weakening in construction in that particular part. Energy chemicals continues to see strength, especially in the chemicals and refining space. That's not only construction. That's continued routine maintenance and turnarounds and a number of other activities that go on at the sites. In the non-industrial segments, I think the food and beverage markets especially continue to be strong and continue to grow similar to last year. Life sciences as well for that matter.
I think that, given the fact that we saw one less working day, the other areas is hard goods and the safety products and that sort of thing. They're at a very high level as we end the year, and they continue to stay at that high level but in a more stable range.
Thank you. Mike, give a few words about the situation in Europe.
Yes, thank you. Maybe just a few additional words about Europe and giving a little bit of color of what is happening also in Europe. We also had a significant pricing contribution. We have been ramping up the pricing now from all over the last quarters in 2018 and the first quarter of this year. We're reaching levels of 3.2%, which is quite positive. Europe is also impacted by a working day effect. That also explains some of the less volume contribution. However, what I would like to say maybe is that, from a market point of view, yes, there are some markets, particularly in the automotive industry, that are a little less dynamic. We see a lot of renewal and new markets really boosting, particularly in the food and pharma industry, the biopharma markets.
The convenience food industry is really growing now with more and more new freezing and chilling applications, which is all related to the changes of how people want to get their food in the cities in particular. We see all that really as new growth drivers and that are really starting to materialize. The other thing that we're really experiencing now in Europe is the change that the digital is bringing to the way people are working and expecting to be, let's say, trading and doing their business with Air Liquide. More and more of our package gas business is going through digital channels, up to 20%, even in certain geographies. It's becoming very significant, leading to some very positive, I think, contributions in the mid-future in terms of not only how we interface with our customers, but also how we are able to create efficiencies through digital.
Thank you, Guy. The second question was about Fujian. In Fujian, the plant continues to run at full capacity. The customer continues to offtake the product, and the discussions, negotiations are still going on, so not much more to tell you than what we already mentioned in February when we published our full year.
Okay. Thank you very much.
You're welcome. Next question?
Our next question comes from Martin Roediger of Kepler Cheuvreux. Please go ahead. Your line is open.
Thank you to all of you, Fabienne, Mike, Guy, Aude. One follow-up question on your statements on electronics. Can you explain to me the 50% sales growth in E&I in Asia Pacific in Q1? Maybe can you also help me to understand, did you gain some market share in overall electronics, and did you do some price hikes in electronics? The second question is on the competitive landscape, in general, in industrial gases. It is probably too early to ask, nevertheless, I tried. Two months ago, the merger between Praxair and Linde was approved. Did you recognize that the behavior of the new Linde is different from the former Linde? i.e., is there more price discipline in bidding processes, or is Linde now trying to increase sale prices in industrial merchant even more aggressive than they did before? The final question is on engineering.
How confident are you to return to break even this year and to reach normal margins going forward? I see that the order intake is down by 23% in Q1. Thanks.
First about electronics. Maybe I hand this one to Mike.
Sure. Thanks, Fabienne. Martin, I think there are several aspects in terms of the growth and evolution of electronics. First of all, I think that we saw roughly 14% growth, obviously, as Fabienne said, following on roughly 18% in Q4 of 2018. A lot of this is driven by recurring sales. What we see is carrier gases continue to grow significantly, especially with all the new projects that we signed in 2017 and 2018. Recall, we had very high levels of investment in electronics in both years. We see double-digit growth in carrier gases for the quarter, roughly 13%, which is really one of the key drivers of growth that we see. The other key driver of sustained growth is in advanced materials, and that's at a similar level, significant double-digit growth, both in the U.S. and Asia, serving our tier 1 customers.
We also saw the ramp of the enScribe etch gas offer that we spoke about previously, with the startup of new production facilities in South Korea. Both of those really underpin significant level of organic growth at almost 16% overall. E&I continued to be strong. It's not as strong as it was in the fourth quarter of last year, which was roughly 50%. It's in the 30s, but continues to be a driver of growth as well. Long term, even as I mentioned in my discussion, I think that the growth in carrier gases, the growth in advanced materials really underpin the future for us.
Well, thank you, Mike. In terms of impact of the Linde-Praxair merger, it's probably a little bit early to say. I remind you that country by country as in most of the case, either the Linde part has been resold or the Praxair part has been resold. We still have the same number of competitors on the market. In terms of new Linde behavior, we've not seen much difference for the moment. You know that we have always been in a very disciplined market. We expect it to remain that way. In terms of engineering construction, sales from one quarter to another is not really a proxy as you know that we recognize most of the sale at the end of the contract. Yes, we are going to be breakeven this year.
We may be slightly negative in H1. We'll be clearly positive for the full year. We expect to come back progressively, hopefully in 2020 or if not, in 2021, to the average margin we had in engineering historically, let's say between 5% and 10% and preferably in the high part of the range.
Thank you.
In terms of order intake, we have a very active portfolio in engineering as well. We are expecting some signings. I think that the fact that the order intake is slightly down in Q1 should not create any worries.
Okay, thanks.
Our next question comes from Gunther Zechmann of Bernstein. Please go ahead. Your line is open.
Hi. Good morning. Thanks for taking my questions. The first question is, can you give an indication of the margins we should expect from the EUR 100 million of orders that you signed for the maritime industry by 2020? Should we more assume a GM&T type profitability or more an Alfa Laval type of margin? On what region are you hoping to be? The second question, a simple one. I don't think I've seen it in the press release. Can you give a number for the book to bill in the equipment and installation business that you had in Q1 comparable to the 1.0 that it was at year-end please?
Okay. In terms of the sale of the maritime Turbo-Brayton turbine that was the object of the release of this week, it's really a very profitable business. Not all of the businesses are at this level in Global Markets and Technologies . You know that as it is our most innovative business, we can have strong discrepancies between the value segments. But this one at this time, it's advanced cryogenic technology and the advanced cryogenic technology segment. We have margins which are fully aligned with the group average margin. In terms of geographies, it's mostly a series out of France, but which are exported all around the world. In E&I, we have a book to bill at 0.7, so we can expect the E&I to stabilize over the months to come.
That's great. Thank you.
Our next question comes from Neil Tyler of Redburn. Please go ahead. Your line is open.
Good morning. Two from me, please. Back to the pricing development in the industrial merchant business, particularly in Europe. The extent of the year-on-year change, even excluding the helium market, seems to be at the top end, at least of what's been experienced previously. Allied to Guy's comments on digital efficiencies, is there any reason that you can point out at this point why we shouldn't interpret this momentum as presenting the possibility that you can exceed your typical expectation of raising margins by 200 to 300 basis points? That's the first question. Second question, back to the Fujian contract. You said that there hadn't been much further development on top of what you mentioned in February. Does that mean that essentially the customer hasn't paid you yet? Thank you.
Guy, are you going to improve your margin by 300 basis points with digital?
Maybe back a little bit on the pricing in Europe. Yes, we are experiencing now a high-end pricing contribution, during the last two quarters. I think when you look at the inflation rate in Europe, at the beginning when inflation started to go up, particularly with the energy pricing, we were in a sort of catch-up mode. Clearly we are at this period of time where fundamentally we have a positive leverage on the inflation overall. We should indeed be having an improvement of margins. This being said, the digital applications I think are essentially going to create value first towards the customers in the way they want to operate with us. I think that's very fundamental. We see changes of their expectations in the market. Of course, we expect those applications also to improve our own operating modes in the future.
That's what I can probably say around the pricing and the digital, how it is currently being developed in Europe.
Thanks. That's helpful.
Thank you, Guy. Back to Fujian, I think, I explained in February that the discussion and dispute we have with the customer is about the recognition of the performance test. The customer claims that the performance test is not valid, although it has been checked and validated by an official third party, and therefore is paying what he had to pay under the test period, when we claim he should pay according to the commercial terms of the contract for a normal operating period. We still have this dispute about the level of the monthly payment. That's right.
Just to clarify. You've invoiced them and the like for like that you've reported is based on your invoicing of what you believe is due. Can you just help me understand how much of the like-for-like growth in Asia, or what the contribution was from Fujian ramp up in Q1, please?
Well, we are not going to disclose the numbers.
Totally
The growth in Asia is very strong, even excluding the Fujian contribution.
Okay, thanks.
Our next question comes from Jean-Luc Romain of CIC Market Solutions. Please go ahead. Your line is open.
Good morning. Thank you for taking my question. My question relates to hydrogen as a fuel. I was wondering in the G&T division how the contribution of hydrogen as a fuel compares to biogas in terms of sales.
At the moment, if we look at global market and technology, 60% of sales are advanced technologies and approximately 25% of those sales are biogas and hydrogen, what we could call globally clean mobility. It's obvious that at the moment, the bulk of it is with biogas and the hydrogen sales remain much more modest.
Thank you.
Once again, if you would like to ask a question, please press star one on your telephone keypad. Our next question comes from Peter Clark of Societe Generale. Please go ahead.
Yes, good morning, everyone. There are two questions, actually. The first one is around electronics and probably for Mike, I don't know. The advanced materials, of course, is a business that can go up and down more so than the carriers. Just how stable you think that business is, and then within that, on the electronic side, obviously the Versum deal now having been agreed with Merck, just how you see the competitive landscape, particularly obviously on the gassy side there and the advanced materials they were involved in. Secondly, just to clarify on the North American volume situation for industrial merchant.
From what you're saying, if we strip out the negative day drag, which I think was still negative volume, you're saying you expect the volumes to move positive again from Q2 because there was some one-off effects as well and some temporary market drags. Just clarify that. Thank you.
Mike, I think that.
Okay. I think first of all on the electronics materials, this is obviously a growth factor for us. I think there are several aspects to this that will continue to drive that growth. We don't see it as being cyclical. We see that as actually enabling the continued evolution of the more technologically advanced nodes. All of the investment that is going into new fabs, to go ahead and produce integrated circuits, whether that's in logic or that's in memory. As you go to these more advanced nodes require more carrier gases and more advanced materials. We see that continuing to ramp. As the industry itself utilizes these capabilities, not only does it grow in terms of the overall volumes driven by the industry, but the actual architecture of the chips is evolving.
Traditionally, when you think about production in terms of integrated circuits, you talk about that in million square inches of silicon, which looks at the diameter of the wafer produced and the number of wafers produced. What has happened in chip architecture is we're going from two-dimensional geometries to significant three-dimensional growth. As you grow in three dimensions with multiple layers, you begin to utilize more advanced materials and more carrier gases in order to go ahead and produce that same wafer. I think a perfect example of this right now is in 3D NAND. Which is evolving as a significant driver in memory. The current evolution of 3D NAND and the current production capability, the architecture is a 64-layer design. Think about a Kit Kat on a nanoscale with 64 layers.
That 64-layer is going to evolve to 96 layers in the coming year and a half. In two years, that likely is going to evolve to 128 and then grow from there. We see actually as this growth continues, a significant drive for ever more demand for the advanced materials along with the carrier gases and our enScribe gas offer. In terms of the volumes in North America, we actually saw, as I pointed out, positive volumes in this quarter as well, and we expect to see continued growth in volumes. The various sectors, the various markets, as I pointed out, have different patterns of growth. Some of it is more lumpy, like in construction, which can grow very significantly depending on the number of projects that are sanctioned, which was very significant last year, and that still is underpinned by what happens on the Gulf Coast.
We do expect to see continued volume growth in that area.
Okay. Then the Versum deal?
In terms of Versum, we've seen the evolution of Versum and Merck. I think that clearly, from everything that's been said, the focus is on the continuation of the utilization of Versum and the integration into Merck, which has a clear strategy. I think we'll wait to see how that evolves. I think that I'm not going to speak for them in terms of their strategy and how that's going to move forward.
No change for you?
No. We continue on the clear path that I outlined. We're very driven to continue to develop a highly advanced technical offer, whether that's in the offer of carrier gases, whether that's in the growing evolution of our portfolio of advanced materials that are critical to the technology roadmaps for the advancement of the increasing technological architecture of the advanced nodes. As well as the evolution of our enScribe gas offer that is not only the next generation of etch gases to meet the exacting requirements at the nanoscale, but also provides a very sustainable offer in terms of greenhouse gas emissions.
Okay. Thank you, Mike.
Thank you, Mike. Do we have other questions?
As there are no further questions at this time, we'd like to hand the conference back to the Air Liquide team for any additional closing remarks.
Okay. Thank you very much again for joining us this morning. As you've seen, for us, again, a pretty good quarter. Most of our markets remain very well-oriented, even if we have contrasts between one region and another. We are confident, as extensively explained by Mike, that our growth in electronics is sustainable, with a margin which is very strong as well.