Good morning, ladies and gentlemen, and welcome to the Air Liquide 2018 results conference call. All participants are currently in listen mode only 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 will be standing by.
Good morning, everyone. This is Aude Rodriguez, Head of Investor Relations. Thank you for joining today's conference call. Benoit Potier will present the highlights of the year and Fabienne Le Corvezier, the 2018 performance and the outlook for 2019. Mike Graff is also with us and he will participate in the Q&A session. Our next announcement for Q1 2019 revenue will be on April 26th. Let me now hand you over to Benoit.
Thank you, Aude. Good morning to everyone, and thank you for being with us for our fiscal year figures. The agenda for this morning will be around three themes. First, the growth and the qualification of the growth, which is a profitable, consistent, and responsible growth. I will cover that. Fabienne will come back in details on the performance and show you how solid performance is. We'll talk about the outlook and of course, be ready for question and answers. I start with slide page four by just looking at the highlights. If I start with the growth and sales growth in particular, this is the highest growth since 2011. As a matter of fact, also the q4 of last year was the best quarter of the year.
We are today, in terms of growth rate, above the top of the NEOS objective range, which, if you remember, was between four percent-six percent, just slightly above six percent. If we look at the operating income recurring, there's a continuous improvement in the margin ratio with a 30 basis point improvement. This is in line with the historic record leading to gas and service operating income margin ratio, excluding energy, improved by 30 basis points as well at 18.6. The return on capital employed improved by 60 basis points if we just eliminate the foreign exchange during the year, and I'm sure Fabienne will come back to that point. This is very much in line with NEOS's target of being above 10% in 2021, 2022. Finally, I think the record level of investment decision, which increased by 22%, is also a highlight of the year.
We were highly selective in our investments, not to build in particular overcapacity, but we had plenty of opportunities. We had many new contracts and signings in Large Industry and Electronics in particular, and this is where the increase comes from. We also had many opportunities to invest in GM&T, the deep tech portion of our portfolio, to open, in particular, new innovative markets. If I look at the next page, the sales growth, and the series of semesters that we had, you can see on the left part that both group and Gas & Services enjoyed a pretty good and robust growth in the first and the second half of last year. If we split this growth of six percent between the different business lines, Industrial Merchant would bring two points.
Each of the other business lines making Gas & Services, Large Industry, Electronics and Healthcare would each bring one percent, more or less, and the remaining one percent would be equally split between E&C and GM&T. It's a very well spread growth across business lines, and this is why we think this growth is really robust. When we look at the outlook for the first half of 2019, it is true that we are today in an uncertain environment with particular trade issues, if not war between U.S. and China, with Brexit, and with possible reduced momentum in industrial production. As of now, we have seen no significant impact on our sales. Yes, we are cautious, but we still think that the outlook for 2019 is good.
When we look at the right part of the slide, market by market, you can see that in Large Industry, in particular, chemicals and oil and gas are actually posting good prospects for the first half. We are pretty confident. In IM, the metal fab segment is doing very well and is still promising for this year. Other segments like construction, energy or food and pharma are also well-oriented for the first half of this year. The Electronics in particular, the IC integrated circuit part of the business is doing very well. You'll see the numbers in details with Fabienne in a minute. The Q4 was really an excellent one, and the prospects for this year are still very good.
Page six, when we look at the performance more down into the P&L, talked about the 30 basis points, including energy for Gas & Services margin ratio. When we look at the net profit, you would probably remember that last year we had a tax impact in the U.S. That we precisely quantified at EUR 171 million, if I remember correctly, or pretty around EUR 200 million. If we exclude that, we have a net earning recurring base, on that base is the net profit grew by 4.2% with a negative foreign exchange. If we eliminate that effect, it's actually a growth by 8.7% like for like. The net debt is down significantly. Fabienne will come back to that. The gearing being now in a more comfortable zone of 69%, it's quite an achievement. When we look at the Airgas acquisition, what we did after the capital increase.
The return on capital employed is as published at eight percent, but if we eliminate the difference in foreign exchange between the average rate and the end of the year rate, it's actually 8.3, which is well in line with the NEOS objective. Page seven, it leads us to make a proposal to the shareholders to actually grant another bonus share one for 10 in October this year. The last one was in 2017. In 2017, the dividend was also increased from EUR 2.60 to EUR 2.65, which then, as a matter of the bonus share, led to a distribution increase by 12% in 2018 cash wise. We have decided to go back to this policy of granting a new bonus share, one for 10. At the same time, we maintain the dividend at EUR 2.65 per share.
The payout is now at 55% in 2018. We have not changed our dividend policy, which is a regular distribution of dividend. When I'm back, page eight, to investments, because this is the preparation of the future. 2018 was really a record year in terms of decision. We were above EUR 3 billion, EUR 3.1 billion exactly. You have on the map a split in the different geographies between America, 40%, essentially oil and gas and chemicals in the Gulf Coast. Also one important decision in California actually to invest in a new liquid hydrogen plant to serve the hydrogen energy market in California. 40% in Europe, which is also good news. We had several large industry opportunities. Asia, you would see that it's mainly electronics where the market is still investing significantly.
Of course, we tend to serve the top tier of the market with the largest IC manufacturers in the world. How do we invest? We try to reinforce our presence in our key basins because this is where the added value to customers is at the top, but also the economics are better because we have the existing base to rely upon. The second strategic orientation is to position ourselves in growing markets. This is true in so-called developing economies, thinking about East Europe in particular, but it's also true in electronics. I mentioned that in Asia. We are trying third, to open new innovative markets. My reference to the hydrogen liquefier was related to GM&T in particular, but we'll also continue our investments in biogas. The focus for 2019 will be on the NEOS objectives, in particular on growth.
Our growth needs to be profitable, needs to be consistent, and needs to be responsible. Profitable, I think we have just described how we invest and where. We also intend to strengthen our efficiencies. Fabienne will give you the details in a minute. Essentially, we'll increase our yearly program of efficiency from EUR 300 million - EUR 400 million. It's possible because now Airgas has joined the group. The synergies are more or less behind us, and it will be possible to integrate Airgas into the efficiency program of Air Liquide, and we'll keep our focus on return on capital employed. The growth. Growth must be consistent. We have a good business model, resilient business model, and we will continue to sign contracts with our terms and conditions that are really solid.
We will also make a focus on innovation and digital, because digital will be a good way of bringing more efficiency and more agility to the Air Liquide organization. Finally, because we published our climate objective last November, as you know we want to reduce our carbon intensity by 30% in 2025 compared to 2015. We'll do it by working on our assets, but also by developing low carbon solutions for our customers and by being engaged into ecosystems, and the Hydrogen Council is of course hub of this engagement. This is what I wanted to highlight. I will now hand over to Fabienne. Fabienne?
Thank you, Benoît, and good morning, everyone. We'll now review the detailed figures. Gas and services sales are 5.2% for the full year on a comparable basis, benefiting from a high activity level all around the world, which has continued to strengthen quarter after quarter. In fact, Q4 sales were up 5.6%. 2018 has also been a year of recovery for engineering, thanks to a stronger order book, even if operating profits only came back to positive in the second part of the year. At the same time, you see that Global Markets & Technologies, which gathers our most innovative products and services, were close to 30% up. As a result, mentioned by Benoît, group sales at EUR 21 billion are up 6.1%, a growth pace that we have not seen since 2011. We, of course, continue to watch closely the macroeconomic indicators and, in particular, the industrial production evolution.
As mentioned again by Benoît, most of our markets remain very well oriented, and the trends we observed in Q3 continued in Q4 with a stronger pricing effect. The foreign currency impact was negligible in Q4 versus the year before, resulting in a -3.6% negative impact for the full year, slightly softer than what we initially anticipated. Conversely, the energy price showed a higher increase in Q4 at +2.4%, full effect for the year at +1.6%. You remember that due to the pass-through energy clauses in our large industry contracts, the higher price of energy increases published sales but does not impact profits, and therefore, creates mathematical deficits in the published operating profit to sales ratio. Growth has again been strong across geographies and business lines in Q4.
I would like to mention Americas at +six percent, including a very solid performance at Airgas, developing economies at +13%, driven by China, Turkey, and Latin America, and the acceleration in Asia at +nine percent. In terms of business lines, Merchants and Electronics progression has clearly been above the historical average in Q4. Development of the base business, in other words, the growth excluding startups and ramp-ups as well as acquisition, has been exceptionally strong throughout the year, notably in Q3 and in Q4 at +4.5%. Let's now go a little deeper in the geographies to comment the Q4 activities. Americas, our largest zone, is up five percent for the full year and has been improving quarter after quarter.
Q4 was up 6%, thanks in particular to high growth in Industrial Merchant, above five percent, with a strong activity in all countries, including the U.S. and Canada, supported by bulk, on-site, and packaged sales, launch of new offers, and active pricing campaigns. Electronics, up more than 20%, was also outstanding, with very strong advanced materials and equipment and installation sales to our major customers. In Europe, the full year growth was at three percent, with a slight slowdown in Q4 due to hydrogen turnaround in Large Industry. Industrial Merchant remained strong, close to five percent, benefiting from stronger volumes, in particular to professionals and retail, and improved pricing at +2.6% in Q4. Healthcare grew more than five percent, driven by home healthcare volumes in diabetes in particular.
Asia, at +eight percent for the full year, has been boosted by activity in China and in Electronics along the year, with Q4 at +nine percent. In Q4, Large Industry benefited from three startups, including Fujian. Merchant continued to be strong in China despite a pricing effect slowdown, and solid in Australia. Only Japan, a decrease. Electronics was particularly strong in Q4, above 20%, with gas sales at +14% and very high equipment and installation. Africa, Middle East, and India impressive growth in 2018 is supported by the startup of our huge oxygen plant for Sasol in South Africa. Apart from that, in Q4, we had a solid level of Merchant activity in the Middle East, Egypt, and India, while sales in Healthcare were still boosted by our recent acquisition in Saudi.
If we look now at the business lines, Merchant kept improving along the year, both in terms of mix with packaged gas ramping up and pricing effect, reaching 2.5% for the full year, thanks to an acceleration at 3.3% in Q4. End markets are well-oriented and mostly driven by fabrication as well as technologies and research and professional. Large Industry is supported by startup and ramp-ups, strong and steady demand for air gases in Europe and Asia, as well as hydrogen demand in the U.S. Main variations from one quarter to another come from turnarounds or incidents, penalizing, for example, our Q4 by more than two percent. Healthcare benefited from the expansion of home healthcare in all of our markets, with close to 10% growth in Q4, and from high medical gases in the U.S.
As already mentioned, 2018 has been an outstanding year in all segments of Electronics, and Q4 has been particularly strong with carrier gases at +nine percent, advanced materials at +50%, and equipment and installation at +50%, while we continue to sign new contracts in the U.S. and in Asia. Engineering Construction as well as Global Markets and Technologies were not only marked by high sales growth, but also by a further increase in the order intake. Engineering ends up at EUR 807 million of orders, with approximately 50% coming from the group, and Global Markets and Technologies are EUR 460 million, a record driven by advanced cryogenic and biogas. If we look now at the performance evolution, we see that +3.3% as published, purchases are up more than seven percent, in connection with the increase in energy pricing and the mix of activities.
Personal expense and other expense show conversely a very modest increase, thanks to efficiencies and tight management of spending. Group level headcount growth, excluding scope, is less than 1%. Amortization is slightly down due to the ForEx, and also reflects the renewal of several contracts linked to existing assets in our main industrial bases. Third, our operating profit recurring at EUR 3.45 billion, is showing a slight positive leverage, excluding energy impact, 10 basis points at the group level. As you know, despite some recovery in the second semester, the operating profit for Engineering & Construction remain negative for the full year. Improvement is therefore stronger for gas and services, with operating margin to sales at 18.6% excluding energy, progressing 30 basis points in line with our new objectives. We are pleased to announce that the Airgas synergies are about to be fully delivered.
We were at $290 million at the end of December, and the $300 million are reached more than one year ahead of schedule. Cost synergies at more than $230 million already exceed initial forecast, and the revenue synergies continue to ramp up. However, we are now switching to run mode, with no further follow-up of synergy, but the inclusion of Airgas into our Air Liquide efficiency program. In terms of efficiencies, we are also better than the objective, at EUR 351 million for the year, including a first contribution from Airgas amounting EUR 30 million. Industrial Merchant remains accordingly the first contributor, with more than one third of the total efficiency. The group level, industrial and logistic program deliver 50% of the synergies, procurement program 30%, with themes around energy optimization, digitalization, and mutualization of back offices and reorganization, then account for 20%.
As explained by Benoît, and facing in particular the acceleration of development opportunities and innovation, we have decided to strengthen our efficiency program, which will contribute to secure the fulfillment of the new return on capital employed objective. From now on, the yearly minimum objective will be EUR 400 million per year of sustainable cost saving. 50% of the increase will come from the extensive inclusion of Airgas in the program, and 50% will come from more reorganization and mutualization of our assets and back offices, as well as from enhanced leverage on digitalization in the Air Liquide legacy. I finish with the P&L. Net profit recurring is up 4.2% as published, and close to nine percent excluding ForEx, showing a positive leverage to sales growth.
Non-recurring operating income and expense at minus EUR 102 million includes costs linked to the pursued integration of Airgas and to reorganizations around the world, as well as provisions to cover exceptional geopolitical risks. The decrease in financial cost is linked to an exceptional gain recorded in Q1 following the reorganization of the U.S. debt, but also to currency management and from the progressive reimbursement of the Airgas pre-acquisition debt.
Excluding exceptional gain, average cost of debt for the full year is at three percent, down from 3.2% last year. We'd also like to comment the income tax rate at 24.9%, a three percent decrease last year. In fact, two percent is coming from the U.S. tax reform, and one percent from exceptional items, like the impact on deferred tax of the tax reform in the Netherlands, for example. The performance is also very solid in terms of cash flow and net debt.
Operational cash flow is up 10.9%, thanks to solid cash flow generation and active working capital management. Net CapEx at EUR 2.3 billion or 10.8% of sales, the balance of industrial CapEx only slightly up to last year, lower financials and much lower divestitures. Despite higher dividends and a negative EUR 236 million ForEx effect, net debt is down more than EUR 800 million, and even EUR 1 billion excluding ForEx. Your gearing is now back to 69%, a very sustainable level given the consistency of our cash flow. The return on capital employed evolution is also aligned with the new objective. The published return on capital employed is at eight percent, but the improvement to last year is 60 basis points excluding the ForEx impact, and we are still committed to come back to 10% of course. Benoît mentioned the development opportunities.
The global portfolio of projects to be decided in the next 12 months is stable at Q3 level at EUR 2.6 billion, which means that projects awarded have been more than compensated by new opportunities, which is really good news. Decision at EUR 3.1 billion, the highest ever, benefit notably from a very high level of signing in our bases for large industry, for electronics in particular in China, Taiwan, and Singapore, and in new technologies for biogas and hydrogen mobility.
We ended the year with 17 startups, seven in Q4, including three significant projects in China and one in Singapore for a major electronic customer. Project backlog is slightly up and reflects the acceleration of investment opportunity as the new projects signed have more than compensated the increased number of startups in Q4. Projects included in this backlog, once ramped up, will generate approximately EUR 900 million of additional sales.
The global 2018 contribution to sales of startup and ramp-ups of new units is EUR 270 million, supported in particular by the ramp-up of our very large oxygen unit for Sasol in South Africa. The Fujian project in China finally starts in December after obtaining all necessary permits and satisfaction of technical and performance tests. The unit is running at capacity, and the customer is off-taking the product.
For 2019, our forecast for the startup and ramp-up contribution is above EUR 300 million and includes Fujian, even if discussions are still ongoing regarding the commercial terms and conditions of the contract. Therefore, we'll update you at the end of Q1. I will conclude by reminding you the highlights of the 2018 performance. Strong growth, continued margin and return on capital employed improvement, and acceleration of business development. In 2019, we'll continue to focus on growth and operational excellence, as well as on innovation.
We will significantly extend our efficiency program and continue to reinforce our positions in the key industrial basins of the world. Therefore, assuming a comparable environment, we are confident in our ability to deliver net profit growth in 2019. Thank you very much for your attention. We will now 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 now take our first question from Gunther Zechmann from Bernstein. Please go ahead.
Hi. Good morning. Gunther Zechmann at Bernstein here. Can I start on the margins and the development, especially in the gas and services division, where you disclosed 30 basis points improving, excluding energy. Is there anything in there that is holding that back? If I look longer term through your history, you have always guided to about 20 - 30 basis points continuous improvement in your operating margins, you overachieved on the synergies from Airgas. As you say, the growth is the strongest in eight years, should come with some operating leverage. Why would margins not expand? I know it is a greedy thing to ask, but why would they not expand more than those 20 - 30 basis points historical run rate?
Thank you for your question. First of all, I would say that 30 is at the top of the range. If we just look at the 2030, it is a fact. There are always ups and downs, but what we saw last year was the underlying improvement, which was pretty strong. It is always difficult to just block one period of time and say, because we have XYZ, we need to measure it during the same time frame. What we are trying to do is to see business line by business line, I would say geography by geography, where we are, they were fundamentally more positive than negatives. When we have, as an example, a lot of E&I, we have, of course, margin ratios that are not as good as the average of the group. That is one thing. There are always also geographies.
When we look at the margin improvement by geography, we can say that both in Europe and in the Americas, we could measure a significant increase in terms of basis points in margin. The improvement was in the range of 40 - 50 basis points for both Americas and Europe.
In fact, excluding scope, it's 50% in both.
Right.
50 basis points.
The small scope is always up or down, so it may play a role 10 basis points in general. We had one session in the U.S. with the ARI business from Airgas, which was divested, and it had a slightly dilutive effect on the margin. Without going into many details, it's true that in Europe and America, we had the result of efficiency and synergies. In Asia Pacific, we had a lot of E&I, and the result was that the margin was actually slightly down, but it's nothing to be concerned about. In Africa, Middle East, we had a significant difference in margin. Actually, the margin ratio was down as a result of the different fuel used by our customer in Yanbu. You know that they can use either liquid fuels or gas or natural gas or fuel gas from the refinery.
Depending on the fuel they use, and it's their choice, we have a margin ratio which is very different. So in Africa, Middle East, this was clearly the impact of that fuel mix used by the customer. All in all, when we make the analysis, we had a pretty strong margin improvement, and we think that it's going to be there as we go. When we add on this additional efficiency boost that we want to obtain at a group level of 100 million efficiency per year, so from 300 - 400, we think that the margin ratio is going to improve, and to improve more in the high part of the range than the low part of the range. I hope.
That's very helpful. Thank you
color on what's the achievement of the year.
Yeah. Can I just ask a follow-up as well? The pricing in Industrial Merchant has been very strong for quite some period now. What is your outlook there for 2019, please?
Well, it depends always on capacity available on the market, demand, and offer in general. What we can see as we speak is a quite strong pricing situation or environment both in America and Europe. America, I would say is more or less usual. It's more or less strong, but it's always good. It fits well with the market situation. Europe is more unusual, it was good news to see a much better pricing in Europe. Asia is slightly down. Not down. It's still positive pricing, but the pricing is less strong than in the past. It comes from China in particular, but we still enjoy a positive pricing in merchant. There's no reason to see a fundamental change in pricing as we go, at least in the first half of this year, and more generally in 2019.
We are confident that the pricing is going to be good this year. When we look at the loading of capacity in merchant in particular, and when we look at that over the past 5 years, we've improved significantly the loading of our plants by 600 or 700 basis points. six percent or seven percent of loading, which is, I think, a good sign that the pricing may remain where it is today.
Great. Thanks very much.
Okay. Next question.
We will now take our next question from Martin Rüttger from Kepler Cheuvreux. Please go ahead.
Yes. Thank you for the opportunity to ask questions. First, on the very strong comparable sales growth in electronics in Q4. I would like to get a better understanding on that. You mentioned strong growth in E&I. Was there any other reason behind the strong comparable sales growth? Do you think there was some business shifted from Q1 2019 already into Q4? If so, can you quantify that effect? The second question is on the delta between the operating recurring income and the reported EBIT. On the full year, that was a -EUR 162 million. I think that the market has expected only -EUR 30 million because of the first half. What is the remainder to come up to this EUR 162 million burden? Is there any link from these one-time costs to the announced increased efficiency savings of EUR 400 million in the year 2019? These were my questions.
Okay. Thank you. The first question, I might ask Mike actually to cover your first point, because it relates both to the business environment in Americas, which today represents 40% of the group, also relates to electronics. Mike is actually supervising electronics business worldwide. Mike?
Thanks, Benoît. I guess a couple key points. From an electronic standpoint, we continued to see a ramp across all the key businesses in electronics throughout the year. The performance in Q4, clearly, the E&I portion was very significant and a significant contributor to our results. We also saw a clear strength in both carrier gases and in advanced materials. Both carrier gases and the advanced materials piece ramp. We saw a significant uptick in carrier gases with startups and ramp-ups in Singapore. We saw it in Taiwan, we saw it in China. We actually saw it in Japan as well. We also saw in the advanced materials business significant double-digit growth in the quarter with a rapid uptick in Taiwan. We saw a rapid uptick in China, significant growth in Korea as well.
I think this exemplifies both the continued advancement in the advanced technology nodes as they ramp up among our customers. Also in terms of the development of 3D NAND and its significant growth in the portfolio of memory. That is utilizing both our advanced materials and also for the 3D NAND as you begin to look at the uptick in our N scribe gas offer, which meets the technological needs as well as the sustainability needs of our customers as well. I think it's all of those things that combined. We continue to see that growth continue to be leveraged as we move into 2019. We all see the statements by the various companies. We know that there is some deferral of some projects, but we still see very significant spend and expect production growth in the 2019 timeframe as well.
On top of that, if I may, Mike, when we look at the portfolio of Air Liquide, we actually have significant majority of our portfolio with 10, seven top customers. The predictability that we may have on those customers is as good as the good dialogue we have with them. It's not just spread across the board. It's something that is well understood, and we have a very good discussion about not just the near term, but the mid to long term with them. This is why we think that the electronic segment is actually here to contribute significantly to growth the way it did last year, and it will in the future. The second question asked last year, Fabienne.
Your second question was about the non-recurring operating expense by EUR 162 million. In there, you would find a cost for realignment plan for EUR 65 million approximately. You're right, this is contributing today to our efficiency program and will continue to contribute in the years to come. What else do we have in there? We have approximately EUR 30 million of cost linked to the Airgas acquisition and integration, including the cost of the retention LTI plan that we implemented for the top management of Airgas. We have approximately EUR 30 million of provision for political risk, and that in particular include EUR 20 million linked to the exit of Iran. We had a few engineering contracts that were going on in Iran, following the sanctions, we had to close those contracts, that had a cost. We also have a small provision for hyperinflation in Argentina.
The rest of it is miscellaneous item, including acquisition cost, including the special bonus we had to pay to French employees following the recommendation of the Macron government. These things are non-recurring. I would say what is recurring is really the cost of the Airgas retention plan and the realignment plan. For next year, we should be more in the EUR 100 million range or under.
On this line, all together.
On this line all together, non-recurring operating expenses.
Thank you.
Thank you. Next question.
We will now take our next question from Theodora Joseph from Goldman Sachs. Please go ahead.
Hello. Good morning, Benoît and Fabienne, for taking my questions. Two, if I may. The first was more on your onsite growth outlook. You talk about having more than EUR 300 million in growth for the large industries in 2019. I was wondering if you can talk us through the risk to that number, and also potentially clarify the comment you made around the delayed startups and contract dispute related to the Fujian plant. My second question is more on the macro. The latest macro data points have come in quite weak, and your business model tends to be later cycle. Just wondering where you see the greatest risk in 2019. Thank you.
Globally, I would say that the startup ramp-up should actually deliver what we've planned in principle, because this is well known. Most of the plants, if not all the plants, have already started up, and a small ramp up. In any year, the ramp-up is bigger than the startup. Plants are running. The risk should be limited. There's one in this number, which is the Fujian plant. I think Fabienne explained what the situation was. Let me just come back a second. The plant is up and running. This is a big plant. The efficiency is there. All the performance tests have been completed satisfactorily. The customer is taking the product. We have started the invoicing in December, and in the EUR 300 million, the Fujian impact is included for the year 2019.
There are still discussions with the customer on terms and conditions of the contract, which is the delay that we are talking about. In principle, on paper, I would say the plant is there. It's running. The product is in the pipeline. The customer is consuming product. Discussions will go on. Any other type of risk, macro risk that we may see in 2019? Of course, the Chinese situation, number one, as a domestic economy, and number two, as a power, an economic power in the world, in particular in its trade and relationship with the U.S., are risks. Even if the growth in China, the domestic growth, is slightly under what it was last year, it's still pretty strong.
With a 6.5% or six percent last year GDP growth in China, Air Liquide was able to grow by at least two times this number, though we have a leverage actually, in a country like China. Why? Essentially because China is developing high technologies. It's catching up in many fields. Mike mentioned electronics, but it's also true in the more usual applications. I can tell you that our innovation center, which was opened a year ago, is doing very well. A lot of customers are visiting it, and we are signing many contracts as a result of that. China is not just one or two single segments. It's all across the board that this country is offering us a lot of opportunities. The trade tension or war between the U.S. and China, we have not seen any significant impact so far.
It might happen, it might be worse, we are more cautious than concerned, to be honest, at this stage. We still think that domestically and also with the exports out of China, the opportunities will be there in 2019. The rest of the world, honestly, we see geopolitical risks in nearly all countries. So far, to be honest, we have not seen any serious impact on the business. This is why we are starting the year being confident in the economy, at least for the first half of this year. The second half is probably a little bit too early, but all in all, it should be a good year for growth for Air Liquide.
That's very helpful. Thank you, Benoît.
Thank you. Next question.
We will now take our next question from Markus Mayer from Baader Helvea. Please go ahead.
Good morning, Fabienne. Good morning, Benoît and Michael. I have also three questions. The first one is, again, on the outlook. After this record 2018 year, so far no significant impact on the demand from trade war, why have you only kept your dividend flat? Does this indicate your caution in 2019 or 2020? Additionally, could you also explain the assumption, the outlook of this comparable environment? Does it mean you expect basically the same environment than we've seen in the record year 2018? That's my first question. Second question is on this additional EUR 100 million synergies. Maybe I've missed it, but could you help me on the retention rate and what are the costs of this additional EUR 100 million efficiencies? Also provide inflation assumptions for 2019, in particular on the personal costs.
Lastly, as you're among the strongest companies for gases demanded by refineries and also for enhanced oil recovery and this just for the oil industry, do you already see a negative impact from the lower oil price, or do you expect us to see this year? Thank you.
I'll take the first one. I ask Fabienne to cover the second one. Maybe Mike, just to share the burden, take the third one, if I may. The dividend policy must be looked at not just on the value of the dividend, but the amount of money of cash that we distribute. It's important to remember that the distribution is the multiplication of the dividend by the number of shares. When we increase the number of shares by giving a bonus share, we definitely increase the future distribution. That's the distribution that we look at more than just dividend. I think the fact that we announced a bonus share for October this year will implicitly increase the dividend next year, I mean, under normal assumptions. So we implicitly pass on a positive message on the outlook and on 2019, but also on 2020.
Otherwise, we would not decide to distribute one for 10. Every time we have a one for 10, if we don't change the dividend, the face value of the dividend, the following year, we increase distribution by 10%. I think that's the real answer to your question. It's more a distribution policy than just a dividend policy.
Okay.
That's my best answer to your question. It's not linked to caution. We also have to look at the payout, which is a very important parameter when we decide. The payout today is 55% on that basis this year. We tend to say that long-term and on the average, a payout of 50% is fine. We are already above, we just need to take that into account when we decide each and every year what the distribution of the year should be. That's my best answer to your question.
Could you also maybe comment on the comparable environment?
The additional EUR 100 million efficiency, Fabienne?
Yes. As I explained, approximately 50% of the efficiency will come from the inclusion of Airgas in the program. A lot of this efficiency at Airgas will be costless. It's more extending the Air Liquide procurement program, some of the Air Liquide optimization processes, so it should have a very limited cost. On the Air Liquide side, we will continue to mutualize our back offices. That, of course, has a cost which will be covered in the non-operational expenses in the restructuring cost, but it should not inflate what you have seen in the last two years. In terms of retention, you know that historically our average retention has been 30% for the efficiencies. We have the objective to progressively increase this rate.
You know that it is very dependent from the inflation assumption, because when we have a lot of inflation, usually it takes a little bit of time to adjust the pricing and therefore we use some of our efficiencies to fill the gap, and then the retention is under. When the inflation goes down, we have a good chance to have a retention which will be higher. In terms of inflation, what we plan for 2019 is something under two percent for Q1 and a little bit more for the full year, closer to two percent.
Thank you. Mike, on oil price?
I think in terms of oil pricing in all of our parts of the business that touch oil, I think first of all, just from a refining standpoint and the continued uptake of hydrogen in the refining process, that's been very strong, and we continue to see a lot of strength in terms of refining and the uptick on hydrogen. In terms of, I would say, the oil well services piece, the liquid nitrogen into the fracking space, that's been low all year with lower oil prices, especially up in Canada. That's had somewhat of a year-over-year impact there. The reality is, I think all of the players in the fracking space have continued to develop technology and efficiencies and drive. At $50 or $55 oil, especially in the U.S., we continue to see rapid growth in hydraulic fracturing and the development of everything around it.
We've continued to go ahead and see the equipment supply into that space continue to grow. Within Airgas, all the markets have been strong throughout the year. In the Q4 , there was a slight decline in the energy and materials market, somewhat may be affected by oil price, offset by a very significant increase in continued construction activity for pipelines, as well as power plants, and also the continued ramp-up of chemical investment and spending associated with construction activity. Overall, I think we've seen continued growth and evolution despite the fact you may see oil prices down at $50 or $55.
Okay. coming back to my first question.
Thank you. Next question.
Does it make sense?
We will now take our next question from Andrew Stott from UBS. Please go ahead.
Good morning, everybody. Thanks for the presentation. Thanks for taking the question. It was mainly coming back to the first question on margins. I wanted to ask it in a different way. If you look at the construct of the P&L, you've done an incredibly good job on the fixed cost side. Both your selling costs and your, what you call other, which I guess is the rest of the central cost, is down 60 basis points as a ratio to sales. Where you've struggled in terms of coping with energy cost inflation, but also clearly other inflation is COGS. Your COGS year-on-year are up 150 basis points almost as a ratio.
The question is: as you look into 2019, how much of that variable layer of costs do you think could come down, not just because of the oil price but maybe other pressures? Do you think that you've got another sticky year in that area overall? Thank you.
I think Fabienne will answer that question.
Well, it's true that our COGS year-on-year are growing quicker than sales. You have the but this is also a in sales, so this is not really an issue. As you know, most of it is pass-through. The second component is the mix of businesses. When you have a very good performance at Airgas, when you have a very good performance in equipment and installation, the purchasing part, the purchasing component is much stronger than for businesses like the sale of oxygen, for example. This is inflating our purchases, as you can see in the continuum. That's why we have purchases growing quicker than sales. This is going to be very dependent on the mix of business. On top of that, you have the recovery of E&C, the very strong growth of GM&T.
There again, you have two businesses which have a margin, as you know, which is lower than the average of the group. E&C was still losing money in 2018 for the full year, even if we were positive in H2. Global Markets & Technologies has a margin which is quite volatile. As for innovative activities, which is more in the eight percent-nine percent range. When we grow this business, and this is essential for our development and for our future, of course, it has also a dilutive impact on the margin. Of our Gas and Services business line, we have a strong increase. There is a mix of the products. When merchant goes up very rapidly, you know that merchant has a lower margin than large industry, so it has also an impact.
On one side, you have the improvement in each geography and each business line, and then you have the mix that plays quite a lot in the compounded margin at the group level.
Thanks for the input, Steve.
I'll say an additional word, if I may. This is absolutely the reason why in 2018 you have this analysis of fixed cost on one hand and cost of goods sold on the other. That being said, independently from the business mix, that will be what it is, part of the EUR 100 million of additional efficiency will be targeted on those costs where we can act. I think if we did a good job on the fixed cost so far by maintaining G&A and the structural cost at a low level, even though there's always things to do, we know that. Part of our target for the new boost in efficiency program will be around cost of goods sold, and this is where we think we have a bigger potential. There's further to come.
Thank you.
Thank you. Next question.
We will now take our next question from Patrick Lambert from MainFirst. Please go ahead.
Good morning, everybody. Thanks for taking a few questions. First one is more related to CapEx and opportunities of EUR 3.1. Will it be possible to get a split between large industry, electronics, and others, a bit more granularity on where this EUR 3.1 will go, and the outlook for CapEx for 2019? First question. Second question, regarding corporate costs, which were a bit bumpy, a bit higher in H2, and you cited the R&D and the digitalization impact. How could we forecast 2019 in terms of corporate cost? Is that largely done, or you see that a bit more sustained into 2019 in terms of R&D spend? Third question about IFRS 16. I haven't seen any. Maybe I haven't read everything, but have you commented on any impact of IFRS 16 in 2019? I think I'll stop there.
Okay, thank you. I think Fabienne is going to take most of the questions. Fabienne?
On the EUR 3.1 billion, we will talk about the split between the business lines. 50% is large industry. It is the bulk of it. As usual, more than 50%. We have around 50% in industrial merchant, with various projects around the world and investments at Airgas. Electronics represents 15%, which is quite a lot. It is more than the stake of electronics in the total group sales. In terms of CapEx or payment on investment, what are we going to see next year? We are going to see an increase, of course. We should stay in the 10%-12% of sales range, but more to the top of the range than to the bottom. Corporate costs, do you want to continue?
Yes.
On corporate cost, clearly, we will continue to increase R&D on digitalization. We are spending more in R&D and innovation than our competitors. It is part of the very specific strategy of Air Liquide. This is going to continue. Digitalization is also essential to the development of our customer base, but also to the improvement of our COGS and on the development of efficiencies. We are digitalizing a lot of process. This is also contributing to efficiency. H2 was-
Could we wind, wait. Sorry
kind of high growth for those two expenses, we should come back more to the average of the year that you've seen for year 2020. In terms of IFRS 16, in the appendix, you have the explanation of the main impact. The impact on the debt is going to be quite strong, between EUR 1.3 billion and EUR 1.5 billion. You know that the leasing cost will be replaced by depreciation and financial cost. It should increase our EBITDA before depreciation by approximately 100 basis points. You'll have a consequent increase in the depreciation, an improvement around 10 basis points should be visible at the operating profit level, you'll find the resulting increase in the financial expense. We should have a negligible impact on the net.
For the debt, it's not an issue for our rating, as the rating agencies were already taking those adjustments into account. It will increase the net debt as presented in the balance sheet.
Just an additional comment on innovation, if I may, because it relates to corporate costs. Innovation, it is true that in the past five years, nearly 10 years, if we include the U.S., we have renewed or we will have renewed most of our innovation centers. We started in 2007 with Delaware Innovation Space, we had Shanghai. We created a new one in Shanghai. We renewed and integrated our main innovation center in Paris-Saclay, last year. This year, we are going to commission the Japanese one, which moves from Tsukuba to a new Yokosuka place. We still have one in Germany and one in Grenoble, which are two smaller development centers that will be renewed. In 10 years, we would have renewed all the innovation systems of Air Liquide. Going from R&D, purely R&D, to more innovation with startups and ecosystems.
This is a major effort. It had a cost. Not that we have increased the OPEX significantly, but we have what we need now to really work well for the next 10, 15 years. That's point number one. We are really very proud of it, and we think it's really essential for the years to come. The second point is digitization. We are spending more OPEX today than we are generating savings, but it's coming. The SIO, the Smart Innovative Operations program, is bringing fruits already. It has been implemented in France, in Asia, both in Shanghai and in Kuala Lumpur, it's work in progress in the U.S. I would say that in less than two years, we'll have the significant benefits of this digitization of Air Liquide as a group on the assets, on the customers, and on the ecosystems being really implemented.
What you see today is a cost, but it's more an investment, and what will come is more innovation and more savings, thanks to digitization. It's a little bit patient money that is invested, but we are pretty convinced that it will really bring the savings that we are expecting in the years to come. Mike wanted to add something.
If I could just add one thing in addition to the benefits from a digital standpoint and the long-term benefits from R&D, just as one example. I mentioned advanced materials earlier. If you go back 10 years ago, that was nothing in our portfolio, and today is a very significant driver of our electronics business. The spend, the opening of the RTC in Delaware, the continued evolution in Tsukuba in Japan, have directly contributed to the advances that we've been able to develop technology-wise to develop these molecules that are now basically cornerstones in the technology roadmaps of the key players in the integrated circuit space. I think it's one clear example where we take that R&D spend and we more than monetize it in terms of creating new businesses and profitable growth.
Thank you, Mike. We have a few questions. We'll try to be very short and please ask one question, not several, if you can, so that we can cover most of them before the end of this conference. Next question?
We will now take our next question from Neil Tyler for Redburn. Please go ahead.
Yeah, good morning. I'd like to circle back to the margin development in the gases business, please, and ask two questions related to that. Firstly, an interpretation question. Is it right to, given your previous comments, to look at the margin development as underlying improving by somewhere between 40 and 50 basis points? The mix effect, perhaps removing 10 - 20 on a year-on-year basis. The second related question, when we talk about the extended efficiency program. Historically, you've always framed the objective of those programs as being with efficiencies in pricing in aggregate to offset cost inflation. I just want to ask if that's still the case and the EUR 400 million really largely reflects a larger overall cost base or are you now targeting a larger net saving gain over the next few years? Thank you.
Thank you. Very clear, Fabienne.
Yeah. Is the improvement of the margin 40 - 50 basis points underlying? If you look at Americas, if you look at Europe, we have effectively delivered a 50-basis point improvement. You see that Asia is decreasing, and this is clearly a mixed effect. The Africa, Middle East is a very special event that we won't find for the years to come, but it's not creating that much on the group margin. We have E&C and GM&T that we already discussed. I think, yes, it's fair to say that the underlying is stronger than what you see at the group level.
The efficiency program is used to compensate the gap between inflation on cost and inflation on price. That has been the case over time, but over time, we have also managed to retain part of it to improve our margin, our long-term margin improvement between 20 and 30 basis points, partly due, or partly the consequence of this efficiency program, and this is going to continue. As I said before, the objective is, of course, to have the maximum retention every year. The average over time, I think, has been around 60%. We have a strong objective to increase that. Once again, it will depend on the inflationary context of one year to another.
That's helpful. Thank you.
Okay. Next question.
We will now take our next question from Chetan Udashi from JP Morgan. Please go ahead.
Yeah. Hi. Very two quick ones. One is on FX. Any early read on how you think FX impact will be for maybe Q1 and 2019 in total? Second question is, can you give us some sort of a flavor of how much is electronics part of the $300 million plus start-up revenue in 2019? Thank you.
Fabienne, Forex impact.
Well, the.
'19.
Yeah. Forex is always pretty difficult to predict. What we anticipate, in Q1, is to have a flattish Forex, more or less. It's what we see right now in the operation. For the full year, we anticipated still a negative Forex between one percent and two percent, but honestly, I don't know. I think for Q1, we are probably quite right. For the rest of the year, what we have in our budget is between -one percent and -two percent, but I can't guarantee-
Did you say flat for Q1?
Fabienne, do we split the expected additional sales coming from start-up, ramp-up by business line normally? No?
No, we don't.
Electronics, I have not in mind the new.
Electronics, we know the contribution of start-up and ramp-up in Electronics to the $300 million is strong because you have a lot of start-up. It's in the $80 million range.
Okay.
Thank you.
We don't give those numbers, but of course, we look at it that way.
We'll make an exception this morning. Fine.
Okay. Next question.
Thank you very much.
Last one.
We will now take our next question from Peter Clark from Société Générale. Please go ahead.
Yes. Good morning. I made it again. Thank you. Just want to clarify, you said obviously no significant impact on sales. Firstly, that there has been no significant impact on the sort of bidding activity. Secondly, really for Benoît, in terms of responsible growth and reducing the carbon intensity. Just wondering, does that mean it takes you really out of future Chinese gasification projects now unless there is carbon capture with them? Thank you.
The bidding activity actually is good. I just explained that in the 2018 decisions, we had 40% in Americas, 40% in Europe and 20% in Asia. What is pretty sure in terms of impact on sales, not necessarily this year, but the following years, is that Asia is going to remain strong because of the Electronics segment. I'm pretty sure that North America is going to be very strong because we have already a significant number of existing customers or new customers coming to us and to the industry, talking about new projects they have. The timeframe for those projects is totally different from the sort of short-termism that we have to face today. We are looking at 2019 and 2020, and our projects are actually starting up in 2022, 2023.
When we look at this five-year time horizon, we are very confident that the bidding activity will translate into sales. If Mike can add anything, I think that can illustrate what I see both in the Electronics and U.S.
I think that, looking at Electronics, clearly we signed nine carrier gas projects already this year, or I should say last year. Clearly that's going to continue to ramp up and continue to grow the business primarily in Asia and somewhat in the U.S. as well. That's very clear. It's very significant. As you know, those ramp-ups occur a lot quicker. We don't need as long of a lead time there as we do in the typical Large Industries project. In Large Industries, especially looking at the Gulf Coast, we have start-ups that will be coming on certainly in 2020 and 2021. There's a number of new projects that are in process and project development as we speak.
We are clearly very deep, as I mentioned, at the end of the Q3 , into that second wave of chemical business development activity. We see it all throughout the Gulf Coast. There's no doubt there will be continued opportunities for growth there.
On your second question, it's clear that there's a link between gasification and CO2 emissions. I mean, this is just a fact. We are now engaged in a more responsible growth. We will look for each and every new investment at the emissions situation. We will take that new emission into account when we decide. Doesn't mean in practice that we will be necessarily out of gasification business, but we will think twice before we engage into a new project. It's, by the way, rather long-term because anything linked to CO2 is actually 2030 or 2050. It's really long-term. That being said, we make a link between gasification and responsible growth. We are not necessarily going to jump on every single gasification project in wherever it is, China or elsewhere in the world.
We are committed to carbon intensity reduction by 2025. We will do what is necessary to meet the objective, including being more cautious on gasification projects. That's the best I can say as a system. I think we are reaching the end. I don't think we can take any more questions at this stage. We're sorry, but there will be further discussions between the teams, Fabienne and Aude, and the analysts and investors. Feel free to come back to us later in the day in London and in the following days, wherever we are. Thank you very much. Conclusion is that 2018 was a good underlying year, the best since 2011. I think we are well prepared for the future years. Airgas is behind. We can now boost our efficiency program. We can grow.
We'll be combining all those components to deliver a sustainable, profitable, and consistent growth in the years to come. Thank you very much. Have a good day.