Good morning, ladies and gentlemen, and welcome to Air Liquide 2018 Results Conference Call. All participants I will now hand over to
Good morning, everyone. This is Claude Rodriguez, Head of Investor Relations. Thank you for joining today's conference call. Benoit Pozzi will present the highlights of the year and Fabienne Luka Vazier, the 2018 performance and the outlook for 2019. Mike Graff is also with us and he will participate in the Q And A session.
Our next announcement for quarter 2019 revenue will be on April 23. Let me now hand you over to Benoit.
Thank you, all. Good morning to everyone and thank you for being with us for our fiscal year, figures. The agenda this morning will be around 3 themes first to growth and the qualification of growth. Which is a profitable, consistent and responsible growth, and I will cover that. Fabienne will come back in details, on the performance and show you how solid performance is.
And we'll talk about the outlook and, of course, be ready for questions and answers. I'll start with Slide 4. I just, look at the highlights. If I start with the growth, and sales growth in particular, this is the highest growth since 2011. And as a matter of fact, Also, the fourth quarter of last year was the best quarter of the year.
We are today in terms of growth rate above top of the NEOS subjective range, which, if you remember, was between 4% 6%, just slightly above 6. If we look at the operating income recurring, there's a continuous improvement in the margin ratio with a third basis point improvement. And 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 change during the year, and I'm sure Fabienne will come back to, to that point.
So this is very much in line with MEO's target of being above 10% in 2021, 2022. And 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, and signings in And we also had many opportunities to invest in GMT, the deep tech portion of our portfolio, to open in particular a new innovative market. 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 and services enjoyed a pretty good and robust growth in the first and the second half of last year.
And if we split this growth of 6% between the different business lines, industrial margins would bring 2 points. Each of the other business lines making gas and service, the large industry electronics and health care would each bring 1% more S. And the remaining 1% would be equally split between E and C and GMT. So 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 the first half of twenty nineteen.
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. But as of now, we have seen no significant impact on our sales. So yes, we are cautious, but we still think that the outlook for 2019 is good.
And when we look at the right part of the side, market by market, you can see that in large industry, in particular, chemicals and oil and gas are actually, post seeing good prospects for the first half. So we are pretty confident. In I'm 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 first half of this year. And the electronics, in particular, the ICIN integrated circuit.
Part of the business is doing very well. You'll see the numbers in details with Fabienne in a minute, but the fourth quarter of was really an excellent one and the prospects for this year are still very good. Page 6, when we look at the performance, more down to the P and L, talked about 30 basis points, including energy for gas and services margin ratio. When we look at the net profit would probably remember that last year, we had a tax impact in the U S that we precisely quantified at 107 to EUR 1,000,000, if I remember correctly, particularly around EUR 200,000,000. If we exclude that, we have a net earning recurring base.
And on that basis, the profit grew, 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 69%. And it's quite an achievement when we look at the Airgas acquisition, what we did after the capital increase in 2 years, we actually brought back debt to really a normal level.
And the return on capital employed is as published at 8%. 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. So page 7, it leads us to make a proposal to the shareholders to actually grant another bonus share 1 for 10 in October this year The last one was in 2017. In 2017, the dividend was also increase from $2.60 to $2.65, which then as a matter of the bonus share led to a vision increased by 12% in 2018, cash wise. So we have decided to go back this policy of granting a new bonus share, 1 for 10.
At the same time, we maintained a dividend at 2.65 to share. The payout is now at 55 percent in 2018, but we have not changed our dividend policy, which is a regular distribution, of dividends. When I'm back page 8 to investments because this is the preparation of the future. 2018, 2018 was really a record year in terms of decision. We were above 3,000,003.1 exactly.
You have on the map a split in the different geographies between America 40 percent, essentially oil and gas and chemicals in the Gulf Coast. But also one important decision in in the 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. And Asia, you would see that it's mainly electronics where the market is still investing significantly. And 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 key basins because this is where the added value to customers is at the top, but also the economics better because we have the existing base to rely upon. The second gig orientation is to position ourselves in growing markets. This is through in so called developing economies, thinking about East Europe in particular, but it's also true in electronics. I mentioned that in Asia, and we are trying 3rd to open new innovative markets.
And my reference to the Hydrogen Liquifier was related to GMT particular, but we'll also continue our investments in biogas. So the focus for 2019 will be on the neos objectives, in particular, on growth. Our growth needs to be profitable. It needs to be consistent. Needs to be responsible.
Profitable, I think we have just described how we invest, where. We also intend to strengthen our efficiencies. Fabienne will give you the details in a minute. Essentially, we'll increase our program, our yearly program of efficiency from EUR 300,000,000 to EUR 400,000,000. It's possible because now Airgas has joined the group.
The synergies are more or less behind us, and it would be possible to integrate Airgas to the efficiency program of Air Liquide, and we'll keep our focus on return 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 And finally, because we published our climate objective in 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 half of this engagement.
So this is what I wanted to highlight. I will now hand over to Fabienne. Fabienne?
Thank you. Good morning, everyone. We'll now review the detailed figures. Gas and services sales up 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 year of recovery for engineering, thanks to a stronger order book, even if operating profits only came back to positive in the and part of the year. At the same time, you see that Global Markets And Technologies, which gathers our most innovative products and services, were close to 30% up. As a result, mentioned by Benoit, group sales at 1,000,000,000 are up 6.1%. The growth pace that we have not seen since 20 11. We, of course, continue to watch closely the macroeconomic indicators and in particular, the industrial production evolution.
As mentioned again by Benoit, most of our markets remain very well oriented and the trend we observe in Q3 continued in Q4 with a stronger pricing effect. 4 versus the year before, resulting in a minus 3.6 negative impact for the full year, slightly softer than what we we anticipate. Funds of studies, the energy price showed a higher increase in Q4 at plus 2.4%, so full effect for the year at plus 1.3%. You remember that due to the past 2 energy closes in our large contract, the higher price of energy increases published still, but does not impact profit and therefore creates mathematical deficit in the published operating for fixed sales ratio. Growth has again been strong across geographies and business hours in Q4.
I would like to mention Americas at 6% including a very solid performance at Airgas, developing economies at +13 percent, driven by China, Turkey and Latin America America and the acceleration in Asia at +9 percent. In terms of business lines, merchants and the recurring progression clearly been above the historical average in Q4. Development of the big business, in other words, the growth, excluding startups and ramp ups as well acquisition has been exceptionally strong throughout the year, notably in Q3 and in Q4 at plus 4.5%. Let's now go a little deeper in the geographies to comment the Q4 activities. Americas, our largest zone is up 5% for the full year, and then improving quarter after quarter.
Q4 was up 6%, thanks in particular to high growth in Industrial Merchant, above 5%, with a strong activity in all countries, including the U. S. And Canada, supported by bulk, on-site, and package sales. Launch of new offers and active pricing companies. The electronics, up more than 20% was also standing with very strong advanced materials and equipment and installation fees to our major customers.
In Europe, the full year growth was at 3%, with a slight slowdown in Q4 due to hydrogen turnarounds in Large Industries. Digital Merchant remains strong, close to 5%, benefiting from stronger volumes, in particular to Professionals and tail and improved pricing at plus 2.6% in Q4. The skier grew more than 5%, driven by home health care volumes in diabetic environments. Asia at +8 percent for the full year has been rooted by activity in China and in electronics along the in Q4, large industry benefited from 3 startups, including Fujian. Merchant continued to be strong in China, despite the pricing effect load, I will, and solid in Australia.
Only Japan, it decreased like electronics was particularly strong in Q4, above plant with gas sales at 1st Quarter 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 SASful South Africa. Apart from that, in Q4, we had a solid level of merchant activity in the Middle East, Egypt and India, while still in last year was a good by our in around 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 3.3% in Q4. Ed markets are well oriented and mostly driven by fabrication as well as technologies and research and professional. Large Industries is supported by startup and ramp ups, strong and steady demand for Airgases in Europe and Asia, as well as hydrogen demand in the U.
S. Main variations from 1 quarter to another come from turnarounds or incidents, penalizing, right, sample our Q4 by more than 2%. Healthcare benefited from the expansion of home health care in all of our markets, 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 segment of and Q4 has been particularly strong with caries at +9 percent, Advanced Materials at plus 6% on the equipment and percent, while we continue to sign new contracts in the U.
S. And in Asia. Engineering construction as well as Global Market And Technologies were not only marked by high sales growth, but also by a further increase in the order take. Engineering ends up at 807,000,000 of orders with approximately 50% coming from the group and global market and technologies are EUR 460,000,000, a record, driven by Advanced Cryogenics and biogas. If we look now at the Performance Evolution, we see that plus 3.3% as published, purchases are up more than 7% in connection with the increase in energy pricing and the mix of activities.
Personal expense and other expenses show conversely a very modest increase, thanks to efficiencies and site management of spending. In fact, at group level, headcount growth, excluding scope, less than 1%. Amortization is slightly down due to the ForEx and also we expect the renewal of several contracts linked to existing assets in our main industrial base. 3rd, our operating profit recurring at EUR 3,450,000,000 is showing a slight positive leverage excluding energy impact, 10 basis points at the group level. As you know, despite some recovery in the 2nd semester, the operating fit for engineering and construction remain negative for the full year.
Improvement is therefore stronger for Gas And Services with operating margin to sales at 8 0.6% excluding energy, progressing 30 basis points in line with our new subject. We are pleased to announce that the gas synergies are about to be fully delivered. We were at at the end of December, the $300,000,000 are reached more than 1 year head of CDS. Cost synergies at more than 2 $30,000,000 already exceeded initial forecast and the revenue synergies continue to ramp up. However, we are now switching to run mode with no further follow-up or synergy, but the inclusion of Airgas into our Air Liquide Efficiency Program.
In terms of efficiencies, we are also better than the objective at 1,000,000 for the year, including a first contribution from Airgas, amounting 1,000,000. Industrial Merchant remains accounting as a first contributor with more than 1 third of the total efficiency. The group level, Industrial And Logistics program, delivered 50% of the synergies, procurement program, 50% 3 themes around, energy optimization, digitalization, and mutualization of back offices and reorganization account for 20 days. As explained by Benoit, 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 NIO's return on capital employed objectives. So from now on, the yearly minimum objective will be EUR 400,000,000 per year of sustainable cost savings.
50% of the increase will come from the extensive inclusion of Airgas in the program, and 50% will come from more and mutualization of assets and back offices as well as from enhanced leverage on digitalization in the allocated legacies. Finish with the P and L, net profit recurring is up 4.2% as published and close to 9% excluding ForEx, showing a leverage to this growth. Nonrecurring operating income and expense at minus 1,000,000 include costs linked to pursued integration of Airgas and to reorganizations around the world as well as provisions to cover exceptional geopolitical. The decrease in financial costs is linked to an exceptional gain recording in Q1 following the reorganization of the U. S.
Debt, but also to current management. And from the aggressive reimbursement of the Airgas pre acquisition debt. Excluding exceptional gain, average cost of debt for the full year does 3%, down from 3.2 percent last year. Would you also like to comment the income tax rate at 29 at 24.9%, the 3% decrease last year. In fact, 2% is coming from the U.
S. Tax reform and 1% exceptional items like the impact on deferred tax of the tax reform due to New Zealand, for example. 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 as active work capital management. Net CapEx at 1,000,000,000 or 10.8 percent of sales, the balance of fuel CapEx, only slightly up to last year, lower financials and much lower divestitures.
Despite higher dividends and the negative EUR 236,000,000 for FX effects, net debt is down more than EUR 800,000,000 and even EUR 1,000,000,000 excluding 5. Year end gearing is now back to 39%, a very sustainable level, even the consistency of our cash The return on capital employed evolution is also aligned with the NEOS objective. The published return on capital employed is at 8 percent, but the improvement to last year is 60 basis points, excluding the flight to back, and we are still committed to come back to a sense and of course. Is, the global portfolio of projects to be decided in the 12 months is stable at Q3 level at 2 1,000,000,000, which means that projects awarded has been more than compensated by new opportunities, which is really good news. Decision at 1,000,000,000, the highest ever, benefited notably from a very high level of signing in our business for large industry.
For electronics, in particular, in China, I wanted to go for any new technologies for biogas and hydrogen mobility. We ended the year with 17 startups, 7 in Q4, including 3 significant projects China, and 1 in Singapore for a major electronic customer. Project backlog slightly up and reflects the acceleration of investment opportunity as the new project signed have more than compensated the increased number of start in Q4. Projects including this backlog, 1 ramped up, which generates approximately 900000000 of additional seats. The global 2018 contribution to sales of startup and ramp ups of new units is 1,000,000, 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 performances, the unit is running at capacity and the customer is offtaking the product. For 2019, our forecast for the startup and Rubber contribution is above EUR 300,000,000 and includes Fujian, even if these discussions are still ongoing regarding the commercial terms and condition of the contract. Therefore, we'll update you at the end of Q3 1. I will conclude by reminding you the highlights of the 2018 performance. Strong growth, continued margin and return capital improvement and acceleration of business development.
2019, we'll continue to focus on growth and operational excellence as well as on innovation. We will significantly expand our program and continue to reinforce our positions in the key industrial basins of the world. Therefore, assuming a comparable environment, we are in our session.
You. You. We will now take our first question from guttensheckmann from Bernstein. Please go ahead.
Hi, good morning, Gunther Sejman at Bernstein here. Can I start on the margins and development, especially in Gassen Services division that you disclosed 30 basis point improving excluding energy? Is there anything in there that's holding that back? If I look longer term through your history, And you've always guided to about 20 to 30 basis point continuous improvement in your operating margins. That you overachieved on the synergies from Airgas.
As you say, the growth is the strongest in 8 years. And should come with some operating leverage. So why would margins not expand? I know it's a greedy thing to ask, but why would they not expand more than those 20 to 30 bps historical run rate?
Thank you for your question. First of all, I would that 30 is at the top of the range. If we just look at the 2030s, in fact, there are always ups and downs but what we saw last year was the underlying improvement, which was pretty strong. So it's always difficult just look one period of time and say because we have X Y Z we need to measure business line by business line, and I would say geography by geography, where we are, And there were fundamentally more positives than, than negatives, when we have, as an example, a lot of E and I, we have, of course, margin ratios that are less mean, not as good as the average of the group. That is one thing There are always, also, I mean, geographies.
And when we look at the margin improved by geography, we can say that both in Europe and in the Americas, we could measure a significant increase in, 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? Point?
So scope is the small scope is always up or down. So it may play a role 10 basis points in general. And 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. So without going into many details, it's true that in Europe and America, we have the result of efficiency and synergies. In Asia Pacific, we had a lot of E and I, and the result was that the margin was at slightly down, but it's nothing to be concerned about.
And 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 And 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. So all in all, when we make the analysis, we had And we think that it's going to be there as we go. And we and when we add on this additional efficiency boost that we want to obtain at a group level of 100,000,000 efficiency per year.
So from 300 to 400, we think that the margin ratio is going to improve and to improve more in the high power arranged in the low part of the range. I hope
That's very helpful. Thank you.
Color on what was the achievement of the
Yes. 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 would say is more or less usual, it's more or less strong, but it's always good. And it fits well with the market situation. Europe is more unusual, and it was a good news to see, a much better pricing in Europe.
Asia is slightly down, or down, not down. It's still a positive pricing, but the pricing is less stronger than in the past. It comes from China in particular, but we still enjoy a positive pricing in March. We there's no reason to see a fundamental change in pricing as we go, at least in the first half this year and, more generally in 2019. So we are confident that the pricing is going be good this year.
When we look at the loading of capacity in March and in particular, and when we look at that over the past 5 years, we've improved significantly the loading of our plants by 6 or 7 100 basis points or 6% to 7% of loading, which is, I think a good sign that the pricing may remain where it is today.
We will now take our next question from Martin Rudiger from Kepler Cheuvreux. Please go ahead.
Yes. Thank you for my questions, or 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 and 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? And if so, can you quantify that effect? And the second question is on the delta between the operating recurring income and the reported EBIT on the full year, that was a minus EUR 162,000,000. And I think that, the market has expected only minus EUR 30,000,000 because of the first half. What is the remainder to come up to this 162,000,000 burden?
And is there any link from these one time costs to the announced increased efficiency savings of 400,000,000 in the year 2019? These are all my questions.
Okay. Thank you. The first question I'll ask Mike actually to cover your first point because it relates both to the business environment in America, as we today represent 40% of the group and also relates to electronics. Mike is actually, supervising and electronics business worldwide. Mike?
Thanks, Benoit. I guess a couple of key points, from an electronic standpoint, we continue to see ramp across all the key businesses in electronics throughout the year. The performance in Q4, clearly, the E and I portion was very, very significant and a significant contributor to our results. But we also saw clear strength in both carrier gas and in Advanced Materials. Both carrier gases and the Advanced Materials piece ramp, you saw a an uptick in carrier gases with startups and ramp ups, in Singapore, we saw it in Taiwan, we saw it in China, and 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 and significant growth Korea as well. And I think this exemplifies both the continued advancement in the advanced technology nodes as they ramp up our in growth in the portfolio of memory. So that is utilizing both our advanced materials and also for the D. NAND as you begin to look at the uptick in our enScribe gas offer, which meets the technological needs and sustainability needs of our customer as well.
So I think it's all of those things that combine and we continue to see that growth continue to be leveraged as we move into 2019. We all see the statements by the various companies. And 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.
And on top of that, if I may, Mike, when we look at the portfolio of Air Liquide, we actually have majority, significant majority of portfolio with 10, 7 top customers. So the that we may have on those customers is as good as the good dialogue we have with them. And so it's not just spread across the board is something that is well understood and we have a very good discussion about not just the near term, but the meat for long term with them. And this is why we think that the electronics segment is actually here to, contribute significantly to growth the way it did last year and it will in the future. The second question last, Fabienne.
So your second question was about the nonrecurring operating expense by 160 to 1,000,000. So in there, you would find a cost for realignment plan for Mackenzie. And you're right, this is going, this is contributing today to our efficiency program, and we'll continue to contribute in the years to come. What else do we have in there? We have approximately 1,000,000 of cost linked to the Airgas Acquisition And Integration, including the cost of the retention LTI plan that implemented for the top management of Ergas.
We have approximately 1,000,000 of provision for political risk, and that in particular include 1,000,000 linked to the exit of Iran. We had a few and contracts that were going on in Iran and, following the sanctions we had to, close those contracts. So that at the court, also have a small provision for hyperinflation in Argentina. Then the rest of it is miscellaneous item, including acquisition costs, including the special bonus we had to pay to frame employees following the recommendation of the Macron government, these things are non recurring. So I would say what is recurring is really the cost of the Airgas retention plan and the realignment plan.
So for next year, we should be more in the 100,000,000 range or or under?
On this line, altogether.
On this line, altogether, non rec operating expenses.
Thank you. Next question?
We will now take our next question from Tierra Joseph from Goldman Sachs. Please go ahead.
The first was, more on your on-site growth outlook. You talk about having more than $300,000,000 in growth for the Latin 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 start ups and contract dispute related to the Fujian plan? And 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 laser cycle.
Just wondering where you see the greatest risk in 2019? Thank you.
Yeah, globally, I would say, 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 it's more ramp up. In any year, the ramp up is bigger than the startup is, you know, plants are running. So the risk should be limited There's one in this number, which is the Fujian plant. I think Fabienne explained what, what the situation was. Let me just come back a second.
The plant is up and running. The big plants. The efficiency is there. All the performance tests have been the completed satisfactorily. So the customer is taking the product.
So we have started invoicing in the December. And in the 300,000,000, the Fujian impact is included for the year 2019 Now there are still discussions with the customer on terms and conditions of the contract, which is the delay that we are talking about. But in principle, on paper, I would say the plant is there. It's running. The product is in the pipeline and the consumer, the customer is consuming products.
Discussions will go on. Any other type of risk, macro risk that we may see in 'nineteen. Of course, the Chinese situation number 1 as a domestic economy and number 2 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.
And with a 6.5% or 6% last year, GDP growth in China, Air Liquide was able to grow by at least 2 times December. So we have a leverage, actually, in, in a country like China, why essentially because China is developing high technologies. It's catching up in many fields, might mention electronics. But it's also true in the more usual, applications. And I can tell you that our innovations which was open a year ago is doing very well with a lot of customers are visiting it, and we are signing many contracts a result of that.
So China is not just 1 or 2 single segments. It's all across the board that these countries are a lot second impact so far. It might happen. It might be worse, but we are more cautious than concerned. Be honest, at this stage.
And we still think that the domestically and also with the exports out of China are, the opportunities will be there in 2019. Now the rest of the world, honestly, we see geopolitical risks in nearly all countries, but so far, to be honest, we have not seen any serious impact the business. So this is why we are starting the year being confident in, 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 early.
That's very helpful. Thank you, Benoit.
Thank you. Next question.
We will now take our next question from Markus Mayer from Baader Helvea. Please go ahead.
Yes. Good morning, Fabienne. Good morning, Benoit and Michael. I have all three questions. The first one is, again, on the outlook.
After this record 2018 year, and we saw far as the so far, 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? And, additionally, could you also explain the assumption, the outlook of this comparable environment? Does it mean you expect basically the same environment than we have seen in the record year 2018.
That's my first question. 2nd question is on this additional 100,000,000 synergies. Maybe I've missed it, but could you help me on the retention rate and what are the costs of this addition 100,000,000 efficiencies, and also provide inflation assumptions for 2019 in particular on the personnel costs. And then lastly, as you're among the strongest company for gases, demanded by refineries and also for and has a oil recovery and this is for the oil industry. Do you already see a negative impact from the lower oil price, or do you expect this to see this this year?
Thank you.
Okay, I'll take the first one, ask Fabienne, the second one, and maybe, Mike, just to share the burden. You take the third one, if I say. 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. And it's important to remember that the distribution is the multiplication of the dividend by the number shares. And when we increase the number of shares by giving a bonus share, we definitely increase the future distribution So 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. And so we implicitly pass on a positive message, on the outlook and on 2019, but also on 20 Otherwise, we would not decide to distribute 1 for 10. Every time we'll have a 1 for 10, if we don't change dividend, the face value of the dividend, the following year, we increased distribution by 10%. I think that's the real answer to your question. It's for a distribution policy than just a dividend policy.
And that's my best answer to your question. It's not linked to caution, but we also have to look at the payout, which is a very important, parameter when we 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, and so we just need to take that into account when we decide each and every year what the distribution of the year should. That's my best answer to your question.
More 100,000,000 efficiency, Fabienne? Yes.
As I explained approximately 50% on the will come from the inclusion of Airgas, in the program. A lot of these efficiency at Airgas will be cost less. It's more extending the Air Liquide procurement program. Some of the Air Liquide Optimize processes. So it should have a very limited cost.
On the air ticket side, you to neutralize our back offices that, of course, as a cost, which will be covered in the nonoperational expenses in the restructuring costs, but it should not inflate, what you have seen in the last 2 years. In terms of retention, you know that historically, our average retention has been 30 for the efficiencies. Of course, 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 time of time to adjust the pricing and therefore, use some of our 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 attention, which will be higher.
In terms of inflation, what we plan for 2019 is something handled to percent for Q1 and a little bit more for the full year closer to
Thank you, Mike on oil price?
I think in terms of oil pricing and all of our parts of the business that touch oil, I think first of all, just from 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 fracing space. That's been low all year with lower oil price especially up in Canada that's had somewhat of a year over year impact there. But the reality is I think all of the players in in the fracing space have continued to develop technology and efficiencies and drive in a $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. So we've continued to go ahead and see the equipment supply into that space continue to grow. Within Airgas, all the market have been strong throughout the year. In the fourth quarter, there was a slight decline in the energy materials market, somewhat may be affected by oil price, offset by a very significant increase in continued construction activity for pipeline as well as power plants and also the continued ramp up of chemical investment in spending associated with construction activity. So overall, I think we've seen continued growth in evolution despite the fact you may see oil prices down at $50 or $55.
Okay. And coming back to my first question.
We will now take our next question from Andrew Stott from UBS. Please go ahead.
Yes, good morning, everybody. Thanks for the presentation. Thanks for taking the question. It was mainly coming back to the first question. On margins.
And I wanted to ask you in a different way. I mean, if you look at the construct of the P and L, you've done an incredibly good job on fixed cost side. So your 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 sales. Where you've struggled in terms of coping with energy cost inflation, but also clearly other inflation is COGS. So 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 the oil price, but maybe other pressures. Or do you think that you've got another sticky year in that area overall? Thank you.
Yes. I think by the end, we'll answer that question.
Well, it's true that on your outgoing quicker than sales. So, you have seen, but this is also a, fleet with sales. So is not really an issue. As you know, most of it is possible. The second component in the, is a mix of business 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. So this is inflating our purchases, as you can see in the India continuing. And 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 and C is a very strong growth of GMP.
And there again, you have 2 businesses, which have a margin, as you know, which is lower than the average of the group. E and C was still losing money in 2018 the full year, even if we were positive in H2 and Global Market And Technology as a margin, which is quite volatile as for innovative activities, which is more in the 8% to 9% range. So when we grow this business and this is essential for our development and for our future, of course, it has also a deal impact on the margin. So if you look at all of our, business line, we have a strong increase. Then there is a mix of the product.
When merchant goes up very rapidly, you know, that merchant has a lower margin than industry. So it has also an impact. So on one side, you have the improvements in each geography and each business line. And then you have the mix, that plays a quite a lot, in the compounded margin at the group level.
Thank you for the
additional word, if I may. This is absolutely the reason why in 2018, you have this analysis of fixed costs on one hand and cost of goods sold on the other. That being said, an independent key from the business mix that will be what it is, part of the 100,000,000 of additional agency will be targeted. Those costs where we can act. And I think if we did a good job on the fixed costs so far by maintaining G and A and the structural costs, 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 where we think we have a bigger potential. So it's further to come. 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, a 3.1 will it be possible to get a split between large industry, electronics and others, a bit more granularity on where this 3.1 will go? And the outlook for CapEx for 2019 First question. 2nd question regarding corporate costs, which were a bit bumpy a bit higher in H2.
And you cited the R and D and the digitalization impact. How could we forecast 2019 in terms of corporate costs? Is that largely done? Or you see that a bit more sustained into 2019 in terms of R and 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? And I think I'll stop there.
Okay, thank you. I think Fabienne is going to take most of the questions, Fabienne?
So on the on this 1,000,000,000, we'll talk about the, the split between the business lines. So It is a bulk of it, as usual, more than 30%. We have around 30% in industrial merchant with various projects around the world and investments at Caregas and electronics represent 15%, fifteen percent, which is quite a lot. It's more than the stake of electronics in the total group. 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% to 12% of sales range, but more to the top of the range than to the bottom. Copite cut. Do you want to continue? On copper cut, clearly, we will continue to increase R And D And Digitalization. We are spending more R and D and innovation than our competitors.
It's part of the very specific strategy of Air Liquide. This is going to continue. Digitization is also essential to the development of our customer base, but also to the improvement of our COGS and of, of, on the development of efficiency. We are digitalizing a lot of process on this also contributing to efficiency. It's too So the win rate.
Sorry. I, growth for those 2 expenses so we should come back more to the average of the year that you've seen for the full year 2020. In terms of IFRS 16, in the appendix, you have the explanation of the main impact. So the impact on the debt is going to be quite strong between EUR 1,300,000,001,500,000,000. Then, you know that the, leasing cost will be replaced by depreciation and financial costs.
So it should increase our EBITDA before depreciation by approximately 100 basis points point. And then you will have a consequent increase in the depreciation, an improvement around 10,000,000,000 points should be visible at the operating profit level and then you'll find the resulting increase in the financial expense. Then we should have a negligible impact on So on the debt, it's not an issue for our rating as the rating agencies were already taking those adjustments into account. But it will increase in net debt as presented in the balance sheet.
Just another comment on innovation, if I may, and because it relates to corporate costs. Innovation it is true that in the past 5 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 'seven with Delaware Innovation Center, And then we had Shanghai, we created a new one in Shanghai. We renewed and inaugurated our main innovation center in Paris, Saclaire last year.
This year, we are going to commission the Japanese 1, which moves from Tsukuba to a new Yokosuka place. And we still have one in Germany and 1 in Grenoble. Which are 2 smaller development centers that will be renewed. But in 10 years, we would have renewed all the innovation system 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 frequency, but we have what we need now to really work well for the next 10, 15 years. That's point number 1. And we are really, very, very proud of it, and we think it's really essential for the years to come. The second point is organization, we are spending more OpEx today than we are generating savings, but it's coming, the SIO, the smart innovative operation program is bringing fruits already It has been implemented in France, in Asia, both in Shanghai and in Kuala Lumpur, and it's work in progress in US. So I would say that in less than 2 years, we'll have the significant fit of the digitization of Air Liquide as a group on the assets and the customers and on the ecosystem being really implemented.
So what you see today is a cost, but it's for an investment and what will come is more innovation and more savings. So thanks to digitization. So it's a little bit patient, money that is invested. But we are pretty, pretty convinced that it will really bring the savings that we are expecting in the years to Mike wanted to add something. And if I could just add one thing
in addition to the benefits from a digital standpoint and the long term benefits from our just as one example, I mentioned Advanced Materials earlier. So, if you go back 10 years ago, that was nothing in our portfolio. And today is at a very a driver of our electronics business. And the spend, the opening of PRTC in Delaware, the continued evolution Sukuba in Japan have directly contributed to the advances that we've been able to develop technology wise to develop these molecules that are now cornerstones and the technology roadmaps of the key players in the integrated circuit space. And I think it's one clear example where we take at our the spend and we more than monetize it in terms of creating new businesses and profitable growth.
Thank you, Mike. So we have a few questions. So 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.
Yes, good morning. I'd like to circle back to the margin development in the gases business, please. And ask 2 questions relating 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 40.50 basis points and then the And then the mix effect, perhaps removing, 10 to 20 on a year on year basis.
And then the second related question, when we talk about the extended efficiency program, historically, you've always framed the objective of those programs for as being with efficiencies and pricing in aggregate to offset cost inflation. And I just want to ask if that still the case and the GBP 400,000,000 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.
Is the improvement of the margin 40 to 50 basis points underlying. If you look at Americas, if you look at Europe, we have effectively delivered a 50 basis point improvement. Then you see that Asia is decreasing and this is clearly a mixed effect. And, well, the Africa Middle East is a very special event that we won't find for the years to come, it's not creating that much on the group margin. And then we have E and C on GMP that we already discussed.
So I think yes, it's fair to say that the aligning is stronger than what you see at the group level. The efficiency program is used to compensate the gap between inflation and cost and inflation on price, that has been the case over time. But of time, we have also managed to retain part of it to improve our margin, our long term margin month between 2030 basis points, partly due for part in the consequence of this efficiency program and 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've seen been around 60%.
We have a strong objective to increase that, but once again, it will depend from the inflationary context of 1 year to 1 that.
That's helpful. Thank you.
We will now take our next question from chetan Udeshi from JP Morgan. Please go ahead.
Yeah, hi. Very 2 quick ones. So one is on FX any early read on how you think FX impact will be for maybe Q1 2019 in total? And second question can you give us some sort of a flavor of how much is electronics part of the 300,000,000 plus startup revenue in 2019? Thank you.
Fabienne, ForEx impact in 2019,
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 aren't see, it's still a negative for eggs between 1% 2%, 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 minus 1 and minus 2, but I
Fabienne, do we split the expected additional sales coming from startup ramp up by business line normally? So? No, we don't. Okay. So electronics, I have not seen
my electronics, we know, the contribution of startup and ramp up in electronics to, to the 300,000,000 is strong because you have a lot of of startup. It's in the 80,000,000 range.
Thank you. We don't
give those numbers, but of course, we look at it that way.
We'll make an exception this Okay. Next question. And then the last one.
We will now take our next question from Peter Clark from Societe Generale. Please go ahead.
Yes, good morning. I made it again. Thank you. Just just wanna clarify. You said obviously no significant impact on sales.
Firstly, there has been no significant impact on the sort of bidding activity. And then secondly, really for Benoit, 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 this carbon capture with them. Thank you.
Right. The bidding activity actually is good. I just explained that in the 2018 decisions. We had 40% in Americas, 40% in Europe and 'twenty in Asia. What is pretty sure in terms of impact says not necessarily this year, but the following years, is that Asia is going to remain strong because of the electronics segment.
And I'm pretty sure that North America is going to be very strong because we have already significant number of existing customers or new customers coming to us and to the industry, talking about new projects they have. But the time frame for those projects is totally different from the sort of short termism. So we have to face today, we are looking at 'nineteen and 'twenty and our projects are actually starting up in 'twenty 223. So when we look at this 5 year time horizon, we are very confident that the bidding activity will translate in to sales, if Mike can add anything, I think that can illustrate what I see both in the electronics and U. S.
I mean, I think that, looking at, electronics, clearly we signed 9 carrier gas projects already this year. I should say last year. And 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.
So that's very clear. It's very significant. And 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 industries project. In large industries, especially looking at the Gulf Coast, we have startups that will be coming on certainly in in 2000, I should say 2020 2021.
And 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 third quarter, in to that second wave of chemical business development activity. And we see it all throughout the Gulf Coast. And 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 Gauge patient and CO2 emissions. I mean, this is just a fact. We are now engaged in a more response book growth. So we will look for each and every new investment at the emissions situation. And we will take that emission, 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. And I think it's part and it's, by the way, rather long term because anything linked to CO2 is actually, 2030 or 2050. So it's really long term, But that being said, we make a link between gasification and responsible growth, and 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 and we will do what is necessary to meet including, being more cautious on gasification projects. That's the best I can say I think we are reaching the end.
I don't think we can take any more questions at this stage and we're sorry, but there will be further discussions between the team, Fabienne and all and, the analysts and in investors. So feel free to come back to us later in the day, in London and in the following days, whatever we So thank you very much. Conclusion is that 'eighteen 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 can grow, and 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.