Good morning, ladies and gentlemen. Welcome to the Air Liquide Q1 2018 Revenue Conference Call. All participants are currently in listen mode only until we conduct a question-and-answer session. Instructions will be given at that time. Today's conference is being recorded. I'll 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. Fabienne Lecorvaisier will present the first quarter revenue. Together with Guy Salzgeber in Paris and Mike Graff from Houston, they will be available for a Q&A session. As a reminder, our next announcement for half-year 2018 results is scheduled for July 30th. Let me now hand you over to Fabienne.
Thank you very much, Aude. Good morning, everyone. Thanks to you for attending our Q1 call. Our Q1 activity is in fact strong, with sales being up 6% on a comparable basis and further growth in all geographies and business lines, most of our markets being well-oriented. Our sales are supported by high activity level in gas and services, in particular with a very solid base business on loading rate, as well as by the improvement in engineering and by the dynamism of Global Markets & Technologies. An acceleration of bidding activity with many new projects coming on stream and under study or negotiations is also very noticeable. In terms of performance, efficiencies and synergies are being delivered in line with plans and cash flow remains high. All in all, a very strong quarter in terms of sales, also for development activities.
Let's talk about the context for a minute before looking at the details. As mentioned, most of our markets are well-oriented. In particular, refining chemicals and petrochemicals, which now represent more than 70% of our large industries activities. At the same time, industrial production is stabilizing at a sustained level in most of the countries and continues to improve in the U.S. The currency balance is still unfavorable to European companies, with a negative ForEx impact on our published sales reaching -8.2% for the quarter. The energy effect conversely remains modest at -0.3%. For the full-year 2018, at current forward exchange rates, this global negative effect should reduce globally around -5%. Let's now look at the numbers. Our gas and services sales are slightly above EUR 4.8 billion, up 5% on a comparable basis.
We have a strong negative ForEx effect at -8.3%, coupled with a -0.3% energy effect and a -0.7% perimeter effect linked to the sale of the Airgas Refrigerants activity last year. As a result, published sales are down by -4.3%. Significant recovery in Engineering & Construction, as well as the pursued development in Global Markets & Technologies also contribute to the strong growth of our group sales at +6%. For the same reasons, published sales are down 3.2%. We had numerous growth levels this quarter. All of our geographies showed good progression, and in particular Americas at 4.5% and Asia at +7%. Developing economies are at +11% and they are supported by China and Latin America, but also by South Africa and Turkey. In terms of businesses, Large Industries was stronger at +6%, while Merchant Markets remained solid.
In fact, our base business significantly strengthened again to reach a sustained 3.9% growth, a level we have not seen since 2011. Start-ups, 3 for the period, and ramp-ups contributed 1.3%. Part of the impact is, of course, coming from the ramp-up of our oxygen unit started in December for Sasol in South Africa, the largest in the world. Base business, further improvement and development initiative both supported the accelerated growth now for 6 quarters in a row. Let's now review our geographies. In America, sales are 4.5%. Large Industries benefit from strong oxygen demand in North America and in particular in Canada and from a ramp-up in South America. In Industrial Merchant, Airgas growth remains solid despite the low contribution of bolt-on acquisitions, and Brazil is clearly recovering. Healthcare is supported by strong medical gases in the U.S. and robust activity in all the zones.
Electronics is penalized by lower equipment and installation by Airgas, and advanced materials remain solid. Europe is up 3%, penalized by one fewer working day. Demand in hydrogen is high, as well as cogeneration activity, resulting in a very solid growth in Large Industries, in particular in the Benelux. Merchant Markets are well-oriented in all countries, and in particular in Italy, Benelux and developing Europe. Healthcare remained robust, supported by volume increase in home healthcare and by specialty ingredients. Asia is strong at +7%. Large Industries benefit from ramp-ups in China and increased demand in Korea and Australia. Merchant Markets is still developing very rapidly in China, with growth above 15%, while Australia recovers. Electronics is also strong throughout the zone, above 10%, driven by China, South Korea, and Singapore.
To finish with Africa, Middle East benefits from the ramp-up of the Sasol unit in South Africa and from the high load of Yanbu in Saudi, but also from strong growth in Egypt and development in healthcare. The same trends show in the business side analysis. Industrial Merchant benefits from strong volumes in most of the countries, and in particular in developing economies, with an exceptional growth in China. Pricing is also firming up at 2.1%. Large Industries is driven by a very solid demand, with oxygen volumes being up 7% and CO volume up 5%, driven by base business improvement as well as by start-ups and ramp-ups. Healthcare at plus 5% is supported by home healthcare at plus 7%, solid medical gases in particular in developing economies, as well as specialty ingredients. Small acquisitions also contribute in Japan and in the Middle East.
Electronics at 6% is dynamic in all segments, in line with previous quarters, with new contracts ramping up and strong equipment and installation sales in Asia. A few words now about Engineering & Construction. Sales are now recovering thanks to higher order intake last year. The bidding is strong too. We are now confident that the activity will continue to improve. I would also like to spend a few minutes on Global Markets & Technologies characterized by sustained high-order intake and sales growth. In fact, since its creation in 2015, this business unit, in which we regrouped, manage, and incubate our most innovative activities on a global basis, has progressed very rapidly. It now gathers 1,800 people. Sales are close to EUR 400 million. It has delivered sustained double-digit growth along with the NEOS medium-term plan objective.
I would like to give you a few examples of the market that Global Markets & Technologies is now tackling, thanks to the extension of the Air Liquide core technologies. The first one is advanced cryogenic equipment to serve the space, aerospace, and research industries. As you know, we are part of the Ariane 5 and Ariane 6 programs. We are also strong contributors to the most advanced scientific nuclear research center in Switzerland, the CERN, and to the ITER program for nuclear fusion. We also often mention energy transition. We have started to turn it in a real global business with the development of biogas purification into biomethane and its distribution. We now operate 10 production sites and more than 60 retail stations in Europe and in the U.S.
Global Markets & Technologies is also leading our development in hydrogen energy and hydrogen mobility with numerous ongoing initiatives in the world. Finally, Global Markets & Technologies is developing a range of new services for maritime logistic usages and high-tech cryogenic transportation. Let's now come back to the numbers with performance indicators. Efficiencies stand at EUR 79 million for the quarter, 18% above last year. It's important to mention that Airgas is now developing its own efficiency programs along with the Air Liquide module, delivering EUR 5 million of recurring cost savings this quarter. On top, synergies continue to materialize in line with the upgraded plan, with $22 million more in Q1 or close to $240 million cumulative. Cash flow is strong at 19.5% of sales. In terms of investments, all indicators are improving. Our portfolio of opportunities is redeveloping with more medium-sized projects and takeovers.
Even if America remains the first zone in terms of projects, we saw more opportunities in Europe and in Asia, in China in particular. New investment decisions are high too, at EUR 600 million, with new long-term contracts in large industries in the U.S. and the Benelux, and new carrier gases projects in Asia. The contribution of startup and ramp-ups at EUR 67 million benefits from the progressive loading of the Sasol oxygen unit in South Africa. For the full-year forecast, we still have uncertainties about the Fujian project in China. It's a very complex project. Even if our units are ready for startup, we are still discussing with the customer about the effective commercial startup date. Depending on this date, the contribution of new unit startups and ramp-ups to 2018 sales is now estimated between EUR 250 million and EUR 300 million.
Backlog is also increasing at EUR 2.2 billion in terms of total amount of large projects under construction, but also in terms of future sales, now at EUR 0.9 billion. To conclude, a strong quarter for Air Liquide with further sales growth in all geographies and activities and very active bidding. Therefore, we confirm that assuming a comparable environment, we are confident in delivering net profit growth calculated at constant exchange rate and excluding the 2017 exception. This is what I wanted to share with you. Thank you very much for your attention, and we will now open the Q&A session.
As a reminder, to ask a question, press star one on your telephone keypad. We will now take our first question from Georgina Fraser from Goldman Sachs. Your line is open. Please go ahead.
Hello, good morning. Thank you for taking my question. I suppose I have two questions. The first is really on your base business growth, which surprised very positively. It's as strong as levels that we've seen pre-2012. My question really is, can you give some more color around what's driven this, and whether you think this growth is sustainable going into 2018? Also, basically, on your current utilization rates, would you need to invest more, or can you cope with this growth? The second question is on price increases that we have seen in the Americas IM business. Can you guide towards any further price increases you might be planning to put through in the IM business? Based on backing out what the IM growth would imply for volumes in Americas, it does seem to have slipped this quarter.
Is this something that we should be concerned about? Thank you.
Well, thank you, Georgina Fraser. I will take the question about the base business, and I will hand over to Mike for the question on the U.S. Industrial Merchant price variations. It's true that the base business is very high this quarter, at 3.9%. It's in fact a level we had not seen since the beginning of 2011. For us, it's an excellent signal. It is actually fueled by all activities. In Large industry, we have strong volumes. You saw a Large industry at 6%. The base business is very strong in Large industries, with a very strong hydrogen demand in Europe. Good cogeneration activity. This is very specific to winter, but it's contributing in this first quarter. Same thing in the U.S., with a very strong Airgas demand. In Asia, in China in particular, we have two ramp-ups. It's a global contribution.
Industrial Merchants, you saw that we are still solid, above 4% worldwide, with strongly increasing volume, in particular in developing economies, but positive everywhere. In Electronics, we have a high growth in the carrier gases sales. In Healthcare, the number of patients that we treat at home continue to increase, and we also have very nice medical gases development in the emerging countries. It's a global contribution. Is that going to last? It's always difficult to tell. We don't have any negative signal at the moment. The activity really remains solid. In terms of loading, the loading of our existing capacities in Merchant is between 65%-70% everywhere, except for developing Asia, where we are more in the 75% range. We still have available capacity to continue to feed our base business development at the moment. Mike, do you want to elaborate on the U.S. pricing?
Thanks, Fabienne, and good morning. Sure. Fabienne mentioned the pricing improvement in Q1. We saw roughly 2.6% over the quarter, versus 1.9% in Q4. I think with the businesses fully integrated and everything all on the same ERP systems, we don't have any uneven comparators of the historical price changes across the various legacy businesses. We took strong pricing action in Q1, joint with the improved market environment. We expect to continue the dynamic as the year progresses. I think we've got a good balance, actually, between pricing and volume growth. The one level of headwind that we had a bit in the quarter specific to the U.S. was just in regard to argon availability.
There were a series of severe winter storms that affected overall operations industry-wide in the Gulf Coast in early January. That impacted argon production early in the quarter. The supply chain was slow to recover against a backdrop of strong growth in the market demand for argon in the quarter. That's catching up as we move through the quarter. I think overall, a good balance there, and we continue with the pricing efforts.
Okay. Thank you very much, Fabienne and Mike. Very helpful.
Thank you. We'll take the next question.
We will now take our next question from Paul Walsh from Morgan Stanley. Please go ahead.
Morning, guys, and thanks for taking my questions. Can you talk a little bit about the ongoing trends in the engineering business, please, Fabienne, in terms of the repeatability of the organic growth number in Q1? I know the comp year-over-year was particularly weak in engineering. Also maybe any comments around the level of profitability that business might be able to achieve given the recovery you're seeing. Secondly, can you talk a bit about cash flow? Cash flow looks to have improved noticeably in Q1 year-over-year, and really what the dynamics are behind that improvement. Just lastly, obviously activity levels across the board are picking up. Can you elaborate a little bit on how you're feeling about new investment decisions given what's on your radar screen in the next couple of quarters? Thank you.
Thank you, Paul. A lot of good questions about engineering. The increase of the engineering sales compared to last year is impressive, but you're absolutely right, last year was very low. We'll continue to see our sales increase along the year. However, it's important to understand that our engineering capacities are not yet fully loaded. We are confident in the medium term. We don't expect the engineering activities to come back to profitability this year. We'll be in the best case balanced. It's a recovery period. The order intake you've seen is at EUR 190 million for the quarter to be compared to slightly above EUR 100 million last year. The order intake continues to progress as well. To come back to the profitability which is expected from engineering between 5%-10% will probably take us until 2019.
Understood.
Yeah. In terms of cash flow, well, the cash flow improvement is coming from the dynamism of the base business mainly. In terms of working capital, the pattern is quite similar to last year. We are just improving in terms of sales % as the business is doing better. In terms of new-
Just to be explicit on that, Fabienne, is that just higher EBITDA then?
Well, you know we are not commenting on the margin at the quarter. It's good management of our cash worldwide and sustainable EBITDA. In terms of new investment decision, to be clear, we expect the level of decision to continue to be high and even maybe to increase in the quarters to come. We are really working on a very large number of new project at the moment. Of course, we are not going to win all of them. Our current forecast is an acceleration in the investment decision.
Is that a blend of energy and chemicals, or is there a standout right now?
It's mostly refining and chemicals at the moment.
Understood. Thank you. That's very clear.
We will now take our next question from Thomas from Citi. Please go ahead.
Good morning, Fabienne. Thank you very much for taking my questions. Two, if I may. Obviously, the full year you plotted an improving trend in return on capital employed, and I think we're at 7.7% at the return on capital employed. I know that you don't report, obviously, the first quarter return on capital employed, but are these sales numbers commensurate with that kind of improving trend on return on capital employed? Secondly, just more about the sequencing of growth. Just looking at some of these merchant markets, both in Americas and in Europe, looks like in the first quarter or the headline, the comparable growth of 4.3% in the Americas was a touch off versus the 6.1% in the fourth quarter. Are we seeing a moderation in the rate of growth there? Obviously noting that the pricing effect has obviously kicked in.
Similarly, again, you didn't give a fourth quarter for Europe, but it was 3.8% in the second half versus 3.2% in merchant. Has merchant hit its kind of peak run rate? I noticed that I think industrial PMI expectations are starting to soften. Should we just think this is the growth rate, the second half was a bit kind of got ahead of itself maybe, and we're now seeing a, albeit a stable level and a good level, a slightly lower level of growth in merchant in U.S. and Europe?
Okay. Thank you. On the return on capital employed, even if we were communicating, I don't think that the return on capital employed for a quarter would mean much. Our objective is to continue to improve our return on capital employed to come back above 10%, and we are aligned with our plans. I don't think I can say more after only three months, in 2018. I will let Guy and Mike comment about the Industrial Merchant growth, maybe in Europe first with Guy.
Yes. Good morning. For IM in Europe, fundamentally between the last quarter of 2017 and the first quarter of this year, we have an impact of the number of working days, which is slightly more negative in the first quarter 2018 than it was in 2017, in Q4 2017. In fact, we have exactly 1.1 working days less in Q1 2018. Beyond that.
Is that about a 1.5% negative impact? Is that how we should be adding back?
Yes.
For Europe only, it's minus 1.1%.
For Europe, this is quite significant. I would say overall, the activity in Europe is remaining very solid in IM. We see some fundamental good things happening in the markets of the small customers, which is good news. The maintenance, the metal workshops, the constructions, that is going in the right direction. That's also supporting the future perspectives. The other thing that is very good news in Europe is clearly the improved pricing power that we have reached. We were around 0.4% in Q4, and we are now at 0.8%, which is good news also and I think solid when we look towards the future.
Thank you, Guy. Mike, do you want to comment about the Americas growth in industrial merchant?
Sure. Overall sales growth was clearly up with strong demand in all markets. I think that in general, North American sales in packaged gases and hard goods, both for the U.S. and for Canada, showed continued strength. I mentioned the adverse impact in terms of argon availability in the U.S. due to the winter storms. That put a bit of pressure on volume availability. We certainly managed price accordingly. Also in Canada actually, we saw liquid nitrogen sales in the oil well services market impacted by a reduction in fracking activity. Actually, the reduction in fracking activity was the direct result of a shortage in supply of the sand that's actually used as proppant in the fracking process. Some issues in the supply chain. That is an issue they've dealt with, and it has nothing to do with the strength of the market.
We see that clearly improving as we speak. In general, if I look at the manufacturing and metal fab markets, especially in the U.S., they were very strong, led by growth in industrial equipment, heavy equipment, and metal processing. Food, beverage, retail, and services were also very strong. CO2 demand was good. Also the continued growth in poultry processing with the Food Safety Modernization Act. All the other markets for Airgas continued to have strength.
Okay. Thank you very much. Very clear.
We will now take our next question from Martin Roediger from Kepler Cheuvreux. Please go ahead, sir.
Yeah, thanks. I have just three minor questions. First, on the financing. You launched two renminbi bonds in China at a coupon of around 6% each. These bonds have a much higher coupon than, for example, if you would launch bonds in France. Why don't you launch bonds in France, and thus distribute then the proceeds to China? That is my first question. The second is on one statement on your presentation on page 25, where you mentioned that you have sold three large industry units in Asia. Was there any book gain attached to this disposal? Thirdly, a clarification question on your outlook that the startups and ramp-ups will contribute EUR 250 million-EUR 300 million to sales in the full year 2018.
Does this include the Fujian project or not, or is it right to understand that the high end of that range includes the Fujian project and the low end not? Thanks.
In the financing, it is true that we issued two bonds in China on the onshore market, which is the first time of Air Liquide, and we are one of the first European companies to do that. We want to match the currency of our financing and the currency of our cash flow. In China, we finance in renminbis. We have two main possibilities. Either we issue in euro, which is much less expensive, as you mentioned, then we have to do a cross-currency swap to transform those euros in renminbi. Then we have a cost which is much higher.
We can issue now, and this is new because the regulation has been opening, we can issue directly on the Chinese market, and we have not only issued those two bonds, but we have opened a more global program that allows us to issue up to 10 billion renminbis. It is slightly more expensive, but only slightly, around 10 to 20 basis points more after taking into account the cost of the cross-currency swap. It allows us to have real long-term financing, which is very difficult to get in renminbi otherwise. It also allows us to have local financing, which means that the renminbi generated by our activity in China will be directly used to reimburse the debt, and we will not have to cross the frontiers, which is a protection if the regulation changes.
All in all, we diversified our investor base, we finance locally for a few basis point more, a few basis point more only. Yes, we mentioned the sale of 3 large industry units in China. It's in the north of China in a quite remote site. This divestiture happened at the end of last year, there was a capital gain, which was recorded in last year numbers. On the outlook for startup and ramp-up, Fujian is delayed. We hoped to start it at the end of March, it has not happened. Discussions are ongoing with the customer on the effective commercial date. That's why we have updated the contribution of the whole startup and ramp-ups to our 2018 sales. The lower part of the range, EUR 250 million, is integrating a startup of Fujian delayed into 2019. The EUR 250 does not include Fujian.
The EUR 300 includes a part of Fujian. It's a delay on a very large project that happens quite often. We are not particularly worried about that, we thought it was fair to update you on the contribution to the 2018 sales.
Thank you. Just to follow up, the book gains you booked in last year, obviously at the end of last year, can you quantify them for the disposal of 3 units in Asia?
Well, we don't give the detail. It was included in the non-recurring income and expense of last year, the balance of this line was quite modest, as you can remember.
Okay, thanks.
We will now take our next question from Patrick Lambert from Raymond James. Please go ahead.
Hi, good morning and congratulations for a good start. The first question regards the base versus startup ramp-ups, but specifically for large industry. If you can help us quantify a bit the contribution of both the 6% of that, and more importantly, going forward with the pushback of Fujian, how do you see the 6% developing in the rest of 2018 and 2019 startups contribution? Would you venture into giving us your view on the contribution of 2019 ramp-up startups, post the Fujian. The second question is relating to M&A. I think you've been mentioning that you will step up in the remainder of the year. Are we still expecting about, I think you mentioned at the end of 2017, about EUR 400 million of M&A spending. Is that correct? Thanks.
Thank you, Patrick. On the split of the LI growth, we are 6%. In fact, this 6% is around, in rough figures, 4% base business improvement, 4% startup and ramp-up, then we have minus 2% of divestiture. That's how you get to the 6%. The large industry unit that we divested by reorganizing a little bit our portfolio.
Okay.
On the 2019 contribution, frankly, it's a little bit early. It depends on the startup date of Fujian, of course, of the pace of ramp-up of certain units. We'll try to update you at the end of H1. In terms of M&A, it's true that we do not have very impressive M&A for this Q1, you know that last year we had difficulty to sign because of the various tax reforms. We have deals that should materialize in Q2. If we exclude any acquisition linked to the Praxair in the deal, we should be more in the EUR 300 million-
Okay
for bolt-on acquisition.
Any news on the Linde Praxair packages to be-
Well, we read the press
to be accelerated? Yeah.
We talk to bankers, as you may do as well.
No comments.
Well, no comments as in we already said everything on this topic.
Yeah.
There are a few assets that we would be interested in, not many because of our strong position in many markets. That's it, no news on this side for the moment.
Thanks, Fabienne.
We will now take our next question from Andrew Stott from UBS. Please go ahead.
Morning. Thanks for taking two questions. First of all, on pricing, pretty impressive IM pricing number, and you've referred obviously to some of that, I think being argon. Just wanted to check that that part of that was argon. The main question, though, was how do we think about the margin impact of that pricing? Just getting a feeling for what your variable costs have done in Q1. I am not looking for an exact number. I am just sort of generally thinking about whether we are positive or neutral. Secondly, on the EUR 2.3 billion, which clearly shows progress on your portfolio of opportunities, I just wondered, Fabienne, if you can give me an idea of the split between new projects and site takeovers, because you referred to takeovers obviously as being part of that activity. Thank you.
On the pricing, I will hand over to Mike. We said that we had some argon shortage in Q1, and that has penalized a little bit our growth in M erchant. We had real pricing actions on all products. I don't know, Mike, if you want to comment further.
Sure. No, I would just echo that. Certainly argon was a part of that. I think pricing improvement occurred across all aspects of sales, looking at the combination of where we are with both packaged gas sales, as where we are with hard goods. It was all in terms of the overall pricing actions across the board. I mentioned argon because of the supply shortage and where that ended up. It was really across the portfolio.
Okay. Would you think from a global perspective, you're looking at a net positive or are distribution and wage inflation sort of running at that level that you need a 2.1% number? Just trying to get a handle on that.
You know that we are not going to comment on margins. It's true that with the better loading of the capacities and the stronger business, it is favorable to margin on this. You know that very well, I am sure.
Okay.
On the portfolio of opportunities, we have a few takeovers in there. It does not represent more than 15% or so of the portfolio.
Sorry. One, five?
Yeah. 15.
Thank you very much.
We will now take our next question from Laurence Alexander from Jefferies. Please go ahead.
Good morning. A few quick ones, I hope. What's your sense right now on the number of days affecting Q2? Do you think the pace of the methane contracts will start accelerating? In China, apparently there's a new wave of chemical capacity being shot this year and next year. Is that going to be any sort of drag on your China footprint? Lastly, on Airgas, can you talk a little bit about what your experience has been with higher logistics costs? Because in the past, Airgas had some issues handling those, at least on a shorter cycle basis.
On the number of working days, we will have a slight positive impact in Q2 at the group level. It is going to be half working day, so half a day. Not much, but it's better than when it's negative. I don't think I catch your second question. Could you repeat it, please?
Just on the methane, whether the pace of signings will be picking up.
On methane. This one, Mike will discuss together with the logistic cost because it is mostly in the U.S. In China, it is true that we have more projects under discussion, in particular for chemical plants. It depends, of course, on our success rate, but we hope to have a few signings before the end of the year. Mike, do you want to comment on the methane project on one side and on the Airgas logistic cost on the other side, please?
Sure. In terms of business development activity, especially on the Gulf Coast with low natural gas prices and this continued strength in terms of availability of natural gas liquids, it is very clear that kind of the second wave of investment, especially in the chemical space, is upon us. We did not know if there would be a lag between the end of the first phase and the second phase. The level of business development activity has clearly picked up significantly. I think you have seen references already publicized from a number of companies that are either announcing plans to go ahead and look at new investments. Some are already announcing new investments, and we see that reflected in a very strong level of business development activity in the U.S. Obviously, we are participating heavily in that.
In terms of logistics costs and issues you referenced in the past from an Airgas perspective, recognize that clearly as part of our overall synergy program and the integration of the Airgas heritage business and the Air Liquide heritage business in the U.S., we have brought two very strong supply and logistic systems together. By the end of last year, we had those not only fully integrated operationally, but all on the same SAP platform and are now fully utilizing all the optimization capabilities we have with advanced mathematical modeling to assure actually we continue to see those costs better managed than they could have been as two separate organizations. We no longer have trucks passing each other on the road and that sort of thing.
All this is in a much better place, and actually, I think logistics costs are reflected as very positive in terms of the effect on synergies.
Thank you.
Thank you, Mike.
We will now take our next question from Francisco Rodriguez from Banco Sabadell. Please go ahead.
Yes, hello. Good morning. I have a couple of questions. First one would be regarding the potential impact you could have seen on activity in the U.S. linked to the tariffs that have been imposed to steel and other activities. I don't know if that has been the case, and should it be a positive fact or factor going into Q2? The second one would be related to synergies. Again, you're performing very well on this point, and you've almost obtained around 40% of the target for this year. I was wondering why and what do we need to see for you to update your guidance on synergies? Meaning that that should be pushed up, I believe. Thank you.
Michael, I think the floor is yours.
Thank you. In regard to the tariffs and their impact, obviously, this is clearly an evolving situation. To be clear, we have not seen any significant impact on sales, whether in large industries or the merchant business. In the short term, we don't expect to see any sort of strong impact. I think once the details become clear, we'll be in a better place to assess and provide more insight. As you know, there's still a comment period underway for temporary or permanent exemptions, and a lot of back and forth on what may be evolving and what's being negotiated. At this point, no real impact for our business. In regard to the synergies, as Fabienne pointed out, we saw an additional EUR 22 million in synergy delivery generated in Q1.
The cumulative total comes up to EUR 237 million, and we had announced when we shared the perspective on full-year results for 2017, that we upped the level of synergies to be reached by the end of 2018, up to EUR 270 million. That on an accelerated basis by the end of 2019, we expected to exceed EUR 300 million , and we continue on that pace. Clearly, the growth synergies are increasing as planned. They represent over a third of the synergies that we generated in Q1. We continue to see the benefit of utilization of Air Liquide technologies through the Airgas marketing channels. Also, the offer of cylinders and hard goods to Heritage Air Liquide customers.
What we're starting to see ramp now are the benefits growing in Canada and especially in Mexico, with the launch of the combined package gas and hard goods offer in country in Mexico. The cost synergies in the quarter continue to benefit from the additional efforts in procurement, cylinder management integration, and also what I just talked about in terms of the optimization benefits of the fully integrated liquid supply chain. That's where we are for now.
Okay. Thank you.
We will now take our next question from Peter Clark from Societe Generale. Please go ahead.
Yes, good morning. Just two follow-ups really. On the price, I've heard your comments on the momentum there. Just wondering specifically in Europe, because I got that number. I saw the 0.4 went to 0.8, and that's pretty much as strong as you've seen, I think, since 2013. Obviously the cycle's turned there. Just wondering how it's going down into cylinders. Again, I got the point that the small customers were coming back in Europe as well. Just that you've got some momentum happening there. The other question was regarding the portfolio. I get the feeling that it's virtually, well, it's all traditional industrial gas model, essentially. There's no gasification projects you're looking at, given obviously the complications with those. There's a lot happening on these high return industrial gas projects that make more sense. Just those two questions. Thank you.
Guy, do you want to comment further on the European pricing in merchant?
I think globally, the European pricing has, yes indeed, significantly ramped up over the last year. In fact, if you look at where we started on the first half, we were basically at 0. In the second half, between the 2 quarters, we're probably at 0.5, and with the fourth quarter slightly lower. We clearly are now seeing something more in the 0.8%. Overall, I think that's a bit like what Michael Graff was saying for the U.S. It's distributed among the different activities and different products. It is not specifically to one. We would say this is probably going to be there and let's say perspectives are relatively good in that way.
Okay, regarding the gasification project, we are clearly reviewing our strategy in this regard and may update you at a later date. We do not have any active gasification project on which we are working at the moment.
Understood. Very clear. Thank you.
We will now take our next question from Chetan Udeshi from JP Morgan. Please go ahead.
Yeah. Hi, thanks. A couple of questions. First on new projects that you are signing or in terms of bidding activity. In general, do you see any material change in the return profile of these projects compared to that in the past? Is it better in line or say, hopefully not lower than in the past in terms of return profile? The second question is on the delay on that Chinese startup. Are there any specific reasons? Is it just a normal course of it's a big plant, there are always delays with any new chemical plant starting up? Are there any specific environmental related issues, maybe approvals or something which might be causing that as well?
For the bidding activity on the new project, I think we have new project in all of our market segments. I think what is interesting is that we are seeing demand from our customer for increasing their capacities in the existing basin. The opportunity for us to reinforce our position in our existing basin, in Europe, in the U.S., is much stronger than before, which is, of course, an excellent news. Regarding Fujian, I would say this is probably normal for China. We have all of our environmental and operating permits. Our units are working, it's just final discussion with the customer.
Understood. I think, again, coming back to maybe, I think this was asked previously, the net margin benefit of higher pricing in IM business. I think the question is, last year, if you take the 60 basis points margin improvement for the full year, maybe all of that can be explained only by the cost synergies you got out of Airgas acquisition. Not much benefit was seen from the margin improvement, sorry, the pricing improvement in IM. Question is, will it be any different this year in terms of how do we see that higher pricing in IM getting reflected in terms of real underlying margin improvement, as such? Maybe if you can't answer it directly, maybe just to give us a sense of what are the different puts and takes for margin improvement this year that you want to highlight.
Well, you're asking me questions you know I will not answer. How does our model work? We have price increase, we have cost increase. The inflation is slightly picking up at the moment. We have our efficiencies. Depending on the gap between cost and pricing, we are retaining a certain percentage of the efficiency. It's obvious that when we have a strong positive pricing, that enables us to retain a higher percentage of our efficiencies than when we have difficulty to increase our price. Of course, it is what should happen. We should be able to retain a higher percentage than last year of our efficiencies. However, there is always a gap between price and cost. Costs are going up quicker than price.
Another way to say it is that every year, depending on our pricing action, we share more or less of our productivity gains, of our efficiencies with our customer. This is going to happen again this year.
Thank you.
We will now take our next question from Neil Tyler from Redburn. Please go ahead.
Good morning. A couple left from me, sticking with the theme of pricing, you'll be relieved to hear. Just circling back to the European price development, you mentioned that in the Large Industry business, cogen benefited from the severity of the weather through the quarter. I wondered if there's anything in the price or mix effect in Industrial Merchant that reflects a similar backdrop, namely, whether, for instance, LPG pricing spiked or anything like that. Then going back to Andrew's question earlier on the argon influence, Mike, can you give us an indication as to whether you said you were able to make compensatory price moves, whether your own argon business year on year in Q1 in the Americas was therefore sort of flattish, namely that you fully compensated the volume with price? Thank you.
On the pricing in Europe for cogeneration this time, Guy?
Well, the co-gen benefited from the, let's say, harsh weather conditions, particularly in March, which generated a, let's say, quote-unquote, larger electricity sales than we would have normally expected at that point of year. I think that's the reason why you saw a boost on the co-gen business in the first quarter. Now, this is, well, you can say this is pricing, but it is also just volumes of electricity also, okay, that were higher because of the conditions of the weather at that point of time. You were referring possibly to whether weather conditions could have impact on pricing in merchant in Europe, particularly maybe relating to LPG. In Europe, we have very, very little LPG business in merchant. It's only a little bit in the U.K. Other than that, we do not have.
Our pricing is not really sensitive in Europe very much to weather conditions or something like that.
Okay, that's helpful. Thank you.
Mike, on the argon pricing?
Sure. Just coming back to the argon pricing and argon availability. As I mentioned before, we had issues in the supply chain and recognized that these were juxtaposed to the fact that the market itself was actually in growth mode. You had an acceleration in demand for argon that we were trying to fill as we saw what occurred in the early stages of the quarter with argon production, the impact on the supply chain. We continued to go ahead and manage volume growth along with pricing growth, in order to go ahead and not only meet market demand, but also deal with the various issues that were there. That is equilibrating as we reach the end of the quarter and we begin to enter the second quarter. I think it's a balance of both that we saw in the quarter.
Okay. Very good. Thank you.
We may be taking our last question now, please.
Yes, our final question is from Philippe Laroche from Natixis. Please go ahead.
Good morning. Thank you for taking my question. Two complementary ones, actually. On large industries, you have downscaled by about EUR 100 million the level of incremental sales coming from startups, which is about two percentage points for the division. At the same time, we have much better base business growth, which is about 4%, and there's some level of cogen here. I wondered whether you have actually changed your views, your internal forecast for the internal growth for the division for 2018, given that you have this plus and this minus. Just trying to have a view of the net news. Another point on Engineering. In fact, that's the fourth quarter where we have order intake, which is about twice sales and a very high level, ± EUR 300 million.
That should hint at some kind of sudden growth at one point of time to this level. Do we have to actually expect that?
It's true that we have a very good level of activity in Q1. Remember that cogen are active in winter, not in summer, and our main cogens are in Europe, so this is not going to continue. However, we have a strong base business in all the segments, so we are reasonably optimistic at this stage, of course. I'm afraid that internal forecasts will remain internal for the moment. On E&C, we continue to see growth in sales. As mentioned, we'll have a strong growth for the full year. We said at the end of last year that increased order intake would start to deliver in 2018, but will mostly deliver in 2019. That's why I mentioned at the beginning that to come back to a regular or expected level of margin, we will have to wait until 2019.
For the full year, you can expect, of course, not sales being up 75%, but sales being up by one-third or so.
Okay.
I hope we responded to all of your questions. If you have more, the investor relation team is, of course, available on the phone. To conclude, it's a very good quarter for Air Liquide. We saw improvement and accelerated growth in all activities and all businesses. Our performance indicators are in line with plans. We are pretty optimistic going forward. Thank you very much for your attention, and have a nice day.
This concludes today's call. Thank you for your participation. You may now disconnect.