L'Air Liquide Societe Anonyme pour l'Etude et l'Exploitation des Procedes Georges Claude SA
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L'Air Liquide Societe Anonyme pour l'Etude et l'Exploitation des Procedes Georges Claude SA
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Good morning, ladies and gentlemen, and welcome to the Air Liquide's Q1 2018 Revenue Conference Call. [Operator Instructions] Today's conference is being recorded.I 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. And 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 30. 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, we have a very solid base business on the 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 plan, and cash flow remains high. So all in all, a very strong quarter in terms of sales, but 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 and, 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.However, the currencies balance is still unfavorable to European companies, with a negative ForEx impact on our published sales reaching minus 8.2% for the quarter. The energy effect conversely remains modest at minus 0.3%. For the full year 2018, at current forward exchange rates, this global negative effect should reduce globally, around minus 5%. Let's now look at the numbers. Our Gas & Services sales are slightly above EUR 4.8 billion, up 5% on a comparable basis. We have a strong negative ForEx effect, that's minus 8.3%, coupled with a minus 0.3% energy effect and a minus 0.7% perimeter effect linked to the sale of the Airgas Refrigerants activities [ assets ]. As a result, published sales are down by minus 4.3%.Significant recovery in Engineering & Construction as well as the positive development in Global Markets & Technologies also contributes to the strong growth of our group sales at plus 6%. Then for the same reasons, published sales are down 3.2%.We had numerous growth levers this quarter. All of our geographies showed good progression, and in particular, Americas at 4.5% and Asia at plus 7%. Developing economies are plus 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 plus 6%, while Merchant remains 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 Americas, sales are at 4.5%. Large Industries benefit from strong oxygen demand in America, and in particular in Canada, and from the 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 activities in all the zone. Electronics is penalized by lower Equipment & Installation. But Gas, under Advanced Materials, remains solid.Europe is up 3%, penalized by 1 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 market 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 plus 7%. Large Industries benefit from ramp-ups in China and increased demand in Korea and Australia. Merchant is still developing very rapidly in China, with growth above 15%, while Australia recovered. Electronics is also strong throughout the zone, above 10%, driven by China, South Korea and Singapore.To finish with, Africa, Middle East benefit 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 line analysis. Industrial Merchant benefits from strong volume in most of the countries and, in particular, in developing economies, with an exceptional growth in China. Pricing is also summing up at 2.1%.Large Industries is driven by a very solid demand, with oxygen volumes being up 7% and HyCO 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 acquisition 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 & 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, and 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 and it has delivered sustained double-digit growth, along with NEOS medium-term plan objectives.I would like to give you a few examples of the market that Global Markets & Technologies is now attacking, thanks to the extension of the Air Liquide core technologies. The first one is advanced cryogenic equipments to sell to space, aerospace and research industries. As you know, we are part of the Ariane 5 and Ariane 6 programs, but also a strong contributor 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, but 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 developments in hydrogen energy and hydrogen mobility with numerous ongoing initiatives in the world. And 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 model, 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 cumulated. 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 a first zone in terms of project, 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 start-ups 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, and even if our units are ready for start-up, we are still discussing with the customer about the effective commercial start-up date. Depending on this date, the contribution of new unit start-ups 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.So to conclude: A strong quarter for Air Liquide, with further sales growth in all geographies and activities and very active bidding. And therefore, we confirm that, assuming comparable environment, we are confident in delivering net profit growth calculated at constant exchange rates and excluding the 2017 exceptionals. So 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.
[Operator Instructions] We will now take our first question from Theodora Joseph from Goldman Sachs.
I suppose I have 2 questions, and 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. So 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? And also, I mean, based on your current utilization rates, would you need to invest more or is this -- can you cope with this growth? And then 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? And then based on -- backing out what the IM growth would imply for volumes at Americas, it does seem to have slipped this quarter. So is this something that we should be concerned about?
Well, thank you, Theodora. 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 variation. So 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. So for us, it's an excellent signal. It is actually fueled by all activities. In Large Industry, we have strong volumes. You saw Large Industry at 6%. The base business is very strong in Large Industries with a strong -- very strong hydrogen demand in Europe, good cogeneration activities. This is very specific to winter, but it's contributing in this first quarter; same thing in the U.S., with a very strong air gases demand. In Asia, in China, in particular, we have 2 ramp-ups. So it's a global contribution. Industrial Merchant, 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. And in Healthcare, the number of patients that we treat at home continues to increase. And we also have very nice medical gases development in the emerging countries. So 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% and 70% everywhere except for developing Asia, where we are more in the 75% range. So 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. And 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. And we took strong pricing action in Q1, joined with the improved market environment. And 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, and that impacted argon production early in the quarter and the supply chain was slow to recover against the backdrop of strong growth in the market demand for argon in the quarter, and that's catching up as we move through the quarter. So I think, overall, a good balance there and we continue with the pricing efforts.
We will now take our next question from Paul Walsh from Morgan Stanley.
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-on-year was particularly weak in Engineering. And 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-on-year and really, what the dynamics are behind that improvement. And then just lastly, obviously, activity levels across the board are picking up. Could 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?
Well, 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, very low. So we'll continue to see sales increase along the year. However, it's important to understand that our engineering capacities are not yet fully loaded. So 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. So 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. So the order intake continues to progress as well. But to come back to the profitability, which is expected from Engineering, between 5% and 10%, will probably take us until 2019. 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. So we are just improving in terms of sales percentage as the business is doing better. In terms of...
So just to be explicit on that, Fabienne, is that just high 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 be -- 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 projects at the moment. So of course, we are not going to win all of them. But our current forecast is an acceleration in investment decision.
And is that a blend of energy and chemicals? Or is there a standout right now?
It's mostly refining and chemicals at the moment.
We will now take our next question from Thomas Wrigglesworth from Citi.
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 with return on capital employed, but should we -- are these sales numbers commensurate with that kind of improving trend on return on capital employed? And then 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 that the headline -- the comparable growth of 4.3% in the Americas was a touch off versus the 6.1% in the fourth quarter. So are we seeing a moderation in the rate of growth there? Obviously, noting that the pricing effect has obviously kicked in. And then 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. So has Merchant hit its kind of peak run rate? So I noticed that -- I think industrial PMI expectations are starting to soften. So should we just think this is the growth rate -- this is -- second half was a bit kind of got ahead of itself maybe and we're now seeing, albeit a stable level and a good level, a more -- a slightly lower level of growth in Merchant in U.S. and Americas 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 3 months in 2018. I will let Guy and Mike comment about the Industrial Merchant growth. Maybe in Europe first with Guy?
Yes, good morning. So for IM in Europe, fundamentally, between the last quarter of 2017 and first quarter this year, we have an impact of the number of working days, which is slightly more negative in the first quarter '18 than it was in 2017, in Q4 2017. In fact, we have exactly 1.1 working days less in Q1 '18. Beyond that, so...
So is that about a 1.5% negative impact? Is that how we should be adding back?
Yes. Yes, that's the other…
Yes, for Europe. For Europe only, it's minus 1.1%.
So for Europe, this is quite significant. So I would say, overall, the activity in Europe is remaining very solid in IM. We see some fundamental good things happening in the market of the small customers, which is good news. The maintenance, the metal workshops, the constructions, that is going in the right direction, so 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 in hardgoods, 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, so that put a bit of pressure on volume availability. We certainly managed the price accordingly. And also, in Canada actually, we saw liquid nitrogen sales in the oil well services market impacted by a reduction in fracking activity. And 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. And that is an issue they've dealt with and it has nothing to do with the strength of the market, and we see that clearly improving as we speak. But 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; and food beverage, retail and services were also very strong; CO2 demand was good; and also, the continued growth in poultry processing with the Food Modernization and Safety Act (sic) [ Food Safety Modernization Act ]. All the other markets for Airgas continue to have strength.
We will now take our next question from Martin Roediger from Kepler Cheuvreux.
I've just 3 minor questions. First on the financing, you launched 2 renminbi bonds in China at a coupon of around 6% each. But 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's my first question. The second is on one statement on your presentation on Page 25, where you mentioned that you have sold 3 large industry units in Asia. Was there any booking attached to this disposal? And thirdly, a clarification question on your outlook that start-ups and ramp-ups will contribute EUR 250 million to 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?
Okay. So in the financing, it's true that we issued 2 bonds in China on the onshore market, which is the first time for 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 flows. So in China, we finance in renminbi. So we have 2 main possibilities: either we issue in euro, which is much less expensive, as you mentioned, but then we have to do a cross-currency swap to transform those euros in renminbi and then we have a cost which is much higher; or 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 2 bonds, but we have opened a more global program that allows us to issue up to CNY 10 billion. So it's slightly more expensive, but only slightly, around 10 to 20 basis points more after taking into account the cost of the cross-currency swap. But it allows us to have real long-term financing, which is very difficult to get in renminbi otherwise. And 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 will not have to cross the frontier, which is a protection if the regulation changes. So all in all, we diversified our investor base and we financed locally for a few basis points more and a few basis points more only. Yes, we mentioned the sale of 3 large industrial units in China. It's in the Northern China in a quite remote site. This divestiture happened at the end of last year, and there was a capital gain which was recorded in last year numbers. Now on the outlook for start-up and ramp-up, Fujian is delayed. We hoped to start it at the end of March and it has not happened. Discussions are ongoing with the customer on the effective commercial data. So that's why we have updated the contribution of the whole start-ups and ramp-ups to 2018 sales. The lower part of the range, EUR 250 million, is integrating a start-up of Fujian delayed into 2019. So the EUR 250 million does not include Fujian. The EUR 300 million includes a part of Fujian. So it's a delay on the very large project that happens quite often. We are not particularly worried about that, but we thought it was fair to update you on the contribution to the 2018 sales.
Just to follow up, the book gains you booked in last year, obviously, the end of last year, can you quantify them for the disposal of the 3 units in Asia?
Well, we don't give the detail. It was included in the nonrecurring income and expense of last year and the balance of this line was quite modest, as I can remember.
We will now take our next question from Patrick Lambert from Raymond James.
The first question regards the base versus start-up/ramp-ups, but specifically for Large Industry, and 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 '18 and '19 start-ups contribution? Would you venture into giving us your view on the conclusion of the 2019 ramp-up/start-ups 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 '17 about EUR 400 million of M&A spending, is that correct?
Thank you, Patrick. So on the split of the LI growth, so we are 6%. In fact, the 6% is around, in rough figures, 4% base business improvement, 4% start-up and ramp-up and then we have minus 2% of divestiture, and that's how you get to the 6%, the Large Industries units that we divested by reorganizing a little bit our portfolio. Look, on the 2019 contribution, frankly, it's a little bit early. It depends on the start-up date of Fujian, of course, of the pace of ramp-up of certain units. So 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, but 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 Linde deal, we should be more in the EUR 300 million of bolt-on acquisitions.
Any news on Linde Praxair packages to be accelerated?
Well, with the [ press ] as we do. And we talk to bankers as you may do as well.
So no comment?
Well, no comment. I think we already said everything on this topic. There are a few assets that we would be interested in, not many because of our strong position in many markets. So -- and that's it and no news on this side for the moment. Thank you.
We will now take our next question from Andrew Stott from UBS.
Two questions. First of all, on pricing, a pretty impressive IM pricing number, and you've referred, obviously, to some of that I think being argon. Just wanted to check that part of that was argon. And 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'm not looking for an exact number, I'm just sort of generally thinking about whether we're positive or neutral. Secondly, on the EUR 2.3 billion, which clearly shows progress in your portfolio 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.
Okay. So 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 is Merchant -- in Merchant. But 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. But I think pricing improvement occurred across all aspects of sales, looking at the combination of where we are with both packaged gas sales is where we are with hardgoods. It was all in, in terms of the overall pricing actions across the board. I mentioned argon because of the supply shortage and where that ended up, but it was really across the portfolio.
Okay. And 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.
So you know that we are not going to comment on margins. It's true that with a better loading of the capacity and the stronger base business, it is favorable to margin and you know that very well, I am sure. On the portfolio of opportunities, we have a few takeovers in there. It does not represent more than 15% also of the portfolio.
Sorry, 1-5?
Yes, 15%.
We will now take our next question from Laurence Alexander from Jefferies.
A few quick ones, I hope. First, what's your sense right now on the number of days effect in Q2? Secondly, do you think the pace of the methane contracts will start accelerating? Third, 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? And then 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, so we will have the slight positive impact in Q2. At the group level, it would be -- it's going to be half working day, so half a day. So 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.
Oh, on methane. So this one Mike will discuss together with the logistic cost, because it's mostly in the U.S. In China, it's true that we have more project under discussion, in particular for chemical plants. It depends, of course, on our success rates. But we should have -- we hope to have a few signing before the end of the year. Mike, do you want to comment on the methane project on one side and on the Airgas logistic costs on the other side, please?
Sure. In terms of business development activity, especially on the Gulf Coast with the low natural gas prices and the continued strength in terms of availability of natural gas liquids, it's very clear that kind of the second wave of investment in especially the chemical space is upon us. We didn't know if there'd be a lag between the end of the first phase and the second phase. So the level of business development activity has clearly picked up significantly. I think you've seen references already publicized from a number of companies that are either announcing plans to go ahead and look at new investments, and we're already announcing new investments, and we see that reflected in a very strong level of business development activity in the U.S. So obviously, we're 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 brought 2 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 2 separate organizations. We no longer have trucks passing each other on the road and that sort of thing. So all of 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.
We will now take our next question from Francisco Rodríguez from Banco Sabadell.
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 -- well, other activities. So I don't know if that has been the case. And should that be a positive fact or factor going into Q2? And the second one would be related to synergies. Again, you're performing very well at this point and you've almost obtained around 40% of the target for this year. So I was wondering why and what do we need to see for you to update your guidance on synergies. I mean, we knew that, that should be pushed up, I believe, no?
Well, Mike, I think the floor is yours.
Thank you. Thank you. So 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. And 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. But as you know, there's still a common period underway for temporary or permanent exemptions, and a lot of back and forth on what may be evolving and what's being negotiated. But at this point, no real impact for our business. In regard to the synergies, as Fabienne pointed out, we saw an additional $22 million in synergy delivery generated in Q1. So the cumulative total comes up to $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 $270 million; and that on an accelerated basis by the end of 2019, we expected to exceed $300 million. And we continue on that pace. Clearly, the growth synergies are increasing as planned. They represent over 1/3 of the synergies that we generated in Q1. So we continue to see the benefit of utilization of Air Liquide technologies to the Airgas marketing channels; also, the offer of cylinders and hardgoods 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 packaged gas and hardgoods offer in country, in Mexico. And the cost synergies in the quarter continue to benefit from the additional efforts in procurement, similar to management integration and also what I just talked about in terms of the optimization benefits of the fully integrated liquid supply chain. So that's kind of where we are for now.
We will now take our next question from Peter Clark from Societe Generale.
Just 2 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. So obviously, the cycle's turned there. Just wondering how it's going down into cylinders. Because, again, I got the point that the small customers were coming back in Europe as well. So just that you've got some momentum happening there. And then 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. But also there's a lot happening on these high-return industrial gas projects that make more sense. Just those 2 questions.
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 in 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 second quarter, slightly lower -- fourth quarter, slightly lower. And then we clearly are now seeing something more in the 0.8%. So overall, I think that's a bit like what Mike was saying for the U.S., it's distributed along the different activities and different products. It is not specifically to one. So we would say this is probably going to be there and, let's say, expected already to be 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 are not -- we do not have any active gasification project on which we are working at the moment.
We will now take our next question from Chetan Udeshi from JPMorgan.
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? And the second question is on the delay on that Chinese start-up, are there any specific reasons? Is it just a normal course of it’s being -- it's a big plant and there are always delays with any new chemical plant starting up? Or are there any specific environmental-related issues, maybe approvals or something which might be causing that as well?
So for the bidding activity on the new projects, I think we have new projects in all of our market segments. Ultimately, what's interesting is that we are seeing demand from our customer for increasing their capacities in the exiting basin. So it's -- 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, so just final discussion with the customer.
Understood. And I think, again, coming back to maybe I think this was asked previously, the net margin benefit of higher pricing in the IM business. Because 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. So not much benefit was seen from the margin improvement -- sorry, the pricing improvement in IM. So the 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? Or 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 and we have cost increase. The inflation is slightly picking up at the moment. And then we have our efficiencies. And depending on the gap between cost and pricing, we are retaining a certain percentage of the efficiencies. So 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. And 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 costs. Costs are going up quicker than price. Or 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 and this is going to happen again this year.
We will now take our next question from Neil Tyler from Redburn.
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. And 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 that 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?
So on the pricing in Europe for cogeneration this time, Guy?
Well, the Cogen benefited from the, let's say, harsh weather conditions, particularly in March, which generated, let's say, "larger" electricity sales than we would have normally expected at that point of the year. So I think that's the reason why we -- you saw a boost on the Cogen business in the first quarter. Now, this is -- well, you can say it's pricing, but it is also just volumes of electricity or so, okay, that were higher because of the conditions of the weather at that point of time. The -- you were referring possibly to whether weather conditions could have an impact on the -- 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. But other than that, we do not have. So our pricing is not really sensitive in Europe very much to weather conditions or something like that.
Mike, on the argon pricing, yes?
Sure, just coming back to the argon pricing and argon availability, as I mentioned before, we had issues in the supply chain. And recognize that these were juxtaposed to the fact that the market itself was actually in growth mode. So you had an acceleration of demand for argon that we were trying to fill as we saw what occurred in the early stages of the quarter with argon production and the impact on the supply chain. So we continue 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. And that is equilibrating as we reach the end of the quarter and we begin to enter the second quarter. But I think it's a balance of both that we saw in the quarter.
Our final question is from Philippe Lanone from Natixis.
Two complementary ones actually. On Large Industries, you have downscaled by about EUR 100 million the level of incremental sales coming from start-ups, which is about 2 percentage points for the division. And at the same time, we have much better base business growth, which is about 4% and there is some level of cogen here. So I wonder whether you have actually changed your views, your internal forecast for -- the internal growth for the division for 2018 given that you have these -- this plus and this minus. Just trying to have a view of the net news. And 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 plus/minus EUR 300 million, so that should hint that some kind of sudden growth at one point of time due to this level. So do we have to actually expect that?
So 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. But I'm afraid that the internal forecast will remain internal for the moment. And E&C, we continue to see growth in sales, as mentioned. We'll have a strong growth for the full year. But we said at the end of last year that the increased order intake would start to deliver in 2018, but will mostly deliver in 2019. And 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 around 2019. But for the full year, you can expect, of course, not sales being up 75%, but sales being up by 1/3 or so.So 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 plan, so we are pretty optimistic going forward. So 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.