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 Q1 2019 Revenue Conference Call. [Operator Instructions] I will now hand over to the Air Liquide team. Please begin your meeting, and I will be standing by.
Good morning, everyone. This is Aude Rodriguez, Head of Investor Relations. Thank you for joining our conference call today. Fabienne Lecorvaisier will present the first quarter revenue, and Mike Graff will focus on our Electronics activity, its transformation and strategy. Guy Salzgeber is also attending the call and will participate in the Q&A session. In the agenda, our next announcement for half year 2019 results is scheduled for July 30. Let me now hand you over to Fabienne.
Thank you, Aude. Good morning, everyone, and thank you very much again for joining the call. We are happy to report another strong quarter for L'Air Liquide. Our sales growth remains high at plus 9% and 5% on a comparable basis. The market environment remains supportive with inflections in some segments but continued solid demand in others, and I will try to give you more color on this in a minute. Our reinforced action plans for increased efficiencies and performance are launched and will ramp up progressively throughout the year. Cash flow is strong at more than 20% of sales, and we pursued our business development initiatives in a very dynamic environment. Let's come back to the context. Thanks to the strengthening of the U.S. dollar, we now benefit from a ForEx tailwind close to 3%. Conversely, the energy impact is softening thanks to a slowdown of natural gas pricing, mainly in Europe, which has certainly been beneficial to some of our customers. In terms of markets, compared to what we presented to you mid-February, we see an inflection in Construction, notably in the U.S. Apart from that, most of our markets remain well oriented. If we look more precisely at the figures. Gas & Services are up 8.4% as published and 4.8% comparable, despite 1 less business day in Q1 compared to last year. Engineering opportunities progressed its stabilization in terms of sales and margin with EUR 150 million of additional order intake. Global Markets & Technologies continue to be strong, supported by techno sales and by a 50% increase in our biogas sales, with an order book which is also slightly above last year. The period has been very active again for Air Liquide. I already mentioned the focus on performance, but we also inaugurated our new innovation center in Tokyo together with our Electronics customers. In terms of growth initiatives, we completed the acquisition of Tech Air in the U.S., which is very good news for the development of Airgas. And we extended our relationship with Severstal in Russia by signing a new long-term oxygen contract. And last but not least, in line with our climate objectives, we decided to build the world's largest electrolyzer in Canada, following our equity investment in Hydrogenics at the end of last year. All the businesses still show very solid growth with Merchant at 3%, but remember we have 1 less working day. Large Industries and Healthcare are plus 5%; and Electronics, double digits. In terms of geographies, the strongest performance of the quarter are again Asia, supported by the strong restart of China after Chinese New Year, notably in Merchant and Electronics; together with developing economies at large -- in Large Industries segment.The growth of our base business, excluding the contribution of start-ups and ramp-ups, remained solid at 2.9% despite 1 less working day as most of our units are well loaded. The contribution of the new units is close to 2%, slightly higher than for previous quarters. Let's now go around the world. Americas, at 2%, are penalized by high 2018 comparison basis in Large Industries and by the missing working day at Airgas. However, volume demand remained strong, in particular for hydrogen; and Merchant continued to be supported by solid metal fabrication market and pricing. Healthcare progression is high, about 7%, notably in the U.S. and Latin America; while Electronics are 15%, thanks to gases and equipment. Europe, at plus 3%, benefits from strong hydrogen demand in Benelux, start-ups in Turkey and Kazakhstan as well as from growing cylinder volumes and further reinforced pricing effect. Healthcare, about 5%, continues to be supported by high Home Healthcare with rapid growth in diabetes in particular. Asia is up 13%, thanks to ramp-ups in Large Industries in China and solid demand in Australia and Singapore notably. Merchant is strong again with higher volumes everywhere except in Australia and positive pricing. Electronics continues to post record growth in connection with new carrier gases contracts, Advanced Materials progression and Equipment & Installation deliveries. China alone is progressing double digits in the 4 business lines. Africa and Middle East is back to steady growth post-Sasol start-up impact. Industrial Merchant is progressing very well in the Middle East, Egypt and India. In terms of business line, the performance of Industrial Merchant is really reassuring given the fact that we have 1 less business day. It's driven by oxygen and [ hydrogen ] and cylinder volumes and high pricing at 3.3% driven by Americas and Europe. Large Industries is of course benefiting from start-ups, but also from high hydrogen volume at plus 12% and solid oxygen and nitrogen. Healthcare growth is above 5% driven by Europe and Americas. Home Healthcare is up 8% despite a minus 1% price effect, supported in particular by respiratory therapies and diabetes. Med gas is solid, notably in the U.S., thanks to proximity care and to the launch of the Air Liquide's small cylinder offer in the Airgas network. I would like now to stop for a moment on Electronics. You asked us numerous questions about the growth in this business line and about its sustainability. For that, I will hand over to Mike Graff who is supervising Electronics.
Thanks, Fabienne. Over the last 15 years, as you can see, we've transformed our Electronics business, increasing our value to the industry through the introduction and growth of innovative offers and advanced materials and in larger, more efficient and reliable plants that produce the ultrapure gases, which were really a lifeblood for our customers' fabs. Our services, specialty materials and equipment businesses also provide critical products and services for the industry and enable more touch points to strengthen the relationship with our customers and drive greater value for them. Overall, our business has more than doubled over this time frame with a clear and intentional focus on growing our offer in high-value, differentiated products, which enable customer technology advancement and positioning Air Liquide as the leader in electronics. Our business is diverse across Asia, the U.S. and Europe with strong positions in the integrated circuit market as well as in the flat-panel display industry. Production volumes, along with the shift in demand to more advanced nodes, continue to drive our materials business, and the mid- to long-term forecast remains very promising. 2018 was another strong year with a record level of investments to support new production that will enable our customers' growth and continue to expand our technologically advanced offer. This clear and intentional focus on innovation is driving solid growth, along with strongly enhanced and sustainable margin improvement. We continue to leverage our core strength in advanced air separation technologies and industrial operations to provide large, efficient and reliable plants to meet the ever-growing needs of the industry. Our know-how and global presence provide a strong backbone for project execution and operational support to ensure continuing safe, reliable and consistent supply to each of our customers. On the Advanced Materials front, we leverage our strong technical capabilities and our growing network of materials scientists and chemists to work within the semiconductor industry to drive innovation in a time of technology advancement that relies ever more on materials and our highly specialized gases offer. Over time, we have developed a strong collaboration and partnership with Tier 1 customers and OEMs to drive winning solutions that benefit the entire ecosystem. Looking forward, the advances in the electronics industry impact our lives more and more each day. Connected devices are now common and impact not only our personal lives, but access to big data is driving the digital revolution in all sectors of the world from health care to basic industry to transportation to education to the financial sector. The proliferation of new applications, along with the maturing of the industry, has reduced the historic cyclicality seen in the early 2000s, especially in the integrated circuit market, which accounts for almost 90% of our Electronics business. And in many respects, this is really just the beginning. The digitally connected smart society will become even more of a reality with 5G enabling enhanced connectivity in the next few years. Artificial intelligence will drive new ways of working, new ways of learning and new ways of communicating. All of these key industry drivers and more are enabled by technology advancement in the electronics industry, and Air Liquide helps to enable this. Fabienne, back to you.
Thank you very much, Mike. I hope that following this short presentation, you now better understand what the growth levels of our Electronics business are and why we are pretty confident in its future development. Let's look now about the performance. As mentioned at the beginning, additional action plans are mostly launched to be able to deliver more efficiencies and to strengthen the performance, and will start to deliver in Q2. Our efficiency program are also underway at Airgas. For Q1, we have delivered EUR 77 million of sustainable cost reduction, aligned with the planned seasonality. Climate-related initiatives continue to represent approximately 1/3 of those efficiencies and include enhanced optimization, logistics management and reduction of cylinder leakage for helium in particular. We remind you that our newest objective is now to reach EUR 1.5 billion cumulated. This will, of course, enable us to improve our margins and return on capital employed but also to finance increased digitalization and innovation efforts to secure our future. Cash flow also remains very solid at 20.3% of sales. Business development continues to be extremely active as shown by the 12 months' portfolio of business opportunities, which is slightly increased again, with new projects more than replacing the awarded ones. Signings were also strong with significant investment decision driven by energy transition in Canada and Norway and regained momentum in regional M&A. The acquisition of Tech Air, closed in March, will reinforce Airgas positioning and generate high synergies. We started up 7 new units in Q1, of which 3 in Electronics. The contribution of start-ups and ramp-ups at EUR 103 million is driven, as usual, by Large Industries but also by Electronics, and once again, by energy transition. Start-ups for the full year are a concern, and therefore, we maintain the initial forecast for more than EUR 300 million sales contribution, including Fujian in China for 2019. So in a few words and as a conclusion, we enjoyed another strong quarter in terms of activity, and we reinforced our focus and performance while continuing to be very active on new investment opportunities. On this basis, we of course confirm our outlook, which is to deliver net profit growth in 2019. So this is what we wanted to share with you this morning. Thank you very much for your attention. And we would like now to open the Q&A session.
[Operator Instructions] We will now take our first question from Andrew Stott of UBS.
I had a couple of questions. So first of all, on Industrial Merchant. So pricing was up 3% and organic was up 3%. So obviously, volumes were flat, and I hear you're on the trading days. That's probably, what, 1.5%. It still seems a bit light relative to how you're traveling through Q4. So I guess the question is to you, Fabienne. You mentioned that you'd seen a sort of an inflection point in Construction. So I just wondered if you could elaborate on that and whether there were any other softer spots that you saw in Q1 relative to February comments. That's question one. Question 2, simple one, is there an update on the Fujian contract?
Well, thank you. So for IM first. It's true that the sales progression and the pricing are more or less aligned. We have in the year a missing working day, which is accounting for approximately 1% of sales. So if we had the same number of working days, the progression of IM would be 1% higher. Another point to be taken into account is that in the pricing component, you have a helium component. You know that globally, the helium market is relatively tight. And then we have a strong helium pricing as the other competitors. So this is also playing on the pricing. So apart from that, I will assure you, the volumes are growing. The pattern is a little bit different from one geographical zone to another, so maybe I will start with Asia and then hand over to Mike and Guy for a few words about IM in the other region. So in Asia, we have a strong volume growth. The pricing is positive but clearly lower than natural. In China in particular, we continue to grow high double digits. We deploy our cylinder offer and the sales increase is very significant. But this is also true in most of the zone. We had the positive growth in Japan, which is not always the case. Only a slight slowdown in Australia, but apart from that, Asia is strong, and Asia is strong in all markets. Maybe Mike, a few words about Americas, no?
Sure. I think in the Americas, first of all, I would say that metal fab continues to be strong, whether that's Airgas, whether that's Canada. I think throughout the Americas, industrial markets continue to drive growth, especially more in the long investment cycle businesses, the machinery and heavy equipment. Even though automotive is slightly off-peak, it still remains at very high sustained levels of output, and we continue to see factory investment with a continued focus more on automation, whether that's automated cutting, welding or in parts positioning.Fabienne mentioned Construction, and I think it's really a mixed bag here. There's a good backlog of projects. I think spend on the Gulf Coast, especially for petrochemical plants and LNG terminals, continues to be quite strong, and it continues to grow and evolve. I had mentioned before that we had a number of pipeline projects, power plant projects and infrastructure projects in geographies that were outside the Gulf Coast. And they've really come to a close. And there's other projects that are being considered, but they're not sanctioned yet. So that's where I think we see a bit of a difference in the weakening in Construction in that particular part. Energy, chemicals continues to see strength, especially in the chemicals and refining space. And that's not only Construction. That's continued routine maintenance and turnarounds and a number of other activities that go on at the sites. In the nonindustrial segments, I think the food and beverage markets especially continue to be strong and continue to grow similar to last year, life sciences as well for that matter. And I think that given the fact that we saw 1 less working day, the other area is hard goods and the safety products and that sort of thing. They're at a very high level as we end this year, and they continue to stay at the high level but in a more stable range.
Thank you, Mike. Guy, a few words about the situation in Europe?
Yes. Thank you. Maybe just a few additional words about Europe and giving a little bit of color on what is happening also in Europe. We also have a significant pricing contribution. We have been ramping up the pricing now from over the last quarters in 2018. And the first quarter this year also we're reaching levels of 3.2%, which is quite positive. The -- Europe is also impacted by a working day effect. That also explains some of the less volume contribution. However, what I would like to say, maybe, is that from a market point of view, yes, there were some markets, particularly in the automotive industry, that are a little less dynamic. But we see a lot of renewal and new markets really boosting, particularly in the food and pharma industry. The biopharma markets, the convenience food industry is really growing now with more and more new freezing and chilling applications, which is all related to the changes of how people want to get their food, in the cities in particular. So we see all that really as the new growth drivers, and that are really starting to materialize. The other thing that we're really experiencing now in Europe is the change that the digital is bringing to the way people are working and expecting to be, let's say, trading and doing their business with Air Liquide. More and more of our packaged gas business is going through digital channels, up to 20% even in some geographies. So it's becoming very significant, leading to some very positive, I think, contributions in the future in terms of not only how we interface with our customers but also how we are able to create efficiencies through digital.
Thank you, Guy. The second question was about Fujian. So in Fujian, the plant continues to run at full capacity. The customer continues to offtake the product, and the discussions, negotiations are still going on. So not much more to tell you than what we already mentioned in February when we published our full year.
Our next question comes from Martin Roediger of Kepler Cheuvreux.
One follow-up question on your, yes, statements on Electronics. Can you explain to me the 50% sales trough in E&I in Asia Pacific in Q1? And maybe can you also help me to understand, did you gain some market share in overall Electronics? And did you do some price hikes in Electronics? And the second question is on the competitive landscape in general in industrial gases. It is probably too early to ask, nevertheless, I'll try it. Two months ago, the merger between Praxair and Linde was approved. Did you recognize that the behavior of the new Linde is different from the former Linde, i.e., is there more price discipline in bidding processes? Or is Linde now trying to increase their own prices in industrial merchant even more aggressive than they did before? And the final question is on Engineering. How confident are you to return to breakeven this year and to reach all your margins going forward? Because I see that the order intake is down by 23% in Q1.
Okay. So first, about Electronics, maybe I'll hand this one to Mike.
Sure. Thanks, Fabienne. Martin, I think there are several aspects in terms of the growth and evolution of Electronics. First of all, I think that -- we saw roughly 14% growth, obviously, as Fabienne said, following on roughly 18% in Q4 of 2018. And a lot of this is driven by recurring sales. And what we see is carrier gases continue to grow significantly, especially with all the new projects that we signed in 2017 and 2018. Recall, we had very high levels of investment in Electronics in both years. So we see double-digit growth in carrier gases for the quarter, roughly 13%, which is really one of the key drivers of growth that we see. The other key driver of sustained growth is in Advanced Materials. And that's at a similar level, significant double-digit growth both in the U.S. and Asia, serving our Tier 1 customers. We also saw the ramp of the enScribe etch gas offer that we spoke about previously, with the start-up of new production facilities in South Korea. So both of those really underpin significant level of organic growth at almost 16% overall. E&I continue to be strong. It's not as strong as it was in the fourth quarter of last year, which was roughly 50%. It's in the 30s but continues to be a driver of growth as well. But long term, even as I mentioned in my discussion, I think that the growth in carrier gases, the growth in Advanced Materials really underpin the future for us.
Well, thank you, Mike. In terms of impact of the Linde-Praxair merger, it's probably a little bit early to say. I'll remind you that country by country, as in most of the case, either the Linde part has been resold or the Praxair part has been resold. We still have the same number of competitors in the market. In terms of new Linde behavior, we've not seen much difference for the moment. You know that we have always been in a very disciplined market, and we expect it to remain that way. In terms of Engineering & Construction, sales from one quarter to another is not really a proxy as you know that we recognize most of the sale at the end of the contract. Yes, we are going to be breakeven this year. We may be slightly negative in H1, but we'll be clearly positive for the full year. And we expect to come back progressively hopefully in 2020, or if not in 2021, to the average margin we had in Engineering historically, let's say, between 5% and 10%, and preferably in the high part of the range.In terms of order intake, we have a very active portfolio in Engineering as well. We are expecting some signings. I think that the fact that the order intake is slightly down in Q1 should not be -- should not create any worries.
Our next question comes from Gunther Zechmann of Bernstein.
First question is can you give an indication of the margins we should expect from the EUR 100 million of orders that you signed for the maritime industry by 2020? Should we more assume a GM&T type of profitability or more an Alfa Laval type of margin? And what region are you hoping to be? And the second question, a simple one. I don't think I've seen it in the press release. Can you give a number for the book-to-bill in the Equipment & Installation business that you had in Q1, comparable to the 1.0 that it was at year-end, please?
Okay. So in terms of the sale of the maritime Turbo-Brayton turbine, that was the object of the release of this week. It's really a very profitable business. Not all of the businesses are at this level in Global Markets & Technologies, and you know that it is our most innovative business. We can have strong discrepancies between the value segments, but this one, at least, it's advanced cryogenics technology and the advanced cryogenics technology segment. We have margin which are fully aligned with the group average margin.In terms of geographies, it's mostly sales out of France, but which are exported all around the world. In Electronics, we have a book-to-bill at 0.7, so we can expect E&I to stabilize over the months to come.
Our next question comes from Neil Tyler of Redburn.
Two for me, please. Back to the pricing development in the Industrial Merchant business, particularly in Europe. The extent of the year-on-year change, even excluding the helium market, seems to be at the top end at least of what's been experienced previously. And aligned to Guy's comments on digital efficiencies, is there any reason that you can point out at this point why we shouldn't interpret this momentum is presenting the possibility that you can exceed your typical expectation of raising margins by 200 to 300 basis points? That's the first question. Second question, back to the Fujian contract. You said that there hadn't been much further development on top of what you've mentioned in February. Does that mean that, essentially, the customer hasn't paid you yet?
So Guy, are you going to improve your margin by 300 basis points with digital?
So maybe back a little bit on the pricing in Europe. So yes, we are experiencing now a high-end pricing contribution during the last 2 quarters. I think when you look at the inflation rate in Europe, at the beginning, when inflation started to go up particularly with the energy pricing, we were in a sort of catch-up mode. Now clearly, we are in this period of time where, fundamentally, we have a positive leverage on the inflation overall. So we should, indeed, be having an improvement of margins. This being said, the digital applications, I think, are essentially going to create value first towards the customers in the way they want to operate with us. I think that's very fundamental. We see changes of their expectations in the market. And of course, we expect those applications also to improve our own operating modes in the future. So that's what I can probably say around the pricing and the digital, how it is currently being developed in Europe.
Thank you, Guy. So back to Fujian. I think I explained in February that the discussion and dispute we have with the customer is about the recognition of the performance test. So the customer claims that the performance test is not valid, although it has been checked and validated by an official third party. And therefore, he is paying what he had to pay under the test period, when we claim he should pay according to the commercial terms over the contract for normal operating period. So we still have the dispute about the level of the monthly payment. That's right.
Okay. So just to clarify, so you've invoiced them, and the like-for-like that you've reported is based on your invoicing of what you believe is due. Can you just help me understand how much of the like-for-like growth in Asia or what the contribution was from Fujian ramp-up in Q1, please?
Well, we are not going to disclose the numbers. But the growth in Asia is very strong, even excluding the Fujian contribution.
Our next question comes from Jean-Luc Romain of CM-CIC Market Solutions.
My question relates to hydrogen as a fuel. I was wondering in the GM&T division how the contribution of hydrogen as a fuel compares to biogas in terms of sales.
Okay. So at the moment, if we look at Global Markets & Technologies, 60% of sales are advanced technologies. And approximately 25% of those sales are biogas and hydrogen, what we could call globally, key mobility. It's a view that, at the moment, the bulk of it is with biogas, and the hydrogen sales remain much more modest.
[Operator Instructions] Our next question comes from Peter Clark of Societe Generale.
Yes. Two questions actually. The first one is around Electronics, and probably for Mike, I don't know. But the Advanced Materials, of course, is a business that can go up and down more so than the carriers. Just how stable do you think that business is? And then within that, on the Electronics side. Obviously, the Versum deal now having been agreed with Merck, just how you see the competitive landscape, particularly obviously on the gassy side there and the advanced materials they were involved in. And secondly, on -- just clarify on the North American volume situation for Industrial Merchant. From what you're saying, if we strip out the negative day drag, which I think was still negative volume, you're saying you expect the volumes to move positive again from Q2 because there were some one-off effects as well and some temporary market drags. Just clarify that.
Mike, I think they are all yours.
Sure. Okay. So I think first of all, on the Electronics materials, this is obviously a growth factor for us. And I think there are several aspects to this that will continue to drive that growth. And we don't see it as being cyclical. We see that is actually enabling the continued evolution of the more technologically advanced nodes, all of the investment that is going into new fabs to go ahead and produce integrated circuits, whether that's in logic or that's in memory, as you go to these more advanced nodes, require more carrier gases and more advanced materials. And so we see that continuing to ramp. And as the industry itself utilizes these capabilities, not only does it grow in terms of the overall volumes driven by the industry, but the actual architecture of the chips is evolving. And so traditionally, when you think about production in terms of integrated circuits, you talk about that in million square inches of silicon, which looks at the diameter of the wafer produced and the number of wafers produced. What has happened in chip architecture is we're going from 2-dimensional geometries to significant 3-dimensional growth. And as you grow in 3 dimensions with multiple layers, you begin to utilize more advanced materials and more carrier gases in order to go ahead and produce that same wafer. I think a perfect example of this right now is in 3D NAND, which is evolving as a significant driver in memory. And the current evolution of 3D NAND and the current production capability, the architecture, is a 64-layer design. So think about a KitKat on a nanoscale with 64 layers. That 64-layer is going to evolve to 96 layers in the coming 1.5 years. And in 2 years, that likely is going to evolve to 128 and then grow from there. So we see actually, as this growth continues, a significant drive for ever more demand for the advanced materials along with the carrier gases and our enScribe gas offer. In terms of the volumes in North America, we actually saw, as I pointed out, positive volumes in this quarter as well. And we expect to see continued growth in volumes. The various sectors, the various markets, as I pointed out, have different patterns of growth. Some of it is more lumpy like in Construction, which can grow very significantly depending on the number of projects that are sanctioned, which was very significant last year. And that still doesn't underpin what happens on the Gulf Coast, but we do expect to see continued volume growth in that area.
Okay. And then the Versum deal?
In terms of Versum, I mean, we've seen the evolution of Versum and Merck. I think that, clearly, for everything that's been said, the focus is on the continuation of the utilization of Versum and the integration into Merck, which has a clear strategy. I think we'll wait to see how that evolves. And I think that we're not going to speak for them terms of their strategy and how that's going to move forward.
But no change for you?
No. We continue on the clear path that I outlined. We're very driven to continue to develop a highly advanced technical offer, whether that's in the offer of carrier gases, whether that's in the growing evolution of our portfolio of Advanced Materials that are critical to the technology road maps for the advancement of the increasing technological architecture of the advanced nodes as well as the evolution of our enScribe gas offer, that is not only the next generation of etch gases to meet the exacting requirements at the nanoscale, but also provides a sustainable offer in terms of greenhouse gas emissions.
As there are no further questions at this time, I would like to hand the conference back to the Air Liquide team for any additional or closing remarks.
Okay. So thank you very much again for joining us this morning. As you've seen, for us, it's again a pretty good quarter. Most our markets remain well oriented even if we have contrast between one region and another. We are confident, as extensively explained by Mike, that our growth in Electronics is sustainable with a margin which is very strong as well. So for us, we start our Q2 with quite a lot of confidence. Thank you very much for your attention, and we'll talk to you soon. Have a good day.
Thank you. This does conclude the Air Liquide Q1 2019 Revenue Conference Call. Thank you for your participation. You may now disconnect.