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 2020 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 very much for joining our conference call today in this special context. Fabienne Lecorvaisier will present the first quarter revenue. She is joined by François Jackow, Executive VP, Supervising Healthcare, Africa/Middle East & European hubs. And on the phone from Houston, Mike Graff, Executive VP, supervising Americas and Asian hubs and the Electronics business line. They will both participate in the Q&A session. In the agenda, our next announcement is on July 30 for our half year results.Let me now hand you over to Fabienne.
Thank you, Aude, and good morning, everyone. Thank you very much for attending this call. I will start with a short presentation of the highlights of the Q1 activity, but I will also try to share with you our views for the months to come. Then, we will answer your questions together with Mike Graff and François Jackow. Before presenting our Q1, I would like to start by recognizing our teams as well as our customers, patients and suppliers whose dedication and courage in the current context have permitted the continuity of operations. In first quarter, as currently demonstrated, again, we needed, the resilience of our business model and business mix. After progressive industrial slowdown in Q4 and despite a very difficult context in China, but also the degradation of the environment at the end of the period in Europe and then in the U.S., we have been able to slightly grow our sales by 0.6% for the group and 1.1% for Gas & Services. Of course, our various business lines have been impacted in different manners, and I will spend a little more time on the contribution of the Healthcare business line into the fight against the virus. To be noted, we have implemented immediately strong crisis management measures on top of our ongoing commitment to pursue our performance improvement plans and we are adjusting our guidance, taking their effect into account. First, I would like to remind you what factors of resilience are embedded in our business model. I believe this is pretty important for you to be in a position to better evaluate the future impact of the crisis on the group performance. In Large Industry, all of our activities are protected by long-term contracts, including take-or-pay clauses and monthly fees, covering a minimum volume commitment and our investment. In case a customer has to stop its operations for reason out of his control, and declare force majeure, we are still entitled to the monthly fee in most of the contract. In merchant, which is clearly the most exposed to industrial production, we, here, again, have a part of fixed sales, linked to cylinders and tanks rentals. And we also have a good balance between cyclical markets and defensive market. All in all, more than 50% of sales are protected. Then Healthcare is, of course, responding to completely different dynamics, and this is very visible in the current context. Fundamentals are not sensitive to economic cycles. In Electronics, volatility is now more or less reduced to equipment and installation, representing less than 20% of the business, thanks to the refocus on carrier gases with long-term contracts similar to large industry as well as on advanced materials. Our balanced geographical footprint and extended presence all around the world as well as the diversity of our end markets, together with our commitment to a sustainable growth, are also strong factors of resilience Let's now move to the numbers. Gas & Services comparable sales were up 1.1% in Q1, thanks to the elements I just mentioned. Engineering & Construction sales are still decreasing, as a combination of the large stake of group projects not contributing to consolidated sales and of the mandatory closure of our engineering/construction facilities in China for more than 1 month. Total sales for Engineering & Construction are decreasing by 16%.Global Markets & Technologies were up 14%, thanks to advanced cryogenic technologies and biogas. And as a result, group sales are up 0.6% when published sales are slightly down at minus 1.3% penalized, in particular, by the energy price decrease. If we now review the various geographies. Americas were only impacted at the end of the period. The 1% growth results from a modest progression in all business lines, in line with the Q4 performance. Large industry was supported by hydrogen demand in the U.S. and new contracts in Latin America. In merchant, pricing remains solid despite modest volumes and a good decrease in North America. Healthcare was strong, thanks to Latin America and to medical gases and proximity care in the U.S. Europe impacted a little earlier, benefited from solid volumes from Refining; solid merchant in the Benelux, the Nordics and Eastern Europe; and from the surge in Healthcare, driven by hydro alcogels and medical oxygen. You need to remember that Healthcare now represents 39% of the European business. Asia resisted well, thanks to the resilience of the Chinese large industry contracts and to the very strong demand in Electronics throughout the zone. As a point of reference, in China, merchant sales were down 11% for the quarter due to the local confinement measures. To be noted, other countries, in China, Singapore and Korea, only started to be more impacted at the end of the period. The decrease for Africa, Middle East and India sales is mainly due to the planned maintenance stoppage on our large hydrogen site, Yanbu in Saudi, but also in, a lesser extent, to consignment measures taken in the Gulf countries and in South Africa. Regarding business lines. Industrial Merchant showed limited decrease, mostly due to hardgoods. Gas sales were slightly up globally despite the decrease in Asia, and pricing remained solid at plus 3%, in particular in Americas, with a continued helium effect. Large industry sales were more or less stable. The weakness in oxygen volume for the steel industry in Europe and Asia and the Yanbu turnaround being compensated by strong hydrogen volumes in Europe and Americas. Electronics was strong with 4% growth and even close to 10%, if we exclude Equipment & Installation, as nearly all of our customer fabs pursue their operations in China and elsewhere. Advanced Materials sales pursued the ramp-up and grew more than 20%. Healthcare is, of course, another story, with sales up 10%. Everywhere in the world, our teams have been increasingly mobilized over the period to deliver more medical oxygen to hospitals, with volumes multiplied by 5 in average at the very end of March in Italy, for example. We have also accelerated strongly the production of hygiene products at Schülke in Germany and the production of ventilators in France, with plants working 24 hour a day, 7 days a week. In some countries, we are also starting to treat COVID-19 patients at home while continuing to accompany our regular patients. As mentioned at the beginning, we have pursued our efforts for performance improvement. Pricing remains solid in Q1, with annual increase being implemented before the beginning of the crisis at Airgas and active price/mix management. New efficiencies delivered amounted to EUR 91 million and are up 18% to last year, demonstrating that we've not lost the focus. In terms of portfolio management. We have announced the signing for the divestiture of Czech and Slovakia to Messer for the sale of PDP CRYO (sic) [ CRYOPDP ], a small company involved in controlled-temperature sample transportation, and also for the divestiture project of Schülke & Mayr in Germany. We have several other project going on that we try to pursue. We also closed a few bolt-on acquisition in merchant at [indiscernible] in China, and in Healthcare. The good news is that investment activity remained strong for most of the quarter. The portfolio is still very high, and the backlog is stable. Investment decisions amounted to more than EUR 700 million as a result of industrial decisions being 40% higher than last year, with a very strong momentum for electronic projects at historical highs. To be mentioned, the cash flow was also strong at 22.3% of sales. Regarding start-ups. We still managed to start 8 new units in Q1. However, from now on, a number of projects are likely to be delayed due to the closure of our Hangzhou engineering workshop in China for more than 1 month, and to the mandatory stoppage of construction projects in several regions. At this stage, we see approximately 25% of the project to be started in 2020 being affected. As a consequence, we now estimate the contribution of start-ups and ramp-ups to be between EUR 150 million and EUR 180 million in 2020 to be compared with the EUR 230 million we forecasted initially. This new crisis of this magnitude, the priority is, of course, to act immediately on what is under our control, and we did. Let's talk about the specific measures we have immediately implemented to face the crisis. First, measures aimed at keeping our employees safe and staying close to our patients and customers without compromising, in any way, with safety. All employees who can work from home are actually at home, and it works pretty well, thanks to the robustness of our IT system. As in most of the countries, our activities have been critical. We also have a lot of professionals still in the field with the adequate protections, of course, to ensure the continuity of our operations, wherever possible, and they clearly deserve special thanks for their dedication and efforts. We have also launched an additional cost containment plan to adjust our fixed cost to the reduced activity level, which will progressively ramp up over the year. Focus has been reinforced on collections and selectivity of CapEx, with the aim to secure long-term and profitable projects contributing to the performance. We have reinforced liquidity and access to financing with the issuance of a EUR 1 billion bond late March. Let's now move to the outlook. Integrating our crisis management, additional plans, we have tried to build scenery for the full year outlook. First, let me share with you what we see in our various businesses in April. In Large Industries, China is recovering, while the demand is reduced in most of the other countries in the world, in particular in the steel industry and in a lesser extent, for chemicals. However, our contracts are holding strong and we have a limited number of significant force majeure. Industrial Merchant is the most affected with volumes decreasing 30% in bulk and more than 50% in packaged gas and hardgoods in countries where the pandemic is still rising. This is in line with what we've seen in China in February. Of course, the drop in the manufacturing sector is much more significant than in the consumption market as noncritical facilities may close temporarily. Conversely, in Electronics, activity is running close to normal except, of course, for equipment and installations, which require customer interface. And start-ups are confirmed. We have no stress signals from our customers. Then in Healthcare. As discussed before, the activity is far above normal, in particular, in hygiene, medical gases and equipment and installation. Then in the post-crisis phase. It is pretty clear that things will only come back to normal progressively. We can expect chemicals to resume, benefiting in many country from the low energy pricing. In Refining, those inventories are extremely high, and this will delay the recovery when steel is facing structural challenges again. The contract will certainly remain in merchant between industrial markets and consumption markets. In Electronic. We may expect supply chain disruption for a while, which may affect Q3, with a return to pre-crisis trends in Q4. Healthcare should remain strong, even if Home Healthcare can be penalized by the absence of new prescription during the peak of the crisis. So based on our estimates, it is very obvious that Q2 will be heavily impacted. However, thanks to the resilience of the model and to the measures implemented, and on the assumption that lockdown could be fully lifted by the beginning of Q3, we are still confident in our ability to grow the operating margin, even if the top line is significantly penalized in Q2 and, in a lesser extent, in Q3. In terms of net profit, we should be able to maintain net profit flows to preceding year level. Also for your information, we confirm that our General Shareholders' Meeting will be held as planned on May 5, behind closed doors, of course, but broadcasted in real time on our website. We also confirm that our dividend will be paid on March 13 (sic) [ May 13 ]. So this closes my presentation. Thank you very much for your attention. We will now open the Q&A session.
[Operator Instructions] And our first question comes from Martin Roediger from Kepler Cheuvreux.
Three questions, if I may. First question is on operating cash flow, which has been rather strong in Q1. Can you elaborate on that? Secondly, on your take-or-pay contracts, do you help your suffering clients by modifying the contracts, i.e., extending the duration by a few years while lowering the monthly fees? I think you did that also in the crisis, 2008, 2009. And finally on engineering. Is it fair to say that today, in Q1, the majority of total sales is internal business and the EUR 52 million external sales is just a fraction? And in this context, is it, therefore, fair to say that you still will generate a positive operating recurring income in engineering this year?
Well, thank you. I will respond upfront to the cash flow question and the E&C question, and maybe I will hand over for the Large Industries situation to François for Europe, and Mike for the U.S. Regarding the cash flow. We are at 22.3% of sales to be compared to 20.3% last year. So it's a clear improvement. Actually, we, of course, reinforced our collection teams and really focused on customer credit, but the cash flow has not been affected that much so far. We had a pretty good level of collection. Of course, we are watching that very carefully, but we have no alert at this stage. Also we said that we would continue to improve the performance. And of course, the increase in the cash flow to sell reflects that as well. Then to be very clear, we expect some slowdown in the collection in Q2. Although, for the moment, it remains pretty solid. In terms of Engineering & Construction. It's true that the real decrease is less concerning that what we publish. And yes, we still expect to be positive. It's not going to be enormous for sure. But for the moment, we still expect to be positive in E&C for the year. François, for the large industry in Europe.
Yes. Thank you very much, Fabienne. Good morning, everybody. I take this opportunity to hope that everybody on the call is fine wherever you are, and we appreciate definitely, your time this morning. So regarding the large industry. Definitely, this time is the time to be close and even to be close to our customers and that's what we are doing. We are in a very constant exchange with our customers. Some of them are facing a difficult situation. But we have to look at this from a long-term perspective because we have a long-term relationship. So we are working with them to find, I mean ways to create value for them and for us. So it's time of close interaction. It's time also of creativity. But I should say that most of our Large Industry customer are basically in the situation where we do the full implementation of the normal contract at this stage.
Okay. Thank you, François. Mike, do you want to elaborate on that for the U.S. and maybe Asia?
Sure. Thanks, Fabienne, and good morning, everyone, and I would echo François' sentiments. I hope you and your families are safe and healthy in this time. I would just build on what François had to say. I think we stay close to our customers. We continue to go ahead and work with them. In reality, as we look at where we are today, for the Americas, oxygen volumes, as we get deeper into the crisis, are down maybe 15% or 20%. So we have not seen anything very dramatic in terms of a downturn. Hydrogen volumes are down 10%, maybe in some areas, closer to 15%. But again, all of our customers are running. Things continue to operate in our facility front as well. Similarly, with what we saw in Asia has all evolved. We clearly saw, as we talked about on the call a few months ago, a decline in activity in Airgas volumes, maybe down 20% to 25%, and also on hydrogen, down 10% to 20%. But overall, we still maintain about 70% of capacity. And that aligns very well with our minimum take-or-pays. So we stay close to our customers. We work very hard with them to make sure there's reliable, safe supply to them. In the few circumstances, where there were some issues, we have dealt with them. But again, like François says, we work hard first to meet their needs and then to make sure if there is an unusual situation, that there's a recognition of value for both parties.
We will now take our next question from Gunther Zechmann from Bernstein.
Fabienne, François and Mike, one on pricing and one on demand, please. I saw that 10% about -- of global demand for helium is for party balloons which, of course, are down quite sharply. Are you seeing any impact on price --
I'm sorry, Gunther, we can't hear you. Can you maybe talk closer to the microphone?
Can you hear me better now?
Much better. Thank you.
Great. Fabienne, François and Mike as well. I've got one on pricing and one on demand. I saw that about 10% of global demand is from party balloons for helium, which, of course, is down sharply. Are you seeing any impact on price given lower helium demand currently? And the second one is on April volumes. Air Products said that European packaged gas volumes were down 40% in April. Can you give us any idea in terms of the quantity of the impact on your merchant and packaged gas business, please?
Okay. So helium for party balloons is a U.S. market. It's clear that it's around 10% of Airgas helium sales, and that, of course, has stopped. We've not seen so far any impact on the helium pricing, which has been significantly up compared to Q1 last year. And the helium effect on pricing is still 1/3 of the total pricing effect on IMI. Exactly the same thing that we saw for the second part of last year. So that does not change. For the packaged gas volume in Europe, maybe François?
Yes. Thank you, Fabienne. So in Europe, actually, we started to see the drop, I would say, mid-March, with a sharp decline. And in some countries, especially in the southern part of Europe, a drop coming very quickly in a few days, a couple of weeks. We have seen for packaged gases, a drop up to 50%, some time, for a few days, 60%. But now more close to indeed, 40%. For bulk, the drop was less. Probably in the range of 30% to 40%, but again, stabilized in most of the countries. This is mostly for the southern part of Europe because clearly, when we look at the northern part of Europe, the drop was far less than that. If we are looking at Eastern Europe also we have seen a very limited impact. That's probably what we can forecast also for April. And what we see is probably, April is going to be low but -- I mean providing that the situation will not get worse. We are at a plateau, and we see probably a stabilization in April, if not a pickup in some countries.
Our next question comes from Laurence Alexander from Jefferies.
A few quickly. Can you just characterize, with the 40% of Electronics that is protected by take-or-pay, is that 100% protected? Or is there a variable component in those contracts? Secondly, in China, can you characterize if any end markets are back to 100% of precrisis levels? And then thirdly, can you discuss price trends in merchant CO2 in the U.S.?
Mike, do you want to take over the question for the take-or-pay in Electronics and on the China situation?
I will. Thanks, Fabienne. Laurence, I think, first of all, on the question regarding the structure, I think you're speaking to the carrier gas business. And the carrier gas business is well reinforced with monthly fee structures. So we're pretty much back-to-back there. And so the structure is such that everything is basically built into a monthly fee. And for the majority of the facilities, the customer also pays for the utility or the power needs. So that's the 40% that is determined, that Fabienne referred to earlier. In terms of the Chinese markets. As you're aware, when we spoke about the markets back on the February call, we saw, obviously, a dramatic downturn both in packaged gas volumes for merchant and also for bulk. I mean at one point, clearly for China, we were down 50% in packaged gas volumes and bulk was down about 30%. I would say today that we're back to roughly 85% of normal across the markets. So clearly, manufacturing, automotive and some of the craftsman business was down significantly. Some of that has begun to recover, but it's not back fully to where it was. And I think the reinforcement of rent and food and pharma, and our own sites as well in China, have really brought a lot of stability to the business. So I would say that, in general, the markets have a much stronger recovery of about 85% and continuing to strengthen. And I think when you look at the Chinese market today from an industrial standpoint, with our ever-growing domestic economy in the merchant space, you're looking at about 80% of that going to more domestic needs as opposed to supporting export. I think finally, you asked a question about CO2 in the U.S. and specifically, in the Airgas business. And I think as most are aware, there's been a supply disruption to some extent, in CO2 supply, both the combination of what's happened with the demand for transportation fuels and decline in certain areas, whether that's for ethanol production or for refineries. It adds some impact on those sources of CO2. Those sources likely represent about 50%, 5-0 percent, of the supply in North America. So as we have to go ahead and work across the supply chain, working with our suppliers, we're actually working with the government, the U.S. government as well, to assure we can meet the needs for essential businesses. Think about food, pharma, and water treatment as well. We're working hard to make sure we maintain those supplies. And pricing will be impacted for those areas where there may be have to have some incentivization for additional supply, but I can't say there's an overt impact at this point.
Just to complete Mike's answer. CO2 sales in the U.S. are relatively modest. It's EUR 200 million a year or so. So it's not extremely significant.
Our next question comes from Tom Wrigglesworth from Citi.
We've talked about European packaged gases. Could we get an update on the U.S. Merchant's kind of moving parts? Where is the exit rate from the first quarter in terms of U.S. levels, noting, obviously, that there's kind of varying levels of activity across the country? So that would be super helpful. And then secondly, you've indicated that underlying ex Schülke sales, net profit would be flat year-on-year for 2020. Can we assume within that that what you're implying is that the pickup in -- or any collection on Healthcare -- improvement in Healthcare, will be enough at a net profit level to offset the slowdown fundamentally in the merchant business? Is that how should we should interpret that communication?
So the first question is for you, Mike. Can you give us an update of the merchant situation in the U.S., please?
Absolutely. For the first quarter, overall revenues were flat compared to Q1 of 2019. I think that's important to recognize because actually, Q1 2019 was a fairly strong comparator. It was a fairly strong quarter compared to the rest of 2019. And we saw in 2020, here in the first quarter, a fairly solid performance at the beginning of the quarter and then we began to feel the impacts of COVID-19 later in the month of March. So overall, I mean gas was up about 2%, hardgoods down about 5%, we had strong pricing. By the time we look at the comparator with the impact on the COVID crisis at the end of March, gas volumes are slightly off, hardgood volumes are down more so. But on a sequential basis, we really saw very similar, I would say, activity levels in the industrial sectors as what we saw in Q4, and some modestly improved. So obviously, manufacturing, metal fabrication and construction are off a little bit as we get into where we are with the crisis. Construction was already down, and manufacturing had been down in the fourth quarter compared to prior years, with some softening in the industrial markets. The consumption services and services really were driving the market. So I think food, pharma, life sciences, even the co-chain logistics as well as research and laboratory services were very strong. And actually, for Airgas, not a surprise. Healthcare was very strong in the quarter as well, continuing where we were with hospital and proximity care and further penetration of the innovative cylinder offer. So I think that's where we are.As we sit today in April, we see an impact similar to other regions. I mean volumes are down 25% to 30%. A little bit less in gas, a little bit more in hardgoods. We've seen the shutdown of nonessential businesses that are impacting demand in some markets. In construction as well, not just the industrial end of metal fabrication and manufacturing, but you might imagine, construction is down. As you're aware, automotive manufacturing closed across the entirety of the country. Although now, there are signs that some facilities will begin to restart in some of the less impacted regions of the country. And again, the demand in consumption markets has really remained strong, whether that's food, pharma or cold chain logistics. So I'll stop there. I think that that's kind of where things sit.
Okay. Thank you, Mike. Some precision on the guidance. So when we said that net profit should be close to the level of last year, we do not take into account the capital gain that we could realize if we finalize the divestiture of Schülke & Mayr. To be very clear, if we close this divestiture, the net profit, as published, is going to be strongly up. No question. So we are talking here about the normal activities. So clearly, we will have a slowdown in Industrial Merchant, a limited slowdown in large industry given the solidity of the model. Then Electronics should be okay, and Healthcare is going to be strongly up. So the balance of all that will allow us to maintain the net profit level. But when we say that, we clearly do not take into account any capital gain that we could make on the divestiture of Schülke & Mayr. Hope it's clearer.
Our next question comes from Andrew Stott from UBS.
I've got a couple, please. So first of all, just a clarification that I heard. Packaged gases in Europe, down around 40%. And then Mike -- I think that's what you said, François. And Mike, you said minus 25% to 30% in Airgas. Can I just check those 2 numbers?
Okay. So François, on Europe.
Yes. I do confirm. So this is what we have seen, on average, end of March and in April. And again, this is mostly for the region, which are the most impacted, Spain, Italy, France, northern part of Europe and eastern is above that, yes.
Okay. So the question then is how do you think about the difference there between the U.S. and Europe? Is that end-market specific? Or is it just that the lockdown has been more severe in terms of mobility restrictions, et cetera? How do you think about that difference of 15% or so?
Well, if I could. I think that in the Americas, the 25% to 30%, specifically in the U.S., given the size of the country, we have not seen the same level of impact across all 50 states, yes. And so there may be some parts of the country where things are more heavily impacted and some areas where it's not. And so I think that's likely one of the biggest differences that you see between what's going on in Europe and what's going on in the U.S. And we already see in the U.S., in certain markets, certain states are trying to reopen. And as a result, if automotive manufacturing picks up and those types of things begin to evolve, we hopefully will see that stabilize to go no lower than the 25% to 30%. In Canada, it is a bit deeper than that. And in Latin America, it is not as deep as that. So I think it's the balance that we see.
Perfect. Now that's very helpful. Can I steal a second question? Probably one for Fabienne. The move down in the portfolio of opportunities, that EUR 2.7 billion number you highlighted, are you at liberty to say which end customers, so by end market, you're seeing that shift? And are they straight cancellations or are they delays?
Well, in the portfolio we have for Large Industry, we have mostly chemical projects, and we have still a high number of Electronics projects. And also projects which are focused on energy transition on the hydrogen economy. For the moment, in the project that we discuss with our customers, we have not seen any process being stopped. In terms of construction and start-up, there are delays because some construction sites had to slow down, even to stop completely. But in the commercial discussion, we've not seen a customer yet saying, I want to stop discussion for a while. And you've seen that in Q1, the investment decision have been very, very strong. So we don't see that for the moment.
And sorry, just want to know -- want to make sense, staying with that, of your order book today, how big is oil and gas?
Oil and gas in the portfolio is less than 15%.
Less than 15%. Perfect.
Andrew, just to complement the point of Fabienne. What we are seeing also are opportunities for taking over existing assets, modernization and some expansion. But definitely, as you know, well, this is a time where we can see such opportunities.
Our next question comes from Markus Mayer from Baader-Helvea.
Fabienne, François and Mike, I have 3 questions, if I may. The first one is on your receivables. A, if there has been already a default on the receivables, in particular, maybe at your oil and gas customers? And this also do you see significant effects there as oil and gas and also refinery customers in there, that there are reports out, which suggest that the majority of them might be at risk to go into chapter level? Second question is related to this. Could you remind us of how big the exposure of those customers in the oil and gas and the refinery industry is, in general, for the group?And then lastly, of this cash flow improvement, how much was from net working capital or less net working capital outflows, please?
Sorry, can you repeat your last question? We did not hear it well, Markus, please?
Sure. Sure. Sorry, for this. How much of the cash flow improvement came from net working capital effect?
From?
Net working capital.
Oh, from less CapEx. Okay. Sorry, I'm with you. In terms of customer defaults, in Large Industry, we are mostly working with Tier 1 customers. So we don't have any issue for the moment. And as I said a little bit earlier, we still have a pretty good rate of collections with our Industrial Merchant customers. So of course, we are watching that very carefully. But for the moment, it's pretty stable. You had a question about the debt maturity. So the only maturity we have this year is a 2 bond issues to be redeemed in June for a total of EUR 1 billion. And we have already anticipated this reimbursement with the new issue that we've launched in March. The exposure to oil and gas customers is relatively limited in Large Industry. Oil and gas represents approximately 1/4 of the activity, 28% to be very precise. How much is the cash flow improvement is from less CapEx? Not at all for the moment. We expect a progressive reduction in CapEx over the year compared to our initial budget because, as we said, some of the project will be slightly delayed. But we did not see that during Q1. Actually, CapEx were relatively high, and we were pretty close to 13% of sales. So the cash flow improvement is not due to a reduction in CapEx.
And Fabienne, if I could, on the oil and gas impact. I think the other part of this to recognize is, from a refining perspective, while obviously, part of the decline in oil price has to do with supply issues, a lot of it has to do with the lack of demand. So demand for transportation fuels globally is down 20%. But you noticed when we talked about the decline in hydrogen demand for refineries, we're talking about 10% down, maybe 15% in a few areas.And I think that what's happened here is that the mix, the transportation fuel mix, for example, in the U.S., clearly, there's a demand for less gasoline, and jet fuel demand is down as well. But from a logistics standpoint, there's a very strong demand for diesel to keep the food chains and other essential areas operating well. So while you may see some reduction in crude run aligned with what you see globally, there's got to be a demand for an increase in hydrocracking for diesel production. So that kind of creates some buoyance to the demand for hydrogen in that piece.
Our next question comes from Jean-Luc Romain from CIC Market Solutions.
In the French press, yesterday, I saw some articles of doctors questioning usefulness of some of the equipment which is manufactured. Could you elaborate on that?
Jean-Luc, we can't hear you, we can't hear you. Can you close closer -- can you talk closer to the mic, please?
Yes. Sure. Okay. Can you hear me now? Hello?
A little bit better.
Okay. I will try now there. In the French press, yesterday, there were articles questioning the usefulness of some of the respirators which are made. I think the Osiris model. Could you elaborate on that? And the second question is more general. On Healthcare, do we expect on the longer term, an increase in Healthcare spending to maintain in OECD and globally, more preparedness for what kind of pandemics?
So I think the 2 are for François.
All right. So you are referring to the initiative that was led by Air Liquide to, I would say, produce 10,000 ventilators in 50 days, which is basically to boost another order of magnitude of our current production of ventilators in France. This was the request of the French government. And this is something quite exceptional, and that was possible, due to the combination of the strengths of several larger companies, led by Air Liquide and also more than 100 smaller companies. So that is ongoing. We have actually produced, this week, the first 1,000 ventilators and supply that to the hospital. So I think that's really well in line with what we wanted to do. You are referring to one article, which was published yesterday, questioning the use of some of the ventilators because we are producing 2 models, and that was -- there was a question about 1 of the 2 models. And I think there was a misunderstanding, which has been clarified since by the government and by several doctors and the 2 French societies for respiration and for hospitals, which clarified the fact that those ventilators are very useful. They are made to allow the French health care system to go from 5,000 beds to 14,000, which was the plan, in case of an epidemic going out of control. So that's exactly the plan. Those are not the heavy super sophisticated ventilators, which cost EUR 50,000, EUR 60,000. Those are the type of machines which are more in the range of EUR 3,000 to EUR 4,000, but which are made and very useful for COVID patients. So that has been confirmed. There's been several articles since, confirming that by experts. Regarding the health care and the long-term demand. I think, clearly, we see that, first, in spite of the magnitude of the crisis and the exponential increase of the needs, we were, to some extent, well prepared. We have been able to do exceptional things to supply countries which were in great difficulties, I would say. There has been a lot of exceptional actions in Italy, in Spain, in Brazil, in France and in the U.S., for example, to be able to cope with the demand. So I think that's possible, thanks to -- I mean the strength of the industrial system for health care, but also supported by the industrial operation whenever it's needed.What we see in term of long-term demand, we see probably some kind of increase for the medical gases. But definitely, not to the extent of what we see at the peak, I would say, of the epidemic. This being said, if it last in some countries for a few months, there will be a continuous oxygen demand for COVID patients still for a few months. What we see also is that more and more, we are taking care of COVID patients at home to be able to provide the care when they go out of the hospital, which is also a way to free up some space in the hospitals. So we have specific programs which are being put in place. Again, we don't see that as a long-term trend, but that could last for a few months. The rest of the business for Healthcare relies on very strong fundamental. And we do expect to see a continuation of that. We have seen, both in mature and in developing economies, growth of home care activities. And that will continue probably at the same pace, if not more, because the solution that we are developing are clearly value proposition for the health care system. And at a time where we want better care and less cost, probably they will be applied even more.
Thank you, François.
Our next question comes from Jean-Baptiste Rolland from Bank of America.
Fabienne, Mike, François, just a couple of questions. Could you give us an indication about the exit rate of Healthcare in Europe? Then on IM, could you give us like maybe the main differences in terms of end market between IM Asia, IM Americas and IM Europe? And maybe also a sense of how the proportion of take-or-pay contract can vary between regions?And third question on IM pricing. If I understood correctly, you're saying that on the 3% pricing increase that you had in IM overall, 1/3 of it was related to helium. Can I ask when -- the other 2 percentage points, when this price increase had been agreed and in which regions? And last question on Schülke, could you give us an indication about the profitability of that business, maybe whether this is a business which is higher than group average margin or maybe relative to the rest of the Healthcare segment, please?
Jean-Baptiste, your first question was about the rate of Healthcare in Europe, is that right?
The exit rate, please.
The exit rate? What do you mean?
I mean sorry, I mean the growth. What sort of -- because obviously, the -- your Healthcare business, the average 10% that we see is for the quarter. I'm just wondering what sort of growth you're seeing year-on-year towards maybe the rather -- towards the end of the quarter rather than the average?
Okay. So it's true that we had even stronger growth in Healthcare at the end of the period. In March, we were around 20% growth. We have a peak in medical oxygen in some countries and in Italy, in particular, still very strong rate in home health care, and of course, a surge in the sale of hygiene product and equipment and installations. However, what we see also is that in the U.S., also in some regions, in particular, in the New York region, we are currently having more demand for medical oxygen. The stock of the regular surgery procedures is also impacting the other way round. So we're not telling you that we will maintain the 20% for the full Q2, probably not. In terms of merchant, is the situation different country-by-country? I would probably let Mike and François respond. One thing to have in mind, which is important is that in China, the proportion -- the percentage of on-site equipment is higher than in the rest of the group. And this has been protecting the merchant Chinese sales during the peak of the epidemic because for those on-site, you have fixed fees and something like that, and most of them continue to run. François, do you want to give an idea of the repartition, maybe of bulk package in Europe, and then Mike in the U.S.?
Yes. To your point, first, on-site, the proportion of on-site is around 10% for Europe. Then we have a strong packaged gas overall in Europe and the rest being the bulk of the business. Regarding the take-or-pay contract, that's mostly for the on-sites. What we have is contracts for the bulk business for most of it -- for all of it, actually. And we have contracts also for some of the packaged gas business where, of course, we have the rentals.
Mike, in Americas?
Sure. So I think just in general terms, if you look at Airgas specifically or the Americas in general, there is a heavy weight to the packaged gas business and a strong weight as well to the bulk business. Airgas did not have access to the typical on-site model prior to the acquisition. And that is a model that is growing in Airgas, but it's not growing to the same extent you might find in other geographies, especially what you might find in Asia. I think in terms of end-use markets, whether it's manufacturing or construction or metal fabrication, all those markets are strong in both the Americas and also in Asia, especially in China. But obviously, there's a heavier weight on the industrial side, especially in China, thinking about heavy manufacturing, fabrication and certainly, a good amount of construction today versus what you might see in some of the consumer-related businesses of food, pharma, life sciences, it's there. But the weight to that business in the Americas has continued to grow significantly over time. And so I think that that balance is a bit different as well. The bulk business is strong, the liquid business in China, and the packaged gas piece of the business continues to grow. I mean recognize, Airgas has 16 million cylinders in operation today.
In terms of Asian pricing. You may remember that the price of helium has been increasing progressively all along 2019, but in particular, in Q2 and in Q3. So we see progressively, a reduction on the comparison effect and this comparison effect will really try -- start to vanish in Q4.Regarding Schülke, actually, the profitability of Schülke is pretty well aligned with the profitability of the group. However, it was slightly negative to Healthcare activities. As you know, Healthcare activity have global profitability, which is above the group average. But that's what I can say on the Schülke situation.
Our next question comes from Peter Clark from Societe Generale.
Yes. Just a quick one on the definition of resilience within Industrial Merchants. I'm presuming that what you've done is you've taken the rental income, in particular [indiscernible], resilient end markets, including life sciences, on food and beverage as a main. And then if I look at that, and of course, if I look regionally, if I'm comparing Europe with North America, I presume because of the mix, the higher hardgoods, lower rental income, there is a difference and Europe would be significantly or materially above the 55% maybe, and North America would be below?
So in merchant, globally, the rental and fixed fees for on-site, et cetera, represent approximately 55% of the revenues. Then if you look at what we call the resilient market, meaning food, beverage, techno, research, pharma, et cetera, it represent 25% of sales. So that's why we said that to take the rental, plus the resilient market, we have approximately 50% of sales, which are relatively protected.
And regionally, the difference, Europe versus North America, particularly?
Sorry?
Europe versus North America.
Europe and North America? No, I don't think so. I don't think so. You have differences with the percentage of on-site, bulk, et cetera, but I don't think it's very different because in packaged gas, the rental part is also quite significant. So no, I don't think you have a major difference here.
Our next question comes from Andreas Heine from MainFirst.
Only minor ones are left. The first is in -- just for clarification. Schülke will be in part of these recurring net earnings, as long as the deal is not closed, is that right? Or will you restate numbers when that is out and have it only clean compared to 2020 -- to 2019 completely, excluding Schülke? And that's the first question. The second one, if Industrial Merchant stays weaker, do you have flexibility in your CapEx budget dedicated for Industrial Merchant, so to spend less potentially on that in the second half? And how much could that be? That's basically the second question. And the third one, the medical gases. Hospitals probably have also tanks. That one hospital has, let's say, an exclusive contract with Air Liquide and you have also -- given amount in rental fees for this tank on-site, and that gases is only a smaller part of the delivery. Just to understand the dynamics what the higher deliveries of gases means to that business. Maybe some qualitative comments, please?
So for Schülke, Schülke is still part of the group. And then the P&L of Schülke is consolidated into the group consolidated P&L, and that is going to be the case for all of H1. Then, if the project continues to move forward as we expect, we de-consolidate Schülke on July 1. In terms of CapEx, yes, of course, if the activity is lower, we will have less CapEx. In IM, you will always have a proportion of logistic CapEx. New tanks, new trucks, new cylinders that we may not need this year are not in the magnitude. We thought we will also have a slowdown of the large industry CapEx because of the delay we will experience on some construction projects. So globally, we expect CapEx to be 20% lower than the initial budget. For medical gases, so François, can you take over, please?
Yes. So for the medical gases for the hospital. Indeed, we have midterm contracts, which could be 3-, 5-, 7-year contracts. It depends a little bit if it's public or private. It could be -- most of the cases, those are tenders for the public hospitals. In most of the cases, vast majority, those are exclusive contracts. We are the only one to supply a given hospital. We have rental fees for the tanks but also there is a significant part of the business which is cylinders where we have rental fees for sure. And we have also very often a service fee because we do manage some of the turnaround of the cylinders, for example, for the hospitals.
So in the normal -- maybe and I add, in a normal situation, is then, these fixed fees like rental and service and exchange of cylinders, is that also in this magnitude of 35% you mentioned for Industrial Merchant? Is that kind of comparable? Or is it different maybe?
You have to be very careful because the pricing structure is different from one country to another one. But you can probably take that, on average, something similar to this, yes.
Our next question comes from Chetan Udeshi from JPMorgan.
Just a couple of questions. First, on the flat net profit guidance for 2020. Are you willing to break that into how you think the comparable sales growth look like within that? And how much is the margin expansion baked into that guidance? Just maybe any feel for those 2 numbers. And the second question is just to understand the modalities of your take-or-pay structure within Large Industries. So from what I heard previously, I think typically, the minimum load is 70% is what you charge the monthly fee based upon. And what is the volume component of the revenue that you get in Large Industries above the minimum? And is that something, which can be impacted in the downturn?
For the guidance, we managed to give you a guidance. Not many companies will do that. We are confident that as indicated initially in February, we will continue to grow the margin, but you know that we don't give a precise margin guidance. Our commitment, since now nearly 2 years, is to accelerate improvement of the margin. It's going to be more difficult in the current context, but we are still committed to do that. And thanks to the resilience of our fundamentals, we'll be able also under the assumption that the lockdown ends at the beginning of Q3, to maintain the net profit. I think it's difficult to tell you more at this stage. The take-or-pay structure in Large Industries, François, do you want to answer?
Yes. So typically now, in our Large Industry contract, we have some fixed parts. There is one, which is the monthly fee, first. And that's fixed basically with some indexation, of course. And then you have volume requirement, which is the take-or-pay. That's another part, which is fixed. And then you have the volume, which is a variable part. So typically, I mean the minimum load for the take-or-pay, it depends on the contract, but it's between 60% and 90% typically of the volume. So that could be indeed impacted by the downturn. Now depending on the contract, you have more or less profits, which are in the variable part. Again, it's contract-specific, but those could decrease up to the take-or-pay level for the volume part.
And is there a number you guys have in mind at the moment on what could be the total volume consumption above the minimum take-or-pay levels in the Large Industries, as a whole, just in case, if you have a number?
We have never seen in our portfolio of customer, everybody being at the take-or-pay. I mean it's -- first, it's unusual that a customer isn't take-or-pay. And then given, I mean the geographical mix and the mix in term of industries, we don't have all the customer going to the take-or-pay. So there is a balance. As mentioned by Mike before, we see customers, which are holding very well, even some, which are increasing their consumption. So we don't see anybody going to the take-or-pay.
Thank you, François.
Our next question comes from Laurent Favre from Exane.
It's on efficiencies. I was wondering if you could tell us if the excess versus the guidance will be represented by temporary measures that could reverse into next year. Or whether you're pulling forward some measures that you had in mind in your nearest plan? And in relation to that, in the guidance for recurring net income, from memory, it includes those one-off restructuring charges. I think last year, it was about EUR 120 million. I was wondering if you could give us a sense of what the number could be this year. Similar, lower, higher?
Okay. So we remain focused on our EUR 400 million a year target for efficiencies. On top of that, there will be temporary measures and temporary cost-cutting to face the crisis. And that will come on top of the regular efficiency to protect the margin and the net income. Regarding the exceptional expense. We foresee around EUR 100 million of restructuring this year in the exceptional expense and total exceptional expense, excluding the COVID nonrecurring cost, more or less the similar level of last year.
Our last question comes from Peter Haidinger from Goldman Sachs.
Yes. I have 2 quick ones, if I may. Firstly, on Healthcare, do you see meaningful costs involved in servicing that higher demand? And finally, on Large Industries, how do you see refinery closures impacting base growth? And how do you see utilization rates by region?
François, do you want to answer on additional cost in Healthcare due to the current situation?
Yes. There may be some additional costs, but we do believe those are going to be limited because whenever we had to, for example, do something exceptional and to supply either piping or a new installation, in most of the cases, we were able to leverage our industrial merchant presence and use, for example, the people, which were not fully loaded. So at the perimeter of the Healthcare, there could be. But at the perimeter of the group, that should be well maintained.
In terms of refining, so we don't have any customer who have closed their facility for the moment. However, it's true that the inventories are very, very high. So we expect a much slower production in the second part of the year, but we have no signal that any of our customer could close its facility for the moment. François, yes?
Yes. And if I may also on this part, I mean keep in mind that a large part of the volume supplied to refineries is nitrogen, which is used in any cases. So I mean we do expect, I mean quite a stability in the nitrogen volume, even for the refineries, regardless of their output production.
I think the last question about -- was about the loading rate by region in Large Industries, is that right?
Yes, correct.
Well, of course, right now, we see a better loading in China than what we had, let's say, 1 month ago. I think the most affected in terms of loading right now is Southwest Europe, when the U.S. are affected, but as Mike explained, in a lesser extent. I think we can say that globally, for the moment, we have an average 70% loading or so when we were more at 85% prior to the crisis. I hope that does answer your question. Thank you very much for participating. As a conclusion, I would like to remind you that our Q1 was pretty solid. That demonstrated again, the strong resilience of the Air Liquide business model. We remain really focused on our performance improvement plans. We have not stopped anything before the crisis. And on top of that, of course, we adapt to the current situation. And that's why we are confident that we will still deliver margin improvement in 2020. All the teams are mobilized in Healthcare, but not only to ensure the continuity of the operations, to remain close to our customers, to our patients, and they really deserve a lot of recognition and congratulation for that. So that will end our call. Thank you very much again, and we'll talk to you soon. Goodbye. Have a good day.
Thanks, everyone. Be safe and stay healthy.
Thank you very much. Bye-bye.
This concludes today's call. Thank you for your participation. You may now disconnect.