Earnings Transcript for AI.PA - Q4 Fiscal Year 2019

Operator: Good morning, ladies and gentlemen, and welcome to the L’Air Liquide’s 2019 Results Conference Call. All participants are currently in listen-only mode until we conduct a question-and-answer session and instructions will be given at that time. I will now hand over to the L’Air Liquide’s team. Please begin your meeting, and I will be standing by.

Aude Rodriguez: Good morning, everyone. This is Aude Rodriguez, Head of Investor Relations. Thank you for joining our conference call today. Benoît Potier will present the highlights of the year; and A - Fabienne Lecorvaisier, the 2019 performance, and the outlook for 2020. Mike Graff and François Jackow are also with us and they will participate in the Q&A session. Our next announcement for first quarter of 2020 revenue will be on April 21st. Let me now hand you over to Benoît.

Benoît Potier: Thank you all, good morning everyone and thank you for being with us. Start immediately, just looking at the year globally. 2019 is a landmark year for L’Air Liquide for mainly three reasons. Number one, we delivered a clear step-up in performance and margin improvements as a result of a structured program that we put in place end of 2018 to strengthen essentially the existing programs. We have three leavers, pricing and mix and we'll be coming back on details later. The second lever is efficiencies and the third one is portfolio management. 2019 also stands out by the high-level of investment decisions. We chose our commitment to our customers, but also to efficiency because part of these investments were related to efficiencies. And third, we have a strong commitment to climate. As you remember, we introduced our climate objectives end of 2018. Many actions were launched in the operations to reduce our carbon intensity and reach our climate objectives. And we also launched an increased number of major initiatives or I could say breakthrough projects, some in partnership with customers and I'll come back later on that. On Page 4, if we look at the main numbers and start with financial performance, 2019 has been a strong year with a robust top-line first with 4.3% growth in public – in published growth. We had also a strong leverage on results with a step-up in operating income recurring margin improvement with 70 basis points excluding energy and even 90 basis point as published as a matter of fact, and 11.1% of recurring net profit growth. The ROCE, and in particular the recurring ROCE grew by 60 basis points, so we are on track with our five year plan. And in addition, we had increased cash flow which enabled a higher investment. If I just turn to Page 5, I would like just to highlight the fact that this sustainable performance is the result of a structured program, which is in place where we have first reinforced existing plans, which are based on – and you know that pricing efficiencies and continuous improvement and bolt-on acquisitions. But on top of it, new actions were launched end of 2018, beginning of 2019. They were essentially product mix management and to the extent possible priority was given to higher margin products in each well business line, in particular a push on cylinders in IM. The second point is transformation programs with, for example, the implementation of shared services across countries, sort of mutualization of means. The reorganization of some activities or the accelerated deployment of digital tools because behind those efficiencies there's a lot of digital initiatives and further streamlining of the portfolio of activities to focus more on core business and to densify operations. Thanks to the structured program in place. We can commit to further improve the operating margin, assuming, of course, no major change in the environment and in particular also the international health situation is under control. Teams are really focused on implementing the program and I thank them for their full engagement. Second point I’d like to make is the investment program. Those investments are towards customers and efficiency has said it and it goes through higher investments and order in takes in engineering. Investment decisions stand at a high level in 2019 with 3.2 billions for industrial decisions, which is the highest level over the past 10 years. It includes investment for our customers, which means new projects and renewables in particular, but also to support efficiency program. Now about 13% of our industrial investment decisions are dedicated to efficiency programs. The order intake is also recovering in order in engineering and construction. The activity being mainly focused on internal projects for large industry and electronics and this is why the reported numbers are decreasing, but the actual level of activity, E&C, is increasing. All of that is leading us to propose a dividend – Page 7, a dividend distribution in 2020, which is €2.7 per share, which is a 12.4% increase compared with last year. If we take into account the 1 for 10 free share attribution that took place last October it is reflecting the step-up in performance improvement. And if we look at the past 20 years, this is 9% compounded annual growth rate in dividends. The third point I wanted to make was related to climate and to the carbon intensity, with a carbon intensity at 4.6 in 2019. Number one, we are below the initial commitment which is visible on the graph. But I would like just to highlight the fact that things are not going to be linear because every time we start up a new plant, we have new emissions, either direct or indirect. And so everything will depend on the timing of those startups of production units in particular. But we are generally speaking on-track to reach the carbon intensity target that we set in November 2018 of minus 30% and carbon intensity from 2015 to 2025. Let me just highlight a few major initiatives that we took. Page 9, commitment to climate is also for longer term with these number of major initiatives or breakthrough in some cases. Few examples, first CCS is carbon capture and storage projects, we have just announced two partnerships with customers. One is in Norway and is the European scale and two projects within Rotterdam and Antwerp and all of them will be around first capturing CO2, transporting then the CO2 either through pipeline or liquid form to a sequestration site. The second major initiative was related to green hydrogen with the investment in an electrolyzer in Quebec. It's about 20 megawatt PEM technology electrolyzer. It's a world premier I think. And part of the second project was a partnership with Engie in South of France to also build new electrolyzers from sun – from solar energy. In the low CO2 production we have a partnership with two customers in the steel industry, which is probably the first one to seer the study. The – with significant reduction in CO2 and the potential use of hydrogen to replace Coke in the blast furnace. We will help them to study and to implement pilot projects to significantly reduce their carbon footprint. And the third, the fourth example was the hydrogen mobility where we are developing today several solutions in different countries. We can mention California. We can mention China. We sign an agreement with Sinopec recently and with a small company Houpu also in China. So we can say that the hydrogen counter is very, very active. And we had recently a meeting with about 40 CEOs in Versailles in France where we commissioned a very interesting study about cost competitiveness for hydrogen. So all in all, it's a landmark year for L’Air Liquide and I'd like to hand over to Fabienne for the details.

Fabienne Lecorvaisier: Thank you, Benoît. Good morning to all of you. So as mentioned, by Benoît 2019 has been quite a special year for L’Air Liquide in particular the evidence that our performance improvement plans are delivering in a pretty unequal environment and in particular facing a more difficult fourth quarter the resilience of our model allowed us to deliver 4.3% sales growth and regardless of the relatively soft context, operating margin increased to 17.3% for the group. Cash flow to sales is above 22%, and our recurring return on capital employed now stands at 8.6%. Sales have been subject to pretty contracted markets on which I will come back in a minute. Gas & Services sales at €21 billion are up 3.5% on a comparable basis. Sales are actually up for the year in all businesses and geographical zones, but the Q4 slowdown in softer markets adding to a strong comparison basis last year impacted our growth, in particular, in the U.S., Japan and Australia as well as more globally in industrial merchant. Engineering third-party sales decreased 25% in 2019 with a larger part of the resources being allocated to group project to be noted, sales up 3% for the year in total. At the same time, global market and technology sales, supported by advanced cryogenic technologies and maritime services, were up 15%. As a result, group sales progressed 3.2% on a comparable basis, which given the environment confirms the solidity of the model. ForEx was positive until the end of the year, thanks in particular to the threatening of the dollar with a 2.1% positive effect on published sales, while the perimeter effect also added 0.4% in connection, in particular with the Tech Air acquisition in the U.S. Conversely, growth was hampered by minus 1.4% negative energy price impact. In total, we've seen that published in group is 4.3%. Let's now take a few minutes to review our main markets. The trends we observed in Q3 persisted in Q4 with some widening of the gap between growing markets and more difficult ones. And actually, we do not expect anything different in Q1 2020, even if most of our customers are talking about the progressive return to more balanced markets. For our large industry customers, demand remains solid in refining particularly in Northern Europe when metal and chemicals have stabilized at a lower level with quite a large number of maintenance stoppage in Q4. In industrial merchant, consumption-driven markets, and in particular, food and beverage are stronger when sectors like automotive construction or metals are softer. Despite the slowdown of equipment and installation, the electronic market remains very well oriented under the drive of integrated circuits. And to finish with, in health care, demand for medical gadgets is growing on the number of patients to be treated at home is also strongly increasing. In this contrasted context, the understanding of the growth dynamics nearly requires by business and by country analysis. So what I'm going to share with you now is more selected highlights than a complete analysis, and my comments will be focused on Q4. America has posted a 1.5% growth for the year and a slight decrease in Q4, mostly driven by customer outages and improving large industry growth by 95%. In merchant, the pricing effect remained high at 3.9%, while volumes in industrial markets were penalized by a significant drop in hardgoods. Medical Gadgets was strong in the U.S., where, as a reminder, we are the number one player in this segment. In electronic gadgets sales were good with equipment and installation suffered from a high comparison business last year. Europe was up 3.4% for the year and 2% in Q4. Large industry was slightly positive, thanks to refining. Merchant mix was good with more packaged gas, positive volume and price effect at 2.5%. Organic growth in Medcare remained really strong, notably driven by diabetes. Growth was globally more dynamic in Northern Europe than northeastern countries than in the rest of the zone. Asia posted a high 8% for the year with a softer Q4 at 2%. The slowdown is mostly due to difficult Japanese and Australian markets as well as to lower sales in equipment and installation in electronics. China is still doing well with ramp-ups in large industries, high cylinder and carrier gasses and Advanced Materials. Large industry and industrial merchants are also strong in Singapore and in Malaysia. The zone is globally benefiting from [indiscernible] demand on pricing as well as from electronic gadgets and Advanced Materials growth. In Africa and Middle East, our large units are fully loaded and industrial merchant continues to progress very well in Western Africa, Tunisia, Emirates, Egypt and India. I'm on Page 16. I will now try to give you a little bit more color on our various businesses. Merchant was flat in Q4 in an even more unequal environment. The good news is that despite we had good significant decrease, cylinder volume growth remained solid and pricing effect continued to be strong at 3.2% globally. Large industry were clearly penalized by an abnormal number of customer turnaround or accident in Q4 in Americas. Hydrogen volumes continue to be strong in Europe. Chemical demand was staffed and metals seems to stabilize at the previous low level. Health care performed very well, supported by homecare development in Europe, generating high single-digit growth and strong medical gadgets in the U.S. Electronics published numbers are impacted by a sharp decrease in equipment and installation compared to the exceptional level of last year. Excluding those equipment and installation sales, we are up 7% with a global growth, which is perfectly in line with previous quarters and even stronger for carrier gadgets and Advanced Materials. So this is for the activity. Let's move now to the P&L analysis on Page 18. With sales up 4.3% as published, total costs are on year by 1.2%. The decrease in purchases reflects notably the lower energy price, but also the decrease in our goods as well as the outcome of procurement efficiency programs. The increase of personnel expense is linked to bolt-on acquisition as well to the growth mix, an impact equal to the stronger growth in home healthcare, which is the most labor-intensive of our activities. Average stand out increase are less than 2%. The leverage is significant at the profit before depreciation level, which stands now at 27.1% of sales, a 230 basis point progression and still 130 basis points, excluding the first application of the IFRS 16 accounting standard. Depreciation is high, and it's mainly impacted again by IFRS 16. It includes nine months of the Fujian operation. Excluding IFRS and ForEx, the amortization is up 4.5%, which is really in line with the startups of the year. As a result, operating income recurring increased by 10%, showing a 70 basis point progression of the operating margin for the Group and 60 basis points for Gas & Services, excluding the energy impact. As published to be noted, the Group operating margin is now 17.3%. As discussed at mid-year, our performance improvement program relies on three pillars

Benoît Potier: Thank you, Fabienne. Before we start the Q&A, let me just give you a few numbers on China. First, I'd like to pay tribute to our teams. What you have to know is that we have 4,700 people altogether in China, out of which 300 are located in the Wuhan regions. They have been highly mobilized in the past two weeks, nearly 24/7 essentially to supply products to customers. We also supply oxygen to hospitals, and you can guess that this has been a busy time. The main issue for us in the months to come is going to go from a crisis situation to a more sustainable way of managing this crisis. As we speak, if I look at the different business lines, in large industry, about 60% to 70% of our plants have a normal load, which means that we are running, we are supplying customers. We have rather a few customers that have actually stopped. But the L'Air is not under normal conditions, but I would say, close to. The E&C, as we have a workshop in Hangzhou, which is not that far from Wuhan, what we expect is some sort of delays in the execution of projects because some of our cold boxes are actually fabricated and assembled in Hangzhou. In electronics, it's almost normal operations, meaning that the carrier gases are produced and sold to our customers. We've not seen any major impact today on carrier gases. There's some pressure on the specialty materials and advanced materials, but it's manageable. Of course, the E&I projects, supply of equipment are postponed essentially after the crisis. In IM, as it is a very local business, it can be impacted locally. The bulk business is 50%, 60% load today, whereas the packaged gas is more in the 10%, 15% because it's very local and because many shops and activities are actually closed. And we are very small in healthcare in China, it's limited. So the impact will be limited. So this is where we stand. And any costs related to the coronavirus will be accounted in exceptional costs. And if you have more questions, I think, Fabienne or Mike will be ready to answer your questions. So thank you, and we can start now the Q&A session.

Operator: Thank you. [Operator Instructions] We will now take our first question from Tom Wrigglesworth from Citi. Please go ahead. Your line is open.

Tom Wrigglesworth: Benoît and Fabienne, thank you very much for your presentation and that detail there on the China impacts. Couple of questions from me, please, firstly, on the product mix management and focusing on IM pricing, I think you – 3.6% was the full year pricing performance in 2019. Could you break out what was pure price and what was mix in that – through 2019? And then looking forward on that, you talk about pricing initial campaigns for 2020. What will be a base case for 2020, excluding any coronavirus impact? And the second question, if I may. You talked about nine potential targets for portfolio streamlining. Could you help dimensionalize, what's the amount of sales that will be attached with those nine identified targets? That would be very helpful. Thank you.

Benoît Potier: Okay. Briefly on the product mix management, out of this 3.6%, I think one-third, more or less, comes from helium, and you will know what the helium situation is. There's a shortage of supply because it comes from a limited number of sources in the world. And probably, the situation will be prolonged during 2020 before we see in 2021, normally, new sources coming in the market. The split between the pure pricing and the mix, I don't have the number off my head. I don't know whether we have that somehow available. Fabienne?

Fabienne Lecorvaisier: It’s quite difficult to segregate because it’s a mix of both. There is probably more pure pricing in the U.S. as a catch-up of preview situation, the little bit of more mix in Europe where we had packaged gas growing quicker than bulk.

Benoît Potier: Now that being said, you said, okay, can we expect a sort of the same order of magnitude in the future? I think this is – I mean, there’s a helium first. And second, there’s a sort of catch-up situation where we had to face significant transportation cost increase in the past. And we had to pass on those costs to the market. And I think we have done it pretty well in the past year. It’s not going to last forever. So probably in the long run, we will be closer to inflation or inflation plus as a rule of thumb for pricing, but we intend to continue the pricing management, be pure pricing or product mix, because there are a lot of things to do. I mean, when you densify your portfolio of customers, when you restudy the distance between your filling plant or your production plant to your customers, there are many things you can do. And in the end, the pricing but also the cost side of it is improving. So we intend to keep a pretty good and sustainable pricing level over time. That will be close to inflation or inflation plus. And that’s more or less what we can do at this stage. Potential targets for portfolio, Fabienne?

Fabienne Lecorvaisier: So in the potential targets, we have understood the divestiture of Schülke & Mayr in Germany. So this one is major and will be treated, of course, as a large parameter. The others are relatively modest. You probably saw that we announced 10 days ago, the divestiture of Czech and Slovakia, together, it’s clearly less than EUR 20 million. So the other divestiture will be relative on margin, but should have an impact – a modest impact on sales, which is very likely to be compensated by our bolt-on acquisitions.

Tom Wrigglesworth: Okay. Very helpful. Thank you.

Benoît Potier: Thank you. Next question?

Operator: Our next question comes from Andrew Stott from UBS. Please go ahead. Your line is open.

Andrew Stott: Good morning, everyone. Thanks for taking the questions. Probably the first one is for Mike around two issues in the U.S. You were hit pretty hard in Q4 with minus 9% on hardgoods and also you have the U.S. turnarounds, both Q3 and Q4, which you quantified at around about 4% impact. So as you look into 2020, and so much as is possible, can you just give me an idea of how you see the moving parts in the Americas in general? That’s the first question. Second question was an accounting question. Fabienne, when I look at the six disposals you did in 2019. Where did they – where do the impact of that come in the P&L, please? Thank you.

Benoît Potier: Okay. Easy. Mike, you start. Fabienne, you follow.

Mike Graff: Great. Thanks, Benoît. Good morning, Andrew. I guess first starting with the hardgoods piece and more importantly, the Airgas markets. I think, as Fabienne mentioned, there’s kind of a widening contrast between the industrial markets and the consumption markets. And what we saw slow, especially as we move through the year and definitely into Q4, we saw a much softer construction environment and also manufacturing and metal fab. And so that drove both the decline in hardgoods as well as a mitigation on gases. The gases were more flat in some areas and construction slightly off, but the real drive was a significant negative downturn in the hardgoods themselves. If you looked at more the downstream energy and chemicals, actually, we continue to see that to be very resilient. I think there’s been a lot of growth actually in downstream refining and also chemicals over the course of the last five years, and maintenance spend is actually up 31%. So as we go into the coming year, we expect that in those areas, they likely as we get into the first quarter will continue as they are. On the construction segment, it’s a bit mixed. You’ve got the situation where the more traditional construction with general contractors is down. They’ve completed a lot of new projects and the new ones are yet to come out of the ground. They will. Business development has been very strong. And I also think that you’re seeing the midstream being a bit flatter. A lot of the work and midstream pipeline systems and that sort of thing has kind of come to a more stable level. In manufacturing, we saw automotive flat and stable. We saw Class A tractors declined significantly over the year. I think the book for those fell by about 60% from where they were at the end of 2018 going into the end of 2019. And that’s stabilized now. So I think the impact of all that has evolved to a more stable situation. What’s important to recognize, especially on the hardgoods, it’s not only the activity levels of today, but it’s also a level of destocking for those inventories. And yet in the other markets, if we look at the consumption markets, they are still growing very, very significantly. Looking at more the large industry scope, we saw a very, very heavy set of turnarounds in the second half of the year both in Airgas’ and some very, very significant turnarounds from a hydrogen standpoint. We also had the impact of a severe industrial accident that affected one of the companies on the Gulf Coast that also had an impact on us as well. So we are managing our way through all that. We expect, as we go into the first quarter, at least in terms of the basic fundamentals of the industries on the Gulf Coast, they are very sound. The various companies came out of their turnarounds, they returned back to normal operating levels and volume levels. And we expect that to continue into Q1, barring what we know about what could happen with the coronavirus impact and that sort of thing. But still, I think that that’s come back. We still expect turnarounds in the first and second quarter. We don’t have good visibility on all of them, but they likely will look more like they looked like in the first half of 2019.

Andrew Stott: Thank you.

Benoît Potier: Thank you. The second question is accounting and the six disposals.

Fabienne Lecorvaisier: So yes, the impact of the deposals is visible on all the lines of the P&L. As you can imagine, it’s in the comparable business because it’s small disposals. If we look at the balance of disposals we collect on smaller acquisition on the comparable sale, it hampers the sales by €25 million. So it does a small impact, negative impact on sales by €25 million approximately. Conversely, it has a positive impact on – of €5 million on operating income. So this is a balance of small divestitures and smaller acquisitions, and you see that it starts to be relative on the performance. And it’s certainly something that we will continue in the years to come, those portfolio reviews, more proactive portfolio reviews.

Benoît Potier: Thank you. Next question.

Operator: Our next question comes from Gunther Zechmann from Bernstein. Please go ahead. Your line is open.

Gunther Zechmann: Hi. Good morning. Thanks for taking my questions. The first one is on the margin guidance. Just wanted to confirm a couple of things. It looks like most of the fundamental trends that you mentioned behind the margin improvement that you saw in 2019 here to stay the pricing in the merchant business, the mix improvement, the efficiencies. So is it then fair to be looking at a similar level of operating margin improvement in 2020, excluding any impact potentially from coronavirus, so around the 70 basis point mark. That’s the first one. And the second one, it’s good to see the acceleration in the ROCE improvement. Similar question there, is that pace sustainable as we move towards the 2021, 2022 targets. Thank you.

Benoît Potier: I think Fabienne you can comment on the margin and also on the return on capital employed.

Fabienne Lecorvaisier: So I would agree with you that this margin improvement is supported by a structured program with a certain number of levels, which are not a specific 2019 should, but that will continue to be deployed in the years to come. If you look at the history, the last 20 years, the OI to sales has increased on average by 14 basis points a year. So clearly, the 70 basis point of this year is a step up. We are not going to give you a quantified margin guidance, but the fact that we have included a commitment and margin in our outlook is clearly a signal that we want to continue to accelerate our performance improvement. On the return on capital employed, that’s even more true as we have given you an objective of being back to 10% in 2021, 2022. And then we need to align on this objective and to continue to increase our return on capital employed significantly year after year.

Benoît Potier: And if I just may add something. If you look at the split in the efficiencies, the €433 million, there is a vast majority, which is the optimization of what we do, and it’s across business lines. I mean, it can be energy consumption, improvement in reliability, production, it’s the reduction of losses when you have products like helium that you need to transport and so on and on and on. So this part is important, and it will continue. The procurement part, which is about one-third or 30%, is also something that we can improve. So that’s a structural approach more than just the present approach. But what is new is the transformation part, which added on to the efficiency results that we have. And this part is just starting. So when we put all that together we have enough grounds actually to make those efficiency last in the coming years. And so it gives, I would say, a good substance to a further improvement in margin. It's not just the 13 basis points that Fabienne mentioned over the past 20 years. I think we've put in place now more structured approach to efficiency that we will allow us in the future to maintain a good margin improvement. Next question?

Operator: Our next question comes from Martin Roediger from Kepler Cheuvreux. Please go ahead. Your line is open.

Martin Roediger: Hello. Good morning. Thanks for taking my questions. First one is for Fabienne. You mentioned in your outlook comment for Q1 2020 being similar to Q4. But you also mentioned that some customers talk about the more balanced market. Can you explain which kind of end markets or industries you are referring to it in this regard? The second question is a clarification question on your ROCE figure of 8.6%. With the disposal of the Fujian project, does your capital employed figure for 2019 still include Fujian? And if so, what should we pencil in as disposal effects on capital employed for 2020? And finally, that's for Benoît, a question on carbon intensity. Now with 4.6 kg of CO2 per EBITDA, you're very close to your tariff for 2025. You said it's not linear, but your target does not appear now challenging, even if you factor in that the disposal of Fujian and some maintenance turnarounds have helped you. So do you need to update your target? Thanks.

Benoît Potier: Okay. So Fabienne, you start with the first two, and I take the third one.

Fabienne Lecorvaisier: What we've heard from our customers on what we read for the market forecast is that the outlook actually from midyear was better for the beginning of the year than it was at the end of last year. For the other sectors in particular, chemicals, our customers are more talking about a rebound second part of the year, why for electronics, we see a demand. The demand remains solid, but again most probably it’s more acceleration in each two. Regarding your question on the return on capital employed. So the figure of 8.6% excludes the Fujian loss in the year. In the capital employed, the way we calculate them is the average on a three semester end. So when you look at the return capital employed at the end of 2019, we take the capital employed at the end of 2018 at the end of June or the end of 2019. So at the beginning of the year, end of 2018, we add the capital employed of Fujian in the capital employed same at the end of June. So before we have a return of capital employed, which is completely clean for Fujian, you will have to wait until the end of 2020. In this case, the Fujian asset will have completely disappeared of the average of the capital employed. So it's a little bit complicated, but we don't have it in the year, but we still have it in the capital employed for two of the three periods that we average. Hope it’s clear.

Martin Roediger: Hope so for the absolute figure.

Benoît Potier: Yes, this is clear for me. That's good. And because we are in Fujian, you've very right in saying that the Fujian divestiture is actually removing significant tons of CO2 out of the climate balance sheet, if I say so, our CO2 balance sheet of L'Air Liquide. The 4.6 is partly due to that Fujian divestiture, but it's also due to all the programs that we have put in place. It is below the expected emission. That said it's not leaner. You just say it again. We still keep for the time being the 4.4 target for 2025, because this was done about two, 2.5 years ago. But as we will have to give you a new perspective on 2021, 2025 – next year, big enough, next year, we will seize the opportunity to also look at the climate objectives and I would say, we reexamine and reset those objectives with the reality that we have to see end of this year. So we are aware of the fact that we are nearing now the targets. So it will be time next year to give another objective for the next five. By the way, it will not just be 2025, because when we see what the world now is requiring, including investors by the way, is a view on 2030, if not 2040. And how we can compare ourselves with the 1.5 or 2 degree scenario, because this is what is important. So, we’ll take the year 2020 to think about how L’Air Liquide actually contribute to that objective. And so we will be back with new numbers next year to be to be very clear.

Martin Roediger: Thank you.

Benoît Potier: Thank you. Next question.

Operator: Our next question comes from Tony Jones from Redburn. Please go ahead. Your line is open.

Tony Jones: Good morning everybody. Just one left from me. It relates to China and the coronavirus impact, so appreciate the additional color you gave, but given the exceptional circumstances, do take-or-pay contracts still hold, if this large industry lowered demand deteriorated or carried on for a longer period? Thank you.

Benoît Potier: I think you can take this one.

Michael Graff: So, the take-or-pay contracts Tony, still hold. I mean they’re in place. They’re structural for both large industries, and for the carrier gases. So, they continue to hold. And I think what’s important is, while we don’t know exactly how long this will go. When we think about this in terms of a prolonged impact, nobody’s talking about years, they’re trying to understand is this weeks or months? And so our planning is such that we recognize that differential. So, I think that by the time we get to the second half of the year, we should be into more recovery mode for sure. And I don’t think we’re going to see this prolonged for a long period of time.

Tony Jones: Thank you. That’s perfect.

Benoît Potier: Okay. Next question.

Operator: Our next question comes from Jean-Baptiste Rolland from Bank of America. Please go ahead. Your line is open.

Jean-Baptiste Rolland: Good morning and thank you for taking my questions. I would have two please. On the backlog, it seems that you’re having a meaningful improvement suggesting that in the environment or the level of activity for you is pretty good. Meanwhile, the – I mean the macroeconomic environment is pretty challenged. So, I’m just wondering if you – are you growing above the rate of the industry? That would be my first question. And then the second only efficiencies. You were talking about the pickup for 2021 versus 2020. And I think, I remember that you provided a guidance for €230 million for 2020. What sort of level would you get back to in 2021? Are we talking about getting back to €430 million kind of levels again? Thank you.

Benoît Potier: Okay. You’re right. I mean the backlog is pretty healthy. I think, we’ve been winning a significant number of projects and not just in North America. North America was clearly the place where we have signed a significant number of contract, but it also applied in Europe and Asia. Also in Middle East where there’s a lot of activity right now. It’s difficult to say whether we are winning more than our major competitors. I think, we are not necessarily bidding on the same projects, but for those where we have put efforts and where we had a significant synergy with the existing basins to put in place we were successful. And I think it’s just a good – a good illustration of both the competitiveness and the ability to develop and win projects. So, we might be a little bit above competition. I’m thinking not just large industry, but also electronics. And I think in electronics, we’ve been really very successful in the past six to 12 months. The pickup in 2021 or maybe Fabienne would like to give some color on the commerce.

Fabienne Lecorvaisier: My pleasure. So, you mentioned efficient designs, not efficiencies we are talking about is a contribution of startup and ramp up sound to be very clear. 2019 was relatively high but including a Fujian contribution, 2020 will be lowered lower €230 million will be higher in 2021. We’ve quite a good number of large industry and electronic projects starting up. But it’s always difficult two years in advance to know exactly at what moment the project we start, but we should be more in the €300 million range than in the €230 for sure. And then we’ll update you progressively as we get closer to the effective starting dates of those projects.

Benoît Potier: Now, I’d like to seize this opportunity to ask François Jackow and Mike to ask them whether they see delays will change in the customer’s attitude for the new startups. Because I think so far it has been pretty good and the number of delays that we have seen has been rather limited, François in Europe, Middle East and Africa; and Mike in America and Asia.

François Jackow: Thank you, Benoît. Good morning. No, today we don’t see any significant startup coming from the customers as mentioned by Fabienne, I mean say the whole of the customer who we’re seeing lower activity at the end of 2019 actually are multi-mystic for 2020, and especially, the second part of the year. So this is true for steel especially and as they have tools to tackle the carbon footprint. they are quite active actually at considering new projects in Europe. regarding refining already some investment has been committed to cope with the new regulation, especially in bunker fusion and the newer biofuels. But we do expect more to come. So far the customer, continuing on their project. finally, maybe in the middle East, there has been, in the past 12 months, quite a bit of activity. We do see a little bit of maybe, not slowdown, but redesigning of some of the projects; however, it’s still a very active region of the world, where we see several opportunities that should materialize in the next 12 to 18 months.

Benoît Potier: Okay. And on America and Asia?

Michael Graff: In both the Americas and in Asia, we do not see any sign of anyone trying to slow down a startup. Actually, I think that is we’ve gone through the year in Asia while chemicals and steel both were a bit soft in 2019, especially in the chemical space. We’re seeing a resurgence in terms of levels of business development activity and recognized need for the future. So, I think, that bodes well both for the business development activity in the region as well as for the startups that are planned. similarly in the U.S., we’ve signed on the order of eight major contracts for the Gulf coast over the course of the last 18 to 24 months. And all of those are on track, everyone is looking forward to getting those facilities up and running from the conversations we have had. There’s a lot of drive to go ahead and make sure that they get those up in on stream. And again, the business development activity continues as well in the U.S. in that regard. And then finally, in electronics, I think we signed six carrier gas projects last year that continues to be very robust. The market drivers for integrated circuits is very significant as we look going forward. And even though there was a bit of a slowdown in certain areas of the industry in 2019, all of that is expected to return to normal and be caught up in 2020 and beyond. And especially, in the advanced nodes, those under 27 nanometers that we serve with our carrier gases and advanced materials, and some of the new projects, all of those continued to grow double-digit as we went through the year despite the decline in other areas. So, I think it bodes well for the future.

Benoît Potier: Thank you. Can take next questions?

Operator: Our next question comes from front Francisco Rodriguez from Banco Sabadell. please go ahead. Your line is open.

Francisco Rodriguez: Yes. Hello. Good morning. I would have three questions, quick ones. The first one is going to your or coming back to your efficiencies, could you please give us any number regarding your retention rate of those efficiencies? Just trying to look into what margins could be for next year. The second one is regarding your comparable growth, which we’ve seen that’s increased certainly in the fourth quarter. I know that’s quite a big impact of a difficult comparable basis. But going into Q1, I don’t know if you could give us some color on that. You’ve spoken with them on America, but I know, we have more focus shift. And the last one would be regarding engineer and construction, if you could give us some color on what the 2020 could look like. Thank you.

Benoît Potier: So Fabienne, you can start with the first two questions.

Fabienne Lecorvaisier: So, for the efficiency, we – you know that we use efficiency to fill the gap between the increase of course, on the increasing pricing. as you’ve seen in 2019, we had a pretty strong pricing effect. Therefore, the retention of efficiency is much higher than our average of 30%, more than double of that. but it is linked to the conjunction of a situation of high efficiencies and high pricing at the same time. in comparable growth, I think we discussed that already. We’ll see a lot of Q4 trends in terms of market remained in Q1 even if are exceptionally fake, like the E&I comparison and turnaround on the Gulf coast, we’ll see that. So, the comparable growth should be of course, a little bit better in Q1 and in Q4, but quite difficult to say at the moment, particular with the new uncertainty linked to the coronavirus.

Benoît Potier: And the third question is related to the forecast for the prospective for E&C. You’ve understood that E&C is actually highly focused on the group sales meaning executing the projects for the group. So, it translates into less third-party sales or less revenues. I think we’ve probably reached a sort of bottom, where we were in the second half last year. So probably, the best guess would be to be stable or slightly positive for E&C in 2020. And again, this is not an activity level, this is more due to the fact that E&C is going to serve the group and executes project for the group. And as you remember, we have decided a lot of investments, so there would be a lot of new plants to build in the coming two years. Next question?

Operator: Our next question comes from Peter Clark from Société Générale. Please go ahead. Your line's open.

Peter Clark: Yes. Good morning everyone. Thank you, two questions. First one, a lot of talk on pricing and obviously keeping quite a little of the price you pushing through, I'm just wondering, in Europe, obviously you've got your biggest competitor with a new leadership for what the best part of the year. And I guess on the other side – being thorough year in the market. Now, I'm just wondering if there's been any noticeable change in the discipline across the market at all. And then the second question on the minor disposals coming, certainly through reshaping I mean, SEPIC you’ve announced, I'm just wondering the logic for SEPIC and ingredient, you always said this is quite strong synergies with the rest of the healthcare, but just on the SEPIC business. Thank you.

Benoît Potier: Right. Well globally the – I don't know whether there is a clear link between the consolidation of the industry and the pricing, of course we have the question. Many times from our perspective it's clear that the pricing that we have had, I would say in the past two years is more the result of our actions. The sort of catching up in the transportation costs that we had to incur in the past years. The very low inflation because when the inflation is low, your pricing power is more difficult and also the product mix, we insist on that because it's when you are selling more cylinders and less bulk, you have a pricing issue which is of course a better, we also have new offers to customers, because we are – we bring innovation to the market. We have good examples in the cylinder market, with our new tops that have been launched in the past six months in Europe. They are really promising. And they offer new functionalities to customers. So the pricing is slightly different and it translates into more pricing. So in the nutshell no real impact visible from the change in the structure of the industry, but more pricing results, which are the result of our programs. The reshaping of the portfolio Fabienne? The question about SEPIC.

Fabienne Lecorvaisier: Yes. I think with sugar and SEPIC we have two very different situations. Sugar, hygiene product is now acting in mass market where we are very strong competitors, large international group. So to remain competitive in this market we would need to invest massively into sugar. Sugar is not a priority in our strategy and that's why we have decided to severe potential divestiture. SEPIC big is very different. SEPIC is on a niche market. We are able to continue to grow SEPIC with small acquisition, with R&D, with innovation and to continue to develop both sales and margin at SEPIC. It's a very nice addition to our healthcare portfolio. So, two very different strategic situation and that's why we are studying the divestiture of sugar and not for SEPIC.

Peter Clark: Thank you.

Aude Rodriguez: Thank you. Next question?

Operator: Our next question comes from Chetan Udeshi from JP Morgan. Please go ahead. Your line is open.

Chetan Udeshi: Yes, thanks. Just a quick question, can you quantify the impact of helium pricing on your margin on gases for 2019?

Benoît Potier: Okay, Fabienne?

Fabienne Lecorvaisier: Sure. So we told you that the impact of the helium on pricing is approximately one-third of the total pricing impact on 2019, which by the way will continue in 2020. Then if you look at helium globally, it's a little bit more than €600 million, sales at the group level, nearly €22 billion, so it's not that major. It's true that we have a good margin on helium, which is in the good average of the group, I would say. So higher than the average industrial merchant, but in the total group average, it's contributing but it's not worthier doing improvement of the margin for sure not.

Chetan Udeshi: Thank you.

Benoît Potier: Thank you. Next question, we may probably have to take two more questions or three maximum. Next?

Operator: Our next question comes from Laurent Favre from Exane BNP Paribas. Please go ahead. Your line is open.

Laurent Favre: Yes. Good morning and thanks for taking one last. It's on the capital intensity of the backlog. I was a bit surprised that the backlog went up by €600 million to €2.8 billion, but the impact on sales once fully ramped is same at around €900 million. So the ratio is seemingly above 3x on CapEx to sales and it is a bit high. So I was wondering what was behind that? Thank you.

Benoît Potier: Do you want to take this one?

Fabienne Lecorvaisier: Yes. As mentioned in our new projects and investment decisions, we have more renewals and more efficiency CapEx, which all contribute to the profitability. If you exclude them from the backlog was renewal and efficiency projects, we still have a capital intensity, which is 2.5 area as before. So it’s really the impact of, in particular, the efficiency projects, which are also now in the backlog.

Benoît Potier: One additional remark in that regard. We – in the past, we had a lot of investment CapEx for growth, which meant at the time, new contracts, new volumes. We have incurred in the past several years, also a certain number of renewals, where we could invest for not only renewing existing contracts, but adding more volumes to those contracts, but also gaining an inefficiency. And those investments have a different capital intensity by nature. So you don’t see necessarily the result of this investment fully in sales, but you can measure them in profits because you have savings that are due to more efficient plants. And technology after 20 years or 25 years, have improved. So we have a portion of the OIR, which is coming from those renewals, but you don’t necessarily see them in the sales. And so the apparent capital intensity is higher. That’s a common that you need also to take into account. Next two questions, and I think we will close, so…

Operator: Our next question comes from Andreas Heine from MainFirst Bank. Please go ahead. Your line is open.

Andreas Heine: Thanks. And I restrict myself also to one question. PS seems to change, especially for the hydrogen, large industry projects to tolling contracts, lifting the CO2 – reducing the CO2 frame and lifting the margin. Do you do the same and what is your position at L’Air Liquide and doing this or not doing this?

Benoît Potier: Well, we still are of the opinion that if you can manage energy well, meaning, if you can buy energy from different sources, in particular, when you have a network, by the way, if you can process it nicely, you have options that you can offer to your customers that has value. And this is why we tend to keep the energy content in our sales, and we try to limit as much as we can the tolling, I mean, part of our sales. If we had done that one or two times in our history, it was very specific to a particular situation. But generally speaking, tolling, is not our favorite business model. We try to keep energy, but we – essentially because we think that we can add value to the customers. And this is true, by the way, for the ASU for the oxygen when we buy power, and it’s true for hydrogen when we buy natural gas. We have, in particular, in the pipeline systems in Texas, Louisiana or Europe in particular, we have ability to actually source our primary energy, the way we want. And if you think about climate change and emissions in the future, having the ability to offer cleaner products to our customers, where I think be a plus. So that’s the reason, essentially why we are limiting tolling to a very strict minimum.

Andreas Heine: Thanks.

Benoît Potier: Next and final question.

Operator: And we will take our last question from Charlie Webb from Morgan Stanley. Please go ahead. Your line is open.

Charlie Webb: Morning all and thank you for taking my last question. Just probably leading on from your last comment. Just as we think about the innovative projects, carbon capture and storage, green hydrogen, I guess, low CO2 steel production and some of your kind of mobility, kind of, more service orientated parts towards hydrogen. How should we see that evolving next year, both in terms of the return profile for such investment and also kind of the number of such investments looking forward? When do you expect these to be kind of a bigger part of the kind of growth of the business looking forward? And how do you see the kind of returns by far for this type of opportunity looking ahead? I understand, obviously, today, a lot of investment is required, but looking more ahead in the future?

Benoît Potier: Well this not a short-term market. Hydrogen energy, if I'm trying to summarize what I heard from many different sectors around the hydrogen council is going to really change the name of the game in the next 10 years. Now how will it take to really materialize significantly in sales? It's hard to say. I don't think 2020 is going to be a big difference in terms of sales. But if we look at the number of projects that are discussed, if not decided, they are growing. We can see projects in every single country. I think all the major industrialized countries today have hydrogen plants. We recently counted that about 70% to 80% of the major countries in the world had a hydrogen – a national hydrogen plant. So it's coming but it will take few years before it is really significantly materialized. And I'm talking about, in particular hydrogen energy from renewable. CCS is different. CCS is how do I actually capture and takes my carbon of today. And if you are highly emitting industry, be it chemicals, be it refining or steel, you are now under pressure from the public, from the government, from the authorities, from the financial market to do something on your core business. So the projects for CCS applications are being discussed right now. And the two that we – or three, we mentioned earlier in northern part of Europe are real projects with real companies around the table and authorities that are ready to put also money into those big pilot projects. So CCS might be hit in the next five years. Hydrogen energy for mobility will start but will be still modest in the next five years and will probably take off between 25% and 30%, which doesn't mean, by the way, that this is not the right time to act because this is something we have to prepare. And you have to remember that we took a first decision in the U.S. to build a hydrogen – liquid hydrogen plant, number one. Second, we will invest in a 20-megawatt PEM electrolyzer, which means new technology, not the traditional one in Canada. We also took another decision in France to have sort of renewable hydrogen in the south of France, and we are studying many other projects. So project phase for hydrogen energy and CCS is becoming very serious. But in the next five years, it will not be a game changer in terms of sales. But in terms of decisions to invest and to go ahead, it will be important. I hope I answered your question.

Charlie Webb: Yes. No, very interesting. Thank you.

Benoît Potier: Okay. So thank you very much. I think it covers more or less what we wanted to tell you. So a landmark year, excellent performance, committed to go on with the structured program that we launched. And still see growth, that's why I think Mike and François actually highlighted that development is continuing and uncertainty about the situation in China, but we'll follow that carefully. Thank you very much, and see you soon. Bye-bye.

Operator: Ladies and gentlemen this concludes today's conference call. Thank you for your participation. You may now disconnect.