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Edited Transcript of AI.PA earnings conference call or presentation 11-Feb-20 9:30am GMT

Full Year 2019 Air Liquide SA Earnings Call

Paris Cedex 07 Feb 13, 2020 (Thomson StreetEvents) -- Edited Transcript of Air Liquide SA earnings conference call or presentation Tuesday, February 11, 2020 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Aude Rodriguez

L'Air Liquide S.A. - Head of IR

* Benoît Potier

L'Air Liquide S.A. - Chairman & CEO

* Fabienne Lecorvaisier

L'Air Liquide S.A. - CFO & Executive VP

* François Jackow

L'Air Liquide S.A. - EVP of Europe, Africa Middle East & Healthcare Hubs

* Michael J. Graff

L'Air Liquide S.A. - EVP of Americas & Asia Hubs

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Conference Call Participants

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* Andreas Heine

MainFirst Bank AG, Research Division - MD

* Andrew Gregory Stott

UBS Investment Bank, Research Division - MD and Research Analyst

* Charles L. Webb

Morgan Stanley, Research Division - Equity Analyst

* Chetan Udeshi

JP Morgan Chase & Co, Research Division - Research Analyst

* Francisco José Rodríguez Sánchez

Banco de Sabadell. S.A., Research Division - Research Analyst

* Gunther Zechmann

Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst

* Jean-Baptiste Henri Rolland

BofA Merrill Lynch, Research Division - Associate

* Laurent Guy Favre

Exane BNP Paribas, Research Division - Research Analyst

* Martin Roediger

Kepler Cheuvreux, Research Division - Equity Research Analyst

* Peter Anthony John Clark

Societe Generale Cross Asset Research - Senior Analyst, Chemicals

* Thomas P Wrigglesworth

Citigroup Inc, Research Division - Director and Chemicals and Basic Materials Analyst

* Tony Jones

Redburn (Europe) Limited, Research Division - Partner of Chemicals Research

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Air Liquide 2019 Results Conference Call. (Operator Instructions)

I will now hand over to the Air Liquide team. Please begin your meeting, and I will be standing by.

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Aude Rodriguez, L'Air Liquide S.A. - Head of IR [2]

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Good morning, everyone. This is Aude Rodriguez, Head of Investor Relations. Thank you for joining our conference call today. Benoit Potier will present the highlights of the year and Fabienne Lecorvaisier the 2019 performance and the outlook for 2020. Mike Graff and Francois 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 24.

Let me now hand you over to Benoit.

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Benoît Potier, L'Air Liquide S.A. - Chairman & CEO [3]

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Thank you, Aude. Good morning, everyone, and thank you for being with us. Start immediately, just looking at the year globally, 2019 is a landmark year for Air Liquide for mainly 3 reasons. Number one, we delivered a clear step-up in performance and margin improvement as a result of a structured program that we put in place end of '18 to strengthen essentially the existing programs. We have 3 levers: pricing and mix, and we'll be coming back on details later. The second lever is efficiencies. And the third one is portfolio management. '19 also stands out by the high level of investment decisions, which shows 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 '18. 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 -- 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, '19 has been a strong year with a robust top line first with 4.3% growth in published growth. We had also strong leverage on results with a step-up in operating income recurring margin improvement with 70 basis points, excluding energy, and even 90 basis points 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 5-year plan. And in addition, we had increased cash flow, which enable higher investments.

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 '18 or beginning of '19. 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, 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 third, streamlining of the portfolio of activities to focus more on core business and to densify operations.

Thanks to this 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, I said it. And it goes through higher investments and order intakes in engineering. Investment decisions stand at a high level in '19 with the EUR 3.2 billion for industrial decisions, which is the highest level over the past 10 years. It includes investment for our customers, which means new projects and renewals, 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 other -- 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 in E&C is increasing.

All of that is leading us to propose a dividend -- Page 7, a dividend distribution in 2020, which is EUR 2.7 per share, which is a 12.4% increase compared with last year. If we take into account 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 the carbon intensity at 4.6 in '19, 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 start-ups of production units, in particular. But we are, generally speaking, on track to reach the carbon intensity target that we set in November '18 of minus 30% in carbon intensity from 2015 to 2025.

Let me just highlight a few major initiatives that we took. I'm on Page 9. Our commitment to climate is also for longer term with these number of major initiatives or breakthrough in some cases. A few examples. First, CCS, carbon capture and storage projects. We have just announced 2 partnerships with customers. One is in Norway, and it's the European scale, and 2 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 Québec. It's about 20 megawatt PEM technology electrolyzer. It's a world premiere, I think. And 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 partnerships with 2 customers in the steel industry, which is probably the first one to seriously 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 the 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 signed an agreement with Sinopec recently and with a small company, Houpu, also in China. So we can say that the hydrogen council 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 Air Liquide, and I'd like to hand over to Fabienne for the detail.

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Fabienne Lecorvaisier, L'Air Liquide S.A. - CFO & Executive VP [4]

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Thank you, Benoit. Good morning to all of you. So as mentioned by Benoit, 2019 has been quite a special year for Air Liquide with, 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 EUR 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 certain 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 strengthening of the dollar with 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 growth 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 large industry customers, demand remained solid in refining, in particular, in Northern Europe where metal and chemicals are 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 in our equipment and installation, the electronic market remains very well oriented under the drive of integrated circuits.

And to finish with, in Healthcare, demand for medical gases is growing and 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. Americas posted 1.5% growth for the year and a slight decrease in Q4, mostly driven by customer outages, hampering large industry growth by nearly 5%. In Merchant, the pricing effect remained high at 3.9%, while volumes in industrial markets were penalized by a significant drop in hardgoods.

Medical gases was strong in the U.S., where, as a reminder, we are the #1 player in this segment. In Electronic gases sales were good while equipment and installation suffered from a high comparison basis 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 pricing effect at 2.5%.

Organic growth in home healthcare remained really strong, notably driven by diabetes. Growth was globally more dynamic in Northern Europe than -- and eastern countries than in the rest of the zone.

Asia posted 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 i.e. cylinder and carrier gases and advanced materials.

Large industry and Industrial Merchant are also strong in Singapore and in Malaysia. The zone is globally benefiting from helium demand and pricing as well as from electronic gases and advanced material growth.

In Africa and Middle East, our large units are fully loaded and Industrial Merchant continues to progress very well in Western Africa, Tunisia, the 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 the hardgood 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 continued to be strong in Europe. Chemical demand was soft and metal seems to stabilize at the previous low level.

Healthcare performed very well, supported by home healthcare development in Europe, generating high single-digit growth and strong medical gases 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 gases 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 the up by 1.2%. The decrease in purchases reflects notably the lower energy price, but also the decrease in hardgoods as well as the outcome of procurement efficiency program. The increase of personnel expense is linked to bolt-on acquisition and as well to the growth mix, an impact equivalent to the stronger growth in home healthcare, which is the most labor intensive of our activities.

Average salary increases by less than 2%. The leverage is significant at the operating 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 is mainly impacted again by IFRS 16. It includes 9 months of the Fujian operation. Excluding IFRS and ForEx, the amortization is up 4.5%, which is really in line with the start-ups of the year. As a result, operating income recurring increases by 10%, showing a 70 basis point progression of the operating margin for the group and 60 basis points for gas and services, excluding the energy effect. As published, to be noted, the group operating margin is now 17.3%.

As discussed at midyear, our performance improvement program relies on 3 pillars: pricing and mix management; enhanced efficiencies; and portfolio management. And I will take a moment to update you on the progress we have made in each of the 3 domains.

In terms of mix, we of course have a favorable impact of the low equipment and installation and good sales, but our efforts in packaged gas and the focus on high-value application also delivered. In terms of pricing, the price of helium was very favorable, and this will continue, of course, in 2020. Pricing campaigns are also already planned for other projects, in particular, in Europe and at Airgas.

In terms of efficiencies, we have delivered EUR 433 million of additional sustainable cost reduction, 23% more than last year, above our objectives. The largest part still come from a huge number of industrial efficiency programs and from procurement actions while digitization and transformation project are starting to ramp up. The pursued deployment of the Air Liquide efficiency programs at Airgas generating 18% of the total. Since the launch of our newest plant in 2017, we have generated a total of EUR 1.1 billion efficiencies on top of the Airgas acquisition synergy.

In 2019, we also clearly accelerated our portfolio reviews as well as bolt-on acquisition program in order to improve the productivity of the capital employed. It resulted notably in 6 divestitures with still 9 ongoing at the beginning of the year as well as 24 acquisitions. 4 at Airgas, including Tech Air, a major addition to our U.S network, 6 in China to reinforce our packaged gas activities and 5 in healthcare. As part of this portfolio effort, as you know, we are studying the sale of our Hygiene activities under the umbrella of Schulke & Mayr in Germany. And we exited Fujian, a large coal gasification project in China.

I'm now on Page 23, below operating profit, the year is characterized by significant nonrecurring expenses, which include, of course, the loss incurred with Fujian divestiture, but also EUR 95 million for restructuring and reorganization plans all over the world.

Cost of debt is slightly down, excluding the impact of Argentina. And most of the growth is linked to the exceptional gain we recognized last year on the U.S. debt restructuring for EUR 55 million and to the first application of IFRS 16 for EUR 40 million and in a lesser extent to pension actualization.

The effective tax rate is slightly increasing, the main reason being the nondeductibility of the Fujian loss. As a result, our net profit for the group stands at EUR 2.24 billion and is up 6.1% as published and 11.1% if we exclude major exceptionals, meaning the financial gain in 2018 and the Fujian loss in 2019.

Cash flow is also progressing significantly and stands at 22.2% of sales, a record high for Air Liquide. Working capital variation is in line with the activity evolution following stabilization of the factory initiated.

CapEx including Tech Air acquisition were high at EUR 2.6 billion with industrial CapEx up 17% to last year. Nevertheless, thanks to the strong cash performance, net debt continues to be reduced with a year-end gearing now under 65%.

As mentioned earlier, the return on capital employed improved by 60 basis points, excluding Fujian loss and stands now at 8.6%. It's another step forward to reach our 10% objective in '21 or 2022, depending on the investment phase.

The investment opportunities actually continue to be numerous, showing the confidence of our customers in the medium-term perspective. Our 12-month portfolio of opportunities is up to EUR 2.9 billion with an increase in the number of takeover projects. Investment decision are at record high, close to EUR 3.7 billion with a large part being dedicated to large industries and electronic projects, and we've also a notable increase of efficiencies and renewal investment. We also have more investment in advanced technologies, biogas and hydrogen energy and mobility. And to finish with, we started 18 new units, which, together with the ramp-ups, contributed EUR 336 million to the top line.

For next year, we confirm that the estimation of the contribution of start-up and ramp-up should be in the EUR 230 million range before a pickup in 2021. The backlog, which is the total amount of projects above EUR 10 million, which are under construction and not producing yet, is also up to EUR 2.8 billion and should deliver EUR 0.9 billion of new yearly sales after the full ramp-up.

Benoit already shared with you the principles of our outlook, which is extended to a commitment on margin improvement in 2020. Of course, as many companies, we face uncertainties linked to the development of the coronavirus. In this regard, our priority is to protect our people and to ensure the continuity of the operations.

Nevertheless, we are confident that the resilience of the model and all the efforts engaged will allow us to continue to deliver an improved performance and higher returns while pursuing our investments for our future.

So thank you for your attention, and I hand back to Benoit for the opening of the Q&A session.

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Benoît Potier, L'Air Liquide S.A. - Chairman & CEO [5]

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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 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 few customers who have actually stopped. But LI 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.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will now take our first question from Tom Wrigglesworth from Citi.

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Thomas P Wrigglesworth, Citigroup Inc, Research Division - Director and Chemicals and Basic Materials Analyst [2]

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A couple of questions from me, please. Firstly, on the product mix management and focusing on IM pricing, I think 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 and niche 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 9 potential targets for portfolio streamlining. Could you help dimensionalize what's the amount of sales that will be attached with those 9 identified targets? That would be very helpful.

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Benoît Potier, L'Air Liquide S.A. - Chairman & CEO [3]

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Okay. Briefly on the product mix management, out of the 3.6%, I think 1/3, 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, 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?

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Fabienne Lecorvaisier, L'Air Liquide S.A. - CFO & Executive VP [4]

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

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Benoît Potier, L'Air Liquide S.A. - Chairman & CEO [5]

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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 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?

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Fabienne Lecorvaisier, L'Air Liquide S.A. - CFO & Executive VP [6]

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So in the potential targets, we have under study the divestiture of Schulke & Mayr in Germany. So this one is major and will be treated, of course, as large perimeter. 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.

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Operator [7]

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Our next question comes from Andrew Scott from UBS.

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Andrew Gregory Stott, UBS Investment Bank, Research Division - MD and Research Analyst [8]

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Probably the first one's for Mike around 2 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 6 disposals you did in '19, where did they -- where did the impact of that come in the P&L, please?

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Benoît Potier, L'Air Liquide S.A. - Chairman & CEO [9]

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Okay. Easy. Mike, you start. Fabienne, you follow.

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Michael J. Graff, L'Air Liquide S.A. - EVP of Americas & Asia Hubs [10]

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Great. Thanks, Benoit. I guess first starting with the hardgoods piece and more importantly, the air gas 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 5 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 order 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 a bit more of the large industry scope. We saw a very, very heavy set of turnarounds in the second half to the year, both in air gases 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. As 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.

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Benoît Potier, L'Air Liquide S.A. - Chairman & CEO [11]

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Second question is to the accounting and the 6 disposals.

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Fabienne Lecorvaisier, L'Air Liquide S.A. - CFO & Executive VP [12]

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So, yes. The impact of the disposals 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, reclass and smaller acquisition on the comparable sales, it hampers the sales by EUR 25 million. So it does a small impact, negative impact on sales by EUR 25 million approximately.

Conversely, it has a positive impact on -- of EUR 5 million on operating income. So this is a balance of small divestitures and small 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.

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Operator [13]

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Our next question our next question comes from Gunther Zechmann from Bernstein.

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Gunther Zechmann, Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst [14]

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The first one is on the margin guidance. I 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, are 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?

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Benoît Potier, L'Air Liquide S.A. - Chairman & CEO [15]

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I think Fabienne, you can comment on the margin and also on the return on capital employed.

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Fabienne Lecorvaisier, L'Air Liquide S.A. - CFO & Executive VP [16]

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So I will agree with you that this margin improvement is supported by a structured program with a certain number of levers, 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 on margin in our outlook is clearly a signal that we want to continue to accelerate our performance improvement.

On the return on capital employed, it'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.

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Benoît Potier, L'Air Liquide S.A. - Chairman & CEO [17]

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And if I just may add something. If you look at the split in the efficiencies, the EUR 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 1/3 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 a more structured approach to efficiency that will allow us in the future to maintain a good margin improvement.

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Operator [18]

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Next question our next question comes from Martin Roediger from Keppler Cheuvreux.

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Martin Roediger, Kepler Cheuvreux, Research Division - Equity Research Analyst [19]

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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 a more balanced market. Can you explain which kind of end markets or industries you are referring to 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 pen in as disposal effect or capital employed for 2020?

And finally, that's for Benoit. The -- a question on carbon intensity. Now with 4.6 kilograms CO2 per EBITDA, you're very close to your target 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?

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Benoît Potier, L'Air Liquide S.A. - Chairman & CEO [20]

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Okay. So Fabienne, you start with the first two? I'll take the third one.

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Fabienne Lecorvaisier, L'Air Liquide S.A. - CFO & Executive VP [21]

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So what we've heard from our customers and what we read for the market forecast is that the outlook actually for metal 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 not talking about a rebound, second part of the year, why for electronics, we see a demand, the demand remaining solid. But here, again, most probably a small acceleration in H2.

Regarding your question on the return on capital employed. So the figure of 8.6%, exclude the Fujian loss in the R. In the capital employed, the way we calculate them is the average on 3 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 and the end of 2019.

So at the beginning of the year or 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 on 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 R, but we still have it in the capital employed for 2 of the 3 pillars that we average, hope it's clear.

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Benoît Potier, L'Air Liquide S.A. - Chairman & CEO [22]

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Yes...

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Martin Roediger, Kepler Cheuvreux, Research Division - Equity Research Analyst [23]

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I was hoping for the absolute figure.

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Benoît Potier, L'Air Liquide S.A. - Chairman & CEO [24]

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At least it is clear for me, Fabienne. So that's good. And because we are in Fujian, you're very right in saying that the Fujian divestiture is actually removing significant tons of CO2 out of the climate balance sheet, as Franois said 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 linear. You just said it again. We still keep for the time being, the 4.4 target for 2025 because this was done about 2, 2.5 years ago. But as we will have to give you a new perspective on '21, '25 next year -- beginning of next year, we will seize the opportunity to also look at the climate objectives. And I would say, 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 5. 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 will actually contribute to that objective. And so we will be back with new numbers next year to be very clear.

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Operator [25]

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Our next question comes from Tony Jones from Redburn.

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Tony Jones, Redburn (Europe) Limited, Research Division - Partner of Chemicals Research [26]

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Just one last from me. It relates to China and the coronavirus impact. So I appreciate the additional color you gave. But given the exceptional circumstances, do take-or-pay contracts still hold if this large industry lower demand deteriorated or carried on for a longer period?

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Benoît Potier, L'Air Liquide S.A. - Chairman & CEO [27]

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I think you can take this one.

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Michael J. Graff, L'Air Liquide S.A. - EVP of Americas & Asia Hubs [28]

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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, we -- 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.

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Operator [29]

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Our next question comes from Jean-Baptiste Rolland from Bank of America.

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Jean-Baptiste Henri Rolland, BofA Merrill Lynch, Research Division - Associate [30]

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I would have 2, please. On the backlog, it seems that you're having a meaningful improvement, suggesting that 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're -- are you growing above the rate of the industry? That would be my first question.

And then the second on efficiencies. You were talking about the pickup for 2021 versus 2020, and I think I remember that you provided a guidance for EUR 230 million for 2020. What sort of level would you get back to in 2021? Are we talking about getting back to EUR 430 million kind of levels again?

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Benoît Potier, L'Air Liquide S.A. - Chairman & CEO [31]

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Okay. The -- you're right. I mean the backlog is pretty healthy. I think we've been winning a significant number of projects, not just in North America, North America was clearly the place where we have signed a significant number of contracts, 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 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 6 to 12 months. The pickup in 2021, maybe Fabienne would like to give some color on this comment.

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Fabienne Lecorvaisier, L'Air Liquide S.A. - CFO & Executive VP [32]

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My pleasure. So you're mentioning efficiencies it's not efficiencies we are talking about, it's the contribution of start-ups and ramp-ups, to be very clear. 2019 was relatively high, but including a Fujian contribution, 2020 will be lower at EUR 230 million. We will be higher in 2021 with quite a good number of large industry and electronic projects starting up, so it's always difficult 2 years in advance to know exactly at what moment the project will start, but we should be more in the EUR 300 million range than in the EUR 230 million for sure, and then we'll update you progressively as we get closer to the effective starting dates of those projects.

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Benoît Potier, L'Air Liquide S.A. - Chairman & CEO [33]

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Now I'd like to seize this opportunity to ask Francois Jackow and Mike to ask them whether they see delays or a change in the customers' attitude for the new start-ups, because I think so far, it has been pretty good and the number of delays that we have seen has been rather limited. Francois, in Europe, Middle East and Africa; and Mike, America and Asia.

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François Jackow, L'Air Liquide S.A. - EVP of Europe, Africa Middle East & Healthcare Hubs [34]

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Thank you, Benoit. Good morning. Now today, we don't see any significant start-up coming from the customers. As mentioned by Fabienne, I mean, several of the customers who were seeing lower activity at the end of 2019, actually are more optimistic for 2020 and especially the second part of the year. So this is true for steel, especially. And as they have to also tackle the carbon footprint, they are quite active actually at considering the new projects in Europe.

Regarding refining, already some investment has been committed to cope with the new regulation, especially in bunker fuels and the new biofuels, but we do expect more to come. So far, the customer are 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 slow down, 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.

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Benoît Potier, L'Air Liquide S.A. - Chairman & CEO [35]

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Okay. And America and Asia?

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Michael J. Graff, L'Air Liquide S.A. - EVP of Americas & Asia Hubs [36]

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In both the Americas and Asia, we do not see any sign of anyone trying to slow down a start-up. Actually, I think that as 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 start-ups that are planned.

Similar in the U.S., we've signed on the order of 8 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 and onstream. 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 6 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 nanometer that we serve with our carrier gases and advanced materials and some of the new projects, all of those continue 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.

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Operator [37]

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Our next question comes from Francisco Rodriguez from Banco de Sabadell.

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Francisco José Rodríguez Sánchez, Banco de Sabadell. S.A., Research Division - Research Analyst [38]

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I would have 3 questions, quick ones. The first one, 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 has decreased certainly in the fourth quarter. I know that's quite a big impact of difficult comparable basis, but going into Q1, I don't know if you could give us some color on that. You've spoken a little bit on America, but I don't know, could have more full picture. And the last one would be regarding engineering and construction, if you could give us some color on what the 2020 could look like?

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Benoît Potier, L'Air Liquide S.A. - Chairman & CEO [39]

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Okay. So Fabienne, you can start with the first 2 questions.

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Fabienne Lecorvaisier, L'Air Liquide S.A. - CFO & Executive VP [40]

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So for the efficiencies, we -- you know that we use efficiency to fill the gap between the increase of cost and increase in pricing. As you've seen in 2019, we had a pretty strong pricing effect. Therefore, the retention of efficiencies is much higher than our average of 30%, more than double of that, but it is linked to the conjunction of the 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 the Q4 trends in terms of market remaining in Q1 even if our exceptional effects like the E&I comparison and the turnaround and the Gulf Coast we've seen. So the comparable growth should be, of course, a little bit better in Q1 than in Q4, but quite difficult to say at the moment, particularly with the new uncertainty linked to the coronavirus.

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Benoît Potier, L'Air Liquide S.A. - Chairman & CEO [41]

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And the third question is related to the forecast for the perspective 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 the 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 execute project for the group. And as you remember, we have decided a lot of investments. So there will be a lot of new plants to build in the coming 2 years.

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Operator [42]

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Our next question comes from Peter Clark from Societe Generale.

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Peter Anthony John Clark, Societe Generale Cross Asset Research - Senior Analyst, Chemicals [43]

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2 questions. The first one, a lot of talk on pricing. And obviously keeping quite a lot of the price you're pushing through. I'm just wondering in Europe, obviously, you've got your biggest competitor with new leadership for what the best part of the year, and I guess, on the other side, [Praxair], have been for over a 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 or certainly the reshaping. I mean, Shulke, you've announced. I'm just wondering the logic for SEPPIC and the ingredient? You've always said this is quite strong synergies with the rest of the Healthcare, but just on the SEPPIC business?

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Benoît Potier, L'Air Liquide S.A. - Chairman & CEO [44]

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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 2 years, is more the result of our actions that would be 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, 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 was our new tops that have been launched in the past 6 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, on the question about SEPPIC.

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Fabienne Lecorvaisier, L'Air Liquide S.A. - CFO & Executive VP [45]

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Yes. Yes. I think with Schulke and SEPPIC, we have 2 very different situation. Schulke, the hygiene product is now acting on a mass market where we have very strong competitors, large international groups. So to remain competitive in this market, we would need to invest massively into Schulke. Schulke is not a priority on our strategy, and that's why we have decided to study potential divestiture.

SEPPIC is very different. SEPPIC is on a niche market. We are able to continue to grow SEPPIC with small acquisition, with R&D, with innovation and to continue to develop both sales and margin at SEPPIC. It's a very nice addition to our Healthcare portfolio. So 2 very different strategic situation, and that's why we are studying a divestiture of Schulke and not at all of SEPPIC.

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Operator [46]

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Our next question comes from Chetan Udeshi from JP Morgan.

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Chetan Udeshi, JP Morgan Chase & Co, Research Division - Research Analyst [47]

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Just a quick question. Can you quantify the impact of helium pricing on your margin on gases for 2019?

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Benoît Potier, L'Air Liquide S.A. - Chairman & CEO [48]

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Okay. Fabienne?

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Fabienne Lecorvaisier, L'Air Liquide S.A. - CFO & Executive VP [49]

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So we told you that the impact of the helium on pricing is approximately 1/3 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 EUR 600 million sales at the group level out of nearly EUR 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. So it's contributing, but it's not what is doing the improvement of the margin for sure not.

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Benoît Potier, L'Air Liquide S.A. - Chairman & CEO [50]

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Next question? We may probably have to take 2 more questions, or 3 maximum.

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Operator [51]

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Our next question comes from Laurent Favre from Exane BNP Paribas.

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Laurent Guy Favre, Exane BNP Paribas, Research Division - Research Analyst [52]

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It's on the capital intensity of the backlog. I was a bit surprised that the backlog went up by EUR 600 million to EUR 2.8 billion, but the impact on sales once fully ramped up is the same at around EUR 900 million. So the ratio is seemingly above 3x on CapEx, [two cents]. I mean it is a bit high. So I was wondering what was behind that?

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Benoît Potier, L'Air Liquide S.A. - Chairman & CEO [53]

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Do you want to take this one?

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Fabienne Lecorvaisier, L'Air Liquide S.A. - CFO & Executive VP [54]

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Sure. 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 from the backlog was renewal and efficiency projects, we still have a capital intensity, which is in 2.5 area as before. So it's really the impact of, in particular, the efficiency projects, which are also now in the backlog.

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Benoît Potier, L'Air Liquide S.A. - Chairman & CEO [55]

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One additional remark in that regard. We -- now 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 renewal 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 common that you need also to take into account.

Next 2 questions, and I think we will close.

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Operator [56]

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Our next question comes from Andreas Heine from MainFirst Bank.

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Andreas Heine, MainFirst Bank AG, Research Division - MD [57]

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I restrict myself also to one question. [Peer] seems to change, especially for the hydrogen, large industry projects to tolling contracts, lifting and the CO2 for -- reducing the CO2 frame and lifting the margin. Do you do the same? And what is your position? And add a key to -- in doing this or not doing this?

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Benoît Potier, L'Air Liquide S.A. - Chairman & CEO [58]

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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 1 or 2 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, be it 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, will, I think, be a plus. So that's the reason, essentially why we are limiting tolling to a very strict minimum.

Next and final question.

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Operator [59]

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And we will take our last question from Charlie Webb from Morgan Stanley.

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Charles L. Webb, Morgan Stanley, Research Division - Equity Analyst [60]

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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 the 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?

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Benoît Potier, L'Air Liquide S.A. - Chairman & CEO [61]

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Well, this is 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 long 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 plan. So it's coming but it will take a few years before it is really significantly materialized. And I'm talking about, in particular, hydrogen energy from renewables.

CCS is different. CCS is how do I actually capture and think it straight my carbon of today. And if you are a 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 2 that we -- or 3, 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 seen in the next 5 years. Hydrogen energy for mobility will start, but will be still modest in the next 5 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 plan, 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 5 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.

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.

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Operator [62]

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