Paris Cedex 07 Jul 31, 2015 (Thomson StreetEvents) -- Edited Transcript of Air Liquide SA earnings conference call or presentation Thursday, July 30, 2015 at 8:30:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Aude Rodriguez Air Liquide SA - Head of IR * Benoit Potier Air Liquide SA - Chairman & CEO * Fabienne Lecorvaisier Air Liquide SA - CFO * Pierre Dufour Air Liquide SA - SVP * Jean-Pierre Duprieu Air Liquide SA - EVP ================================================================================ Conference Call Participants ================================================================================ * Martin Roediger Kepler Cheuvreux - Analyst * Jeremy Redenius Bernstein - Analyst * Thomas Gilbert UBS - Analyst * Neil Tyler Redburn Partners - Analyst * Peter Clark Societe Generale - Analyst * Peter Mackey Exane BNP - Analyst * Markus Mayer Baader - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good morning, ladies and gentlemen, and welcome to the Air Liquide 2015 first-half 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. -------------------------------------------------------------------------------- Aude Rodriguez, Air Liquide SA - Head of IR [2] -------------------------------------------------------------------------------- Good morning, everyone. This is Aude Rodriguez, Head of Investor Relations. Welcome to our 2015 first-half results conference call. Benoit Potier and Fabienne Lecorvaisier will present the first-half performance and outlook. Pierre Dufour and Jean-Pierre Duprieu are also with us to help answer your questions. I remind you that the next announcement for our third-quarter revenue will be October 27. Thank you and I hand you over to Benoit. -------------------------------------------------------------------------------- Benoit Potier, Air Liquide SA - Chairman & CEO [3] -------------------------------------------------------------------------------- Thank you, Aude, and good morning to all of you. Thank you for being with for this first-half results presentation. In the first half of this year, the second quarter came actually as positive news. It's slightly better than the first quarter in terms of business activity. If we look at the sales and earnings growth, they were helped by the foreign exchange, but unfavorably also impacted by energy price drops. So those are the externalities. Thanks to efficiencies and the overall cost control and business mix, the margin ratio went up by 10 basis points and 70 basis points as reported with the energy effect. The net earnings increased by 12%, so there's a positive leverage on sales. The cash generation was strong, paralleling the net earnings growth. And the debt to equity, adjusted for seasonality of dividends, was quite stable and under 60%. The investments decided for new projects or acquisitions were steady and prepare well for the future. And as we are going to look into the different business lines, we'll see that electronics and healthcare remain very strong over the first half. The large industries rebounded after a softer first quarter, while industrial merchant was contrasted, but globally suffered from a weaker demand in oil and gas and mining sectors in particular. Fabienne will come back on the source of growth, that is to say the base versus the initiatives, in a moment, but already I can say that the base remains marginally positive in the first half. So if we look at page 3, the breakdown of the growth, clearly the ForEx impact was high, as I said earlier, whereas the energy impact was unfavorable, plus 8.5% for ForEx and minus 2.7% for energy. But sequentially sales growth improved by about 1% between Q1 and Q2. Q1 was growing, on a comparable basis, at 2.6%, whereas Q2 grew at 3.5%, leading to first half at plus 3.1% on a comparable basis. When we look at the global economic environment, next page, what is interesting to see is the industrial production index, which is a good leading indicator for gas & services for industries, what we can see on the graph is that the developing, but also large economies, such as the US, were down, whereas -- and this is interesting to note -- Europe benefitted somehow from both the oil price drop and a weaker euro. So Europe was able to absorb this first half much better than other economies. What we can see also is that, in any case, we face a volatile environment over 12/18 months, which is affected by oil crisis in mining and resources industries. At the same time, the healthcare volumes remained strong, but came with an increasing pricing pressure, which we've been accustomed to for now the past one and a half to two years. Finally, E&C, engineering and construction, is on track in terms of new orders. Overall, when we look at the performance, page 5, we delivered strong performance, with sales growing 8.1%, which is the sum of 7% in the first quarter and 9.3% in the second quarter, helped of course by a ForEx tailwind. The operating income recurring grew at 12.3%, leading to an improvement in margin ratio. Fabienne will explain the breakdown, but essentially we have a significant part of the improvement coming from the energy evolution. But even if we exclude energy, we had a slight improvement in the margin ratio. And finally, the net profit grew by 12.5%, so we're very well aligned with operating income, which shows the quality of the performance in this first half. The EPS also increased at double digits. I'd like now to hand over to Fabienne for a more detailed analysis of our performance. Fabienne? -------------------------------------------------------------------------------- Fabienne Lecorvaisier, Air Liquide SA - CFO [4] -------------------------------------------------------------------------------- Thank you, Benoit. Good morning, everyone. So in a softer environment our top line has benefited from a certain number of growth levers, which have evolved quite a bit compared to previous periods. Europe at plus 3% in Q2, close to 2% even if we exclude healthcare, is pursuing its very progressive improvement. Developing economies have been soaring again at plus 10% in Q2, driven by China, Latin America and Saudi Arabia. Healthcare and electronics were strong as well at plus 7% and plus 12% respectively. If we come back to the key numbers on page 7, as outlined by Benoit, we've seen a global improvement in Q2, resulting in a 7.8% published growth for gas & services in H1. On a comparable basis, meaning excluding the ForEx tailwind but also the negative energy impact, the progression stands at 3.1% and 3.5% for Q2 alone. Sales [progression] in engineering & technology was good, 10.5% up for the semester. Conversely, other activities was penalized by a difficult environment in welding and scope effect in diving. As a result, total sales growth is 8.1% as published and 3.2% comparable, with here again a better Q2 at 3.4%. As you know, the semester has benefited from significant startups and of more acquisitions, in particular in healthcare, on which we will come back. Therefore, the contribution of the development initiatives is stronger at plus 3.2%, while the base business progression remains positive. Looking more precisely at the geographies, we are seeing a very progressive recovery in Europe in Q2. Western Europe is positive, benefitting of course from a robust healthcare activity, but also, for the first time in a while, in Q2 of a slight growth in gas and services for the industry. Large industries activities are higher than last year and bulk volume, including specialty gases are also up in France, Iberia, Benelux and Nordic countries. Developing Europe continues to be strong at plus 23% in H1, driven by Russia, Poland and Turkey. At the same time, the low oil price has impacted the America zone at plus 1% only, with soft industrial merchant volumes in North America, in particular in the oil and wells services sector. Conversely, large industries recovered in Q2 in the US and Canada after the Q1 shutdowns and healthcare benefited from bolt-on acquisitions in Canada. South America remained dynamic at plus 11%, thanks to large industries and healthcare, while industrial merchants in Brazil although still difficult, improved a little bit. Asia Pacific at plus 6% for this semester remained contrasted in Q2. The ramp-up effect is softening a little in China, but the activity is still solid, resulting in a plus 15% progression in H1. Other developing Asian countries are growing globally, but merchant activity is also quite softer. The Australian merchant market in particular is still under adjustment, suffering from a weak mining sector. Japan remains positive thanks to a robust electronic industry. On the bright side, electronic activity continues to be strong in the zone at plus 14% for the semester. The strong growth in Africa/Middle East is of course supported, as expected, by the startup of Yanbu in Saudi, but South Africa is also solid and Egypt somewhat better. In terms of business lines, the momentum continued to be excellent in healthcare and electronics in Q2. Healthcare at plus 7% is supported by solid home healthcare development above 10%, better medical gases sales, strong hygiene at plus 14% and more bolt-on acquisitions. In electronics at plus 12% in Q2, sales were also dynamic in all segments. Carrier and specialty gases remain strong and advanced material grew again around 50%. (inaudible) growth on book-to-bill at 1.2% comforts our confidence for the rest of the year. After a very difficult Q1, large industries volumes were better in Q2 in Europe and in North America, thanks to the progressive restart of most of the units under maintenance, even if it took a little bit longer than expected. The startup of the Yanbu large hydrogen plant in Saudi Arabia is representing approximately one-third of this plus 5% recovery. Conversely, the merchant performance was clearly disappointing in mature economies, with, in particular, volume slowdown in the US, in Australia and in Singapore. However, the pricing effect at plus 1% globally for this semester remains positive in Americas, more or less stable in Europe, but is under more pressure in Asia, in Australia, but also in China and in Japan. To finish with the activity review, order intake in engineering & technology was a little higher than last year. Total order in hand also increased, which is good news in terms of the loading of our resources and workshops. Moving now to the performance, in an environment which has still been difficult in many regards, we are delivering. Operating margin is high at 17.4%, thanks to the energy impact, but also to continued efficiencies at EUR132m year to date. Cash flow reaches 19.4% of sales and is showing strong positive leverage at plus 13% to be compared to an 8% sales growth. The P&L structure demonstrates again the efficiencies and cost management efforts. Purchases and external charges are progressing significantly lower than sales. And personnel expense increase is linked to our development in higher-inflation countries and to our willingness to reinforce competencies in some of these territories. Depreciation is up due to the major startups of the period, but nevertheless operating margin is improving at 17.4% of sales, a 70 basis point improvement. 60 basis points is linked to the energy indexation impact, which, as a reminder, is hampering sales without profit impact and 10 basis point linked to the operational improvement. The gas & services margin is up at 19.5%. It is more or less stable, excluding energy. Looking at the various components, the lower value of the historical energy efficiency due to the oil price drop is penalizing cost. The global pricing effect is also low and reflect in particular the pressure on tariffs in healthcare, mentioned by Benoit, in mature economies, while industrial merchant and electronics remain positive. Therefore, despite efficiencies, at EUR121m for gas & services, in line with the full-year objective, the retention is modest. These efficiencies are attributable to industrial programs for approximately 50% and to pursued procurement programs for 25%. The higher share of the non-operational part last year was linked to the 2013 realignment plans in Europe and in Japan. Coming back to the P&L, net profit is in line with operating income. The increase in the financial cost is only due to the ForEx translation impact. At constant ForEx, interest expenses are decreasing minus 2% despite the higher average net debt and thanks to a lower cost of debt at 3.9%, down 20% -- 20 basis points from the last year. Effective tax rate is at the level of last year, while minority interests are up due to better results in some of the operations where we have partners, like Saudi Arabia and Taiwan. As a result, net profit Group share is up 12.5% and earnings per share are up 12.7%, benefitting from the 1.5m share repurchase of the period. Net debt is showing a quite significant increase in H1, ending up at EUR7.9b. However, our gearing ratio adjusted for the dividends seasonality remains very reasonable under 60%, lower than our peers. And Standard & Poor's has confirmed our A+ rating in June. In fact, the net debt evolution is strongly impacted by the ForEx deterioration. Working capital requirement is impacted by EUR60m, CapEx by EUR90m as well as the opening balance by EUR280m. Due to project cycles the decrease in cash available in engineering has also negatively impacted working capital by EUR210m. Net payment on investments at EUR1.2b include EUR200m of acquisitions, net of divestiture, and therefore we confirm our industrial CapEx estimate at EUR2.1b for the full year. Before handing over to Benoit for the investment review, I would like emphasize again the quality of our H1 performance, supported by slightly better activity in Q2 and by continued management for competitiveness, resulting in a positive leverage on operating income and net profit as well as strong cash flow. -------------------------------------------------------------------------------- Benoit Potier, Air Liquide SA - Chairman & CEO [5] -------------------------------------------------------------------------------- Thank you, Fabienne. I'd like now to just go quickly through the investment decisions and the opportunities that we have seen or materialized on page 21. Looking at the investment opportunities, the investment decisions and the contribution to sales of startups and ramp-ups, I'll start with the investment opportunities. The EUR2.9b is slightly down from EUR3b at the end of March 2015 and EUR3.2b at the end of last year. This decrease is mainly due to the project signatures, in particular the Sasol one in South Africa. And when I look at the investment decisions in the first half, they totally -- they amounted to EUR1.3b and they include Sasol, as just said, in large industries for about EUR200m, but also projects in the copper industry in China and one in Poland for the steel industry. In the IM sector it is mainly related to CO2 in Australia and in North America. We had also projects decided in electronic in particular, one for GlobalFoundries in Singapore. And we made several acquisitions in healthcare in the infusion business, but also in the more traditional respiratory business in Ireland in particular. The startups and ramp-up contribution is confirmed at about EUR350m. The Yanbu share of that is around $100m, slightly up from our previous guidance, which was about $70m. All those investments, be it the investment opportunities or the decisions that we have taken, prepare well for future growth. And I'd like just to remind you that the selective investments, the disciplined returns and sustainable projects are part of the Air Liquide investment strategy. Going into more details in the following page, I run through the left part of the slide, you can find on the right one the names of different main acquisitions in the healthcare section. I mentioned one in Germany, Optimal Medical Therapies and it comes after the Licher acquisition in 2011. We have reinforced our presence in Ireland -- in the UK and Ireland territory with this small acquisition in Ireland. And also two other acquisitions supplementing the existing portfolio. One just quick word about the energy transition. We are following the development of the hydrogen energy initiative with the recharging stations in the US, in Germany, with also investments in Europe in general. And the partnership with our partner in Japan, Toyota, is doing rather well. We have announced in particular new recharging stations. And the question about Europe and the development of France in particular is doing well, because we have announced that we will be also supplying a new hydrogen recharging station in -- near Grenoble for HyWay project. The major state-of-the-art syngas plants, which were started up in the first half. Yanbu now is famous. We have tested so far two different feedstocks, natural gas and butane. We have not yet tested propane and naphtha, but it will be done as soon as we have the product available. The ramp-up is in line and I just told you a minute that the sales expected are slightly higher than what we anticipated. The other one is Dormagen in Germany. Some of you have been invited to attend inauguration there. This is a very interesting plant for at least two reasons. One is because we have achieved an exceptional flexibility with a new design and new innovation in the plant, which is working well. And second, because we will have our own source now in the hydrogen pipeline in Germany. This German pipeline so far had one characteristic, which was that we were just sourcing hydrogen from different customers, purifying it, compressing it and then delivering it through the pipeline system to customers. From now on we'll have, on top of that, our own source of hydrogen in the pipeline. Finally, when we look at page 24, the investment backlog, it's slightly down due to essentially major startups, but there is nothing wrong in that. It means just that the investment that we have in the backlog are now producing more sales. The total backlog is at EUR2.1b and the expected sales from this backlog after full ramp-up is EUR900m. So altogether this is a good first half with sustained sales and earnings growth. The performance is solid with a good margin ratio in particular. And the portfolio of projects, the investment opportunities are still there. So we have what we need to continue growing the activities around the world. So in that context, and assuming a comparable economic environment, we are confident in our ability to deliver another year of net profit growth in 2015. Thank you and we can now open the Q&A session. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions). Martin Roediger, Kepler Cheuvreux. -------------------------------------------------------------------------------- Martin Roediger, Kepler Cheuvreux - Analyst [2] -------------------------------------------------------------------------------- Yes. Thank you. I have three questions, if I may. First on depreciation charges which are up 12%. I guess this is related with the Yanbu project as well as FX effects. Are there any other reasons for that relatively high level for D&A and what is the right run rate modeling going forward? The second question is on the net cash flow from operating activities after working capital. This is down by 16% year over year. It looks like this is obviously primarily due to the increase in working capital. Can you elaborate a little bit on that and what can you do to get working capital under control going forward? And the third question is on electronics and gases. You still had a very good performance in the first and, Fabienne, you said you are optimistic until year end. But we hear more and more profit warnings in this end market. So what is your take-away from that end market going forward? -------------------------------------------------------------------------------- Benoit Potier, Air Liquide SA - Chairman & CEO [3] -------------------------------------------------------------------------------- Yes. Thank you for those questions. Fabienne is going to take the first two, but before she says anything, working capital is under control and she's going to explain what happened. But we don't think that it's out of control. So this is just reassuring you that it is under control. So Fabienne, why don't you take the first two and I take with probably Pierre the third one. -------------------------------------------------------------------------------- Fabienne Lecorvaisier, Air Liquide SA - CFO [4] -------------------------------------------------------------------------------- Thank you, Benoit. So depreciation first. It's true that depreciation is growing 12.3%. Excluding ForEx, depreciation is only going up 3.4%, so more or less aligned with sales. You are right. It's due to startups, but not only to the Yanbu startup. We had 12 startup in H1, including Yanbu, which is the largest, including also the startup of Dormagen in Germany and some other projects. So this is directly linked to the startups and to the contribution of those new projects. Now working capital, it's true that the working capital is increasing somewhat more than what we usually see in H1. There are two components and two main explanations to that. The first one is ForEx of course, which is increasing quite a lot our trade receivables. And the second one is engineering. You know that in the engineering projects we have a cash curve which is positive at the beginning and which is more or less cash-neutral when you get closer to the achievement of the project. So this is just the equation of project cycle, but you've seen the cash available in engineering by a little bit more of EUR200m. If we exclude ForEx and if we exclude this E&C effect, the guidance obviously is working capital requirement is slightly increasing due to mix effects. We have traditionally, and this is true for everyone, a higher working capital requirement in Europe than in the US, because payment terms are much quicker in the US. So when Europe goes up a little bit and when the US are less growing of course you have a mix effect. But apart from that, for the guidance, obviously working capital requirements, as a percentage of sales, is more or less stable. So no particular worry. This should correct over the following period. -------------------------------------------------------------------------------- Benoit Potier, Air Liquide SA - Chairman & CEO [5] -------------------------------------------------------------------------------- And before working capital, the good news is of course that the operating cash flow is up and well aligned with the net earnings growth. Electronic gas and all the signals that you may hear here and there from the market, it's true that we've not seen that at this stage. Electronics is still rather strong. I'd like Pierre to comment, in particular about Asia, because this is where most of the electronic business is located. Pierre? -------------------------------------------------------------------------------- Pierre Dufour, Air Liquide SA - SVP [6] -------------------------------------------------------------------------------- Thank you, Benoit. Yes, we read and hear about the same comments in the industry that there is some black clouds over the horizon. We don't see them quite yet for a number of reasons. One of them is that our book-to-bill is still high at 1.2, so there is still investment in the business around the world. The second is that the mix is important. The photovoltaic business in China is still growing very fast, because they are installing a lot of those devices, not only because they are producing them. So we don't think this will slow down beyond the end of the year. And also our new molecules, our advanced materials, are still growing more than 30%, 40%, 50%, which tells me that the high quality, the high-tech devices being built are still doing well. What is going maybe a little more, not negatively, but has a little bit more of a negative outlook is the traditional memories, the traditional chips. Those are suffering a little bit more maybe in the outlook. But our mix is such that we're confident that the year is going to finish okay. And next year should not be a catastrophe, but it's difficult to predict at this time. But we don't see this year finishing badly at all. -------------------------------------------------------------------------------- Martin Roediger, Kepler Cheuvreux - Analyst [7] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Benoit Potier, Air Liquide SA - Chairman & CEO [8] -------------------------------------------------------------------------------- Thank you. Next question. -------------------------------------------------------------------------------- Operator [9] -------------------------------------------------------------------------------- Jeremy Redenius, Bernstein. -------------------------------------------------------------------------------- Jeremy Redenius, Bernstein - Analyst [10] -------------------------------------------------------------------------------- Hi. It's Jeremy Redenius. Thanks for taking the question. I just wanted to ask about your sales guidance for your startups and ramp-ups. You've stuck to EUR350m year off for the full year, which is, I calculated, about 2.5 percentage points of growth. And it looks like you've done about 2.8% in Q1, 3.2% in Q2 and I think I heard you say you've also upped your expectations for Yanbu for the year. So I'm just trying to understand why the EUR350m perhaps hasn't changed. Thanks very much. (technical difficulty) -------------------------------------------------------------------------------- Fabienne Lecorvaisier, Air Liquide SA - CFO [11] -------------------------------------------------------------------------------- -- the split between the base business growth and the contribution of the development initiatives. In the number you see there we have included the bolt-on acquisitions and that's probably the difference that you see in your calculation. So if we include the bolt-on acquisitions, we should be a little bit higher than that, more in the 3%, 3%-plus, as we've been in Q2. -------------------------------------------------------------------------------- Jeremy Redenius, Bernstein - Analyst [12] -------------------------------------------------------------------------------- Okay. Thank you very much. -------------------------------------------------------------------------------- Benoit Potier, Air Liquide SA - Chairman & CEO [13] -------------------------------------------------------------------------------- Thank you. Next question. -------------------------------------------------------------------------------- Operator [14] -------------------------------------------------------------------------------- Thomas Gilbert, UBS. -------------------------------------------------------------------------------- Thomas Gilbert, UBS - Analyst [15] -------------------------------------------------------------------------------- Yes. Good morning, Aude, Fabienne, Benoit and Pierre. Three questions, please. The first one is a strategic one. Obviously healthcare is going very well around the globe. It's a business model you can scale globally. Is there any appetite to revisit the US strategy at this point or is the stance the same that you are very selective on that country because of the way they collect, etc. or has this changed? Has your stance -- is your stance still the same vis-a-vis North America? I know Canada is there and I think Florida is there, but has that changed? The second question is on Yanbu. Obviously, if we look at the Middle East and operating profit is up EUR16m and the sales are up EUR46m. That's an incremental margin of 35%. So can we conclude from there that the operating margin of Yanbu is well above 40%, 50% because of that mix? And again, can I just ask whether the mix -- I didn't quite get the comment during the presentation -- is the mix about to change, the feedstock mix or are you still guiding to the lowest revenue feedstock mix in that project? That's the second question. And then the third question is on the EBIT bridge, which is very helpful. Still, on the EUR8m volume contribution in the bridge to EBIT, can we -- two conclusions; either it's all -- the organic growth is all price or something in the mix there, which hinders the contribution from volume. Can you just reconcile organic growth with the volume contribution in the EBIT bridge please? Thank you. -------------------------------------------------------------------------------- Benoit Potier, Air Liquide SA - Chairman & CEO [16] -------------------------------------------------------------------------------- Okay. I'll take the first, maybe Pierre the second and, Fabienne, you take the third. So this is true that strategically home healthcare in particular, but healthcare in general business is doing well. The model that we have applied essentially in Europe, but also in Canada and Australia in particular, is working quite well. North America is in a situation where we know that the competitive bidding has been hitting this market rather significantly, at least in the past two years. It's not 100% over, not in the decisions but in the effects on market, so we don't think that the market is yet really stabilized in terms of the new dynamics. And this is why we've remained so far rather cautious about the US market. And the second reason for being cautious is that you need a scale in this market to really deliver value to the Company, but also serving well to your patients. This is the type of scale we have been able to build in Europe and this is exactly why we are successful in Europe. So, North America, because of the market reasons and because of scale reasons is always a rather tricky market. So, we are open but rather cautious in what we can do in North America. We have an existing base in Canada which is going well and we are expanding through acquisitions, and I think for the time being this is a rather good strategy. In the more mid-, long-term future, we'll see how the market evolves before taking a view or a stronger view on the North American market. Now that being said, it's an interesting place to be, but there are also other places to be in the world. We see in some emerging economies healthcare markets developing quite well and we've taken positions in some of them, in Asia in particular. And there are others that may materialize in the future. So, maybe I think we should come back to those issues next year during the factual analyst and investors presentation mid-March but that will be time to actually review the healthcare market, because healthcare will be for Air Liquide one of the growth-factor drivers of growth for the next 5, 10 years. So, that's my best answer for the time being. Yanbu, margin ratio, incremental margin ratio and what we can say about that, yes? -------------------------------------------------------------------------------- Pierre Dufour, Air Liquide SA - SVP [17] -------------------------------------------------------------------------------- Yes, thank you. The first-half Yanbu results are a little bit tilted because the first quarter basically we earned the mothball fee because we have not started up yet. And the second quarter was a normal ramp-up quarter. And because of the accounting treatment of all of this the mothball fee ends up in operating income at 100%, which tilts the margin of the first quarter quite high. So, I don't expect the current margin to be any different than the standard hydrogen plants that we have around the world as we have -- as we eventually get to a normal year. As to the mix of the feedstocks, they do not materially affect the profitability because we knew that could be a wild mix. So, we basically did not put too much profitability on the actual variable price. We put just a little bit. So, yes, it could impact, but not much. Today the client is pushing to use as much natural gas as possible. Of course, it makes them more competitive, since this is an export refinery. But they have -- they are tight on supply, so it's difficult to predict how much they will be actually able to give us. The foreseeable future is a mixture that's heavily weighted on natural gas with some butane to complement when they need to. And that's what we see for the next 12 to 24 months. -------------------------------------------------------------------------------- Thomas Gilbert, UBS - Analyst [18] -------------------------------------------------------------------------------- Very helpful there, thank you. -------------------------------------------------------------------------------- Benoit Potier, Air Liquide SA - Chairman & CEO [19] -------------------------------------------------------------------------------- Thank you. And for the third question on the EUR8m contribution which --? -------------------------------------------------------------------------------- Fabienne Lecorvaisier, Air Liquide SA - CFO [20] -------------------------------------------------------------------------------- So, this EUR8m is a volume contribution, a volume and mix contribution and the pricing is not in this column. The pricing is the variance. -------------------------------------------------------------------------------- Thomas Gilbert, UBS - Analyst [21] -------------------------------------------------------------------------------- Okay. -------------------------------------------------------------------------------- Fabienne Lecorvaisier, Air Liquide SA - CFO [22] -------------------------------------------------------------------------------- This relatively low figures I think reflect two things. First of all, we have a decrease in industrial merchant, in particular in Q2. I mentioned that the pricing is remaining positive. That means that we have a real volume decrease which is reflected here. I think the second item is linked is linked to large industry. Large industry, you know that volumes were relatively weak in Q1, due to shutdowns. In Q2 we have a certain number of start-ups and ramp-ups and the depreciation which as we saw is increasing is also impacting this column. So, I think this relatively modest number is mostly a combination of these two items. -------------------------------------------------------------------------------- Thomas Gilbert, UBS - Analyst [23] -------------------------------------------------------------------------------- Thank you, Fabienne. -------------------------------------------------------------------------------- Benoit Potier, Air Liquide SA - Chairman & CEO [24] -------------------------------------------------------------------------------- Thank you. Next question. -------------------------------------------------------------------------------- Operator [25] -------------------------------------------------------------------------------- Neil Tyler, Redburn. -------------------------------------------------------------------------------- Neil Tyler, Redburn Partners - Analyst [26] -------------------------------------------------------------------------------- Good morning, everybody. A couple from me please. The tariff pressure on healthcare pricing in Europe, could you perhaps discuss a little bit about that, how that develops sequentially, and what your expectations are over the coming 12 to 24 months? And similar perspective really on the industrial merchant volumes in North America with regards to your energy customers, how that has developed over the last few months. Clearly, it's weak. And whether you have any visibility over that might develop over the remainder of this year and into next based on customer trading conditions? Thank you. -------------------------------------------------------------------------------- Benoit Potier, Air Liquide SA - Chairman & CEO [27] -------------------------------------------------------------------------------- Okay, Jean-Pierre can take the first one, pricing in Europe for healthcare. -------------------------------------------------------------------------------- Jean-Pierre Duprieu, Air Liquide SA - EVP [28] -------------------------------------------------------------------------------- Yes, so the tariff pressure in Europe is there for the reason you know. I mean, for the public funding, the SK authority putting pressure on the tariff in the different countries. This is going to last for a few quarters. But, that being said, we may be on the low side. And we expect that in the next quarter it could ease a little bit. But, that being said, we should have in mind that the overall pricing pressure is, overall for the Group, minus 1% impact on the Group. And if we are on Europe where the pricing pressure is the most important, of course, the level is in the range of minus 2.5% impact of pricing on our activities. So, in other words, yes, we have tariff pressure. Yes, we -- it's going to last for a while in next quarter, but probably easing a little bit. The impact is relative minus 2.5% and it's embedded into the model that we have in SK. I just want to remind you that we have strong efficiency activities in SK. And we have the volume impact as well as the bolt-on acquisitions. All the model is consistent. I mean, dealing with the tariff pressure, we are used to this tariff pressure for a long time now. So, we are relatively positive about the way it could evolve. -------------------------------------------------------------------------------- Benoit Potier, Air Liquide SA - Chairman & CEO [29] -------------------------------------------------------------------------------- Thank you. The question in North America, about IM and the impact of the energy customers, Pierre, can you take this one? -------------------------------------------------------------------------------- Pierre Dufour, Air Liquide SA - SVP [30] -------------------------------------------------------------------------------- Yes, thank you. Yes, the sales to our oil-well services customers decreased in the first half from first half last year by about 30%. So, it is significant. And what is an add-on impact of that is that a lot of industries support the oil-exploration business or market beyond oil-well services and those were also soft in the first half. So, the overall fabrication market is also hurt by this. Now, this has stabilized. The rig count and all of this has stabilized. So, I think we should expect things that are not getting worse. Now, when are they going to pick up again will depend on many other factors which I can't predict. But basically we have a situation which is very dependent on the appetite of the oil companies to keep exploring. We see in Canada a situation where the [metal] -- because the economy is less dependent on oil exploration we see the other markets actually taking advantage of the low energy prices in Ontario and Quebec and we see some very positive development there. So, it's not all dark. We should also remember that we sold our Hawaiian business in the first few days of January. So, we lost those sales in the first half of the year, as well. It's a small perimeter, so we don't keep it off the -- I mean, we don't specify it, but that also didn't help the sales in the first half. So, I don't see really a deterioration in the coming months, but I do see -- I do not see a huge up-tick either. I see a thing that will stabilize and slightly grow over where it is today. -------------------------------------------------------------------------------- Neil Tyler, Redburn Partners - Analyst [31] -------------------------------------------------------------------------------- Thank you. Perhaps I could ask you a quick follow-up on the IM business in Europe. Back in April you mentioned that the liquid volumes were showing some improvement in France and Spain, to some extent, cylinders were not. Can you, perhaps, expand on those comments; give us an update on how you see things, given the progress over the last three months and what's happening to industrial production in those regions? -------------------------------------------------------------------------------- Benoit Potier, Air Liquide SA - Chairman & CEO [32] -------------------------------------------------------------------------------- Yes, sure. What we said in April is still there. In other words, when we look at all the different countries in Europe and when we split the growth between packaged gases and bulk, in general we still see a slight improvement in bulk. This is not a new phenomenon. It actually emerged last year. But it is steady. It's not big growth but it's steady. So, there is improvement more or less in mid-size companies or those who consume average quantities. They're very small customers. They're typically the plumber, but also the welding activities for fabrication in general. And this market is actually linked to construction, buildings, real estate, and everything. This part package business, this part of the IM business, is still down. And so we've not seen a real improvement in the cylinder business, whereas the improvement in the bulk business is confirmed. Now, this is a general comment, for Europe. If we look at the different geographies it's clear that the countries that are at the periphery of Europe, essentially Iberia, the UK, Nordics and Eastern Europe, including Poland, in particular, are doing better. So, the IM business is improving at the borders of Europe. The core of Europe, including Belgium, France, Germany and Italy, are still suffering, in particular, in the cylinder business. So, what we said overall in April is still valid. We've not seen any change in the trend. The question for the future is going to be when are we going to see the very small segment of the package business to grow again? It's not the case today. But the trend that we've observed is still there. -------------------------------------------------------------------------------- Neil Tyler, Redburn Partners - Analyst [33] -------------------------------------------------------------------------------- Thank you very much. -------------------------------------------------------------------------------- Benoit Potier, Air Liquide SA - Chairman & CEO [34] -------------------------------------------------------------------------------- Thanks. Next question. -------------------------------------------------------------------------------- Operator [35] -------------------------------------------------------------------------------- Peter Clark, Societe Generale. -------------------------------------------------------------------------------- Peter Clark, Societe Generale - Analyst [36] -------------------------------------------------------------------------------- Yes, good morning. It follows on, actually, from what Neil was just asking. If I look at industrial merchant, globally, you're down 2.5%. And obviously you're still talking actually about a vibrant China in that. Just looking forward, how do you feel about this, globally? Because obviously the world seems to be very, very, difficult on the industrial side. The second question is digging back in Europe a bit. I'm just wondering -- you pointed to the underlying 40 basis-point hit on margin. And I'm presuming that's mix, as the core integrated models come under a bit of pressure in Europe on industrial merchant but also the onsite, and you've got more healthcare. It's just a mix issue that's starting to weigh on that margin. And then just a clarification, final one, the corporate and the research and development line was lower than I had. It was down year on year. I think your R&D you've said quite clearly will progressively move up. What do we expect for the full year on that line? That would be great. Thank you. -------------------------------------------------------------------------------- Benoit Potier, Air Liquide SA - Chairman & CEO [37] -------------------------------------------------------------------------------- Okay. The IM is always very difficult to describe, because we, worldwide, I mean, because we have very different and diverse situations. So, I made a comment on Europe and split between packaged gas, which is very small customers, and bulk, which is mid-sized customers, or consumptions. If we take another perspective on the world market we can just look at the different market segments. And if we look at the segments there are two segments in IM worldwide that are doing quite well. It is essentially food and farmer, because the trend in the market is from 2% to 4% growth in this segment. So, this is good and it will probably continue as we go, because it covers not only the food but also the pharma industry and there are many things, many applications that can be either introduced in markets that don't have them today or that can be really brought to the market as innovations. The second one is technology and research, we have more or less the same trend in the market, between 2% and 4% worldwide trend, and this is also a market that we see growing in the near future. The other markets, the automotive and fabrication is up and down, in the past five years we've seen good periods and bad periods. Today, even if it is slightly slowing down, in Q2 we still see positive trends for this market. Now the split between -- the spread between China, Japan, Europe and US is changing over time, but overall I think the cycle is still positive for the automotive industry, fabrication is more so-so. So it's less vibrant. Now the two last market segments, which are materials and energy and linked to the final market, construction market and automotive markets, is more down as we speak and the craftsmen and (inaudible) the very tiny customers, the plumbers and others, are also down. So overall, what we see in merchant business is 2, 2.5 segments out of 5 that offers potential for growth and the remainder, which is about 50%, which is either flat or slightly declining. Is it going to last forever? No, because the dynamics are there and then, of course, what I said earlier is that it depends on the geographies, they are still growing markets, but if you average what we see in the world, this is what we see. The new markets, in particular those that would be generated from the environmental issues, the energy transition issues and the innovation issues will grow, it's just a matter of time and it relates me to the third question. I will leave the second question, the OIR margin in Europe to Fabienne, but if I take your third question about R&D, the R&D markets, I'd like to just -- I've got a paper from Fabienne, so she's going to make a comment. -------------------------------------------------------------------------------- Fabienne Lecorvaisier, Air Liquide SA - CFO [38] -------------------------------------------------------------------------------- I'm quite confused by the question, because R&D is not going up, it's actually going down in our segment reporting, so could you be a little bit more precise in your question please? -------------------------------------------------------------------------------- Peter Clark, Societe Generale - Analyst [39] -------------------------------------------------------------------------------- Yes, just the corporate and the R&D line is down, yes, I saw that, but in the past you said that you would be increasing the attention on R&D, so I assumed for the full year that the corporate and R&D line might at least be up, but that might not be the case, that's the question, it's EUR80m wasn't it in the first half? -------------------------------------------------------------------------------- Benoit Potier, Air Liquide SA - Chairman & CEO [40] -------------------------------------------------------------------------------- That's clear, Peter, I think. This is covering the so-called corporate and R&D costs is covering both R&D and corporate costs, we are making efforts at a corporate level. Now that being said, R&D is still vibrant. We have slightly changed the way we organize our R&D between the user interface and innovation related to usages, innovation related to technologies, which is the traditional R&D, and the innovation coming from science, which is boosted a little bit in the way we organize R&D. So number one, R&D is growing. Number two, we try to organize it even better and we've not talked about the digital impact of what is happening with the big data and internet offerings on our sales, but it will definitely grow. So if we just look at the R&D and related costs they are growing as expected, there's no surprise, and we will get more benefit from the innovation pool within Air Liquide as we go. So this part is doing well. The efforts on corporate costs of course is positive, because we are reducing slightly the corporate costs and this is due to all the efforts around efficiency that we are doing over time. The second question will be for Fabienne. -------------------------------------------------------------------------------- Fabienne Lecorvaisier, Air Liquide SA - CFO [41] -------------------------------------------------------------------------------- So the operating margin in Europe, we are for gas & services at 19.5%, down 14 business points from H1 2014. This is mainly due to the pressure on tariffs in healthcare, so we have here a slight increase in our healthcare margin that will soften over time. We also have a small decrease in our IM margin and this is I think largely attributable to the decrease in the argon pricing in the European market. The rest of the products being more or less stable in terms of margin. -------------------------------------------------------------------------------- Peter Clark, Societe Generale - Analyst [42] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Benoit Potier, Air Liquide SA - Chairman & CEO [43] -------------------------------------------------------------------------------- Thank you, next question. -------------------------------------------------------------------------------- Operator [44] -------------------------------------------------------------------------------- Thank you. Peter Mackey, Exane BNP. Please go ahead. -------------------------------------------------------------------------------- Peter Mackey, Exane BNP - Analyst [45] -------------------------------------------------------------------------------- Good morning, thanks very much, I just have a few remaining detail questions largely. Firstly, just to come back to Fabienne's comment on the working capital and the EUR200m or so impact from the engineering activity, I think, Fabienne, you said that that should correct from here, whereas some of your comments suggested that this is a bit of a change as we're getting toward the end of engineering contracts. So should we see working capital reverse as we go through the rest of the year or should we put the first half aside and recognize that that's just a change in engineering working capital? Secondly, and coming back to Neil's question actually on IM in Europe, obviously at the 1Q stage you gave us that chart of Western European bulk volumes and it showed things were pretty awful at the start of the first quarter. We were all expecting things to accelerate a little in Q2, did -- it may be hopeful to ask for an updated version of that chart, but have you seen some periods of sharp decline again or has business activity just settled at a generally lower level in the second quarter? And the last question I had was on the efficiencies in gases, it looked like EUR120m or so. That's the lowest number we've seen in a half for four or five years. We've been used to you delivering more savings than you've been targeting up until now, should we pretty much get used to savings in line with your targets now? How should we think about your efficiency efforts, or was there something unusual in the first half? Thank you. -------------------------------------------------------------------------------- Benoit Potier, Air Liquide SA - Chairman & CEO [46] -------------------------------------------------------------------------------- Okay, Fabienne take the first and the third. -------------------------------------------------------------------------------- Fabienne Lecorvaisier, Air Liquide SA - CFO [47] -------------------------------------------------------------------------------- Yes, working capital, so I think the tendency will progressively, I would say, come back to normal, there will not be a major and sudden or brutal reversal, but it should progressively come back to normal apart from the ForEx impact that will still be present from having the second half. Efficiencies in gases, you know that we always have a seasonality, so the H2 efficiencies are usually higher than the H1. The reduction is due, as I explained, mostly to the softening impact of the year 2013 realignment plan, but we are still confident that we will be above our target again in 2015, no problem. -------------------------------------------------------------------------------- Benoit Potier, Air Liquide SA - Chairman & CEO [48] -------------------------------------------------------------------------------- Thank you, Jean-Pierre, for IM Europe, a further comment? -------------------------------------------------------------------------------- Jean-Pierre Duprieu, Air Liquide SA - EVP [49] -------------------------------------------------------------------------------- Yes, Peter, in fact what we see in Q2 and probably it's the right answer to your question, but in Q2 we see an improvement compared to Q1 in IM in Europe in terms of volumes. So as Benoit mentioned, it's mostly on liquid that we see good trends. The packaged gas activity is still in negative territory, but isn't the negative territory Q2 compared to Q1 is better in Q2 compared to Q1. So we have a trend, we tend to be positive in that trend. So just to give you an example with sequential numbers; so the trend Q2 compared to Q1 in liquid nitrogen is plus 2.6%, in Lox it's plus 2.6%, in liquid argon, for example, it's plus 2.4%. So we are in a move where the bulk business is slightly increasing quarter after quarter, giving us some positive view about how the business does evolve in Europe. And even coming back to what Benoit said a few minutes ago about the markets, I can only confirm what he said, with a good food and pharma business, for example the very good automotive business also in countries like Iberia, Italy, France among others. So we see a good trend Q2 compared to Q1 and we see that going forward slowly but surely until the end of the year. -------------------------------------------------------------------------------- Peter Mackey, Exane BNP - Analyst [50] -------------------------------------------------------------------------------- Okay, thank you. Just to be clear, I was looking at the organic growth of IM in Europe, obviously that was negative in the second quarter versus roughly flat in the first quarter. Are you suggesting then that there are issues with comp levels and that quarter on quarter things are better in Q2 for IM as a whole, or is it that bulk is up and cylinder is down on a quarter-on-quarter basis? -------------------------------------------------------------------------------- Jean-Pierre Duprieu, Air Liquide SA - EVP [51] -------------------------------------------------------------------------------- No, it's comparative levels. In fact the slight improvement, even bulk being positive, packaged gases being still negative, but both are improving in a certain extent I'm supporting. -------------------------------------------------------------------------------- Peter Mackey, Exane BNP - Analyst [52] -------------------------------------------------------------------------------- Very clear, thank you. -------------------------------------------------------------------------------- Benoit Potier, Air Liquide SA - Chairman & CEO [53] -------------------------------------------------------------------------------- Thank you, maybe the last question, we are reaching the end of the hour so we'll take the last one. -------------------------------------------------------------------------------- Operator [54] -------------------------------------------------------------------------------- Thank you, we will now take the last question from Markus Mayer from Baader. -------------------------------------------------------------------------------- Markus Mayer, Baader - Analyst [55] -------------------------------------------------------------------------------- Yes, good morning, Fabienne, Benoit and Pierre. Two questions remaining, first of all on the start-ups, you had plus in the first half. Maybe I missed it, but what are you expecting for the second half? And as your friendly German competitor he had yesterday -- reported yesterday project delays coming from petrochem projects. Do you also expect such delays to come in the second half then going into 2016? And then the last question on coal gasification project in China, I know we see that more and more of these projects are not coming or are being further delayed. Could you remind us what your exposure is there and what negative impact you expect medium term? Thanks. -------------------------------------------------------------------------------- Benoit Potier, Air Liquide SA - Chairman & CEO [56] -------------------------------------------------------------------------------- Right, the first question about start-ups, we had about -- we had 12 actually start-ups in the first half. We expect to have 7 in the second half, more or less more concentrated actually on Q3 than on Q4, but it's always difficult to have a very accurate view on the timing. All together that would be seven start-ups in the second half. Petrochemical projects delays, no, for us at this stage, no, we just reported that the order intake from the engineering and construction division was good. There have been and will probably be some delays from time to time, but you remember that last year we had two very important projects signed in the US and maybe, Pierre, you would like to add on one thing about methanol in particular and what we do in this field, Pierre? -------------------------------------------------------------------------------- Pierre Dufour, Air Liquide SA - SVP [57] -------------------------------------------------------------------------------- Yes, one of the characteristics of our engineering is that it's one of the, if not the world leader in methanol and methanol has been a market that has really grown in the US, so we haven't seen a real slowdown in bidding activity or in development activity, so we're confident that on the overall petrochemical market methanol is going to be sustained for a little while yet. So just to complement what Benoit said. As to coal gasification in China, we're still active in that space. We're extremely careful, the projects are complex and the projects are long to develop and expensive to develop, so we're extremely careful. We basically try to do one at a time and not overwhelm ourselves with project execution issues. So we have today -- I'm talking about gasification itself, not about oxygen for gasification, which is a sub-market, and basically we have one project, which is complete and running well, the first one we did. We have a second one, which is probably about 40% complete and we have another one under development, which we hope to have good news about in the next six to eight months. So we are trying to not overexpose ourselves to these projects from either an execution or an overall, I would say, size perspective. So we're quite confident that we have still a few projects ahead for us. As to the real exposure is the exposure on CSR, which we're also managing quite carefully, because these projects do emit CO2 and the Chinese are extremely careful about that now, which is a change. They are not accepting projects which are not state-of-the-art and best technology, which again plays well to our engineering strength, because we have gasification technologies in-house, which are essential to reach these enhanced targets that the Chinese government is putting up to their industrials. So we are careful. We don't expect big negative impacts, because we are extremely careful with the development of these projects. -------------------------------------------------------------------------------- Markus Mayer, Baader - Analyst [58] -------------------------------------------------------------------------------- Okay, perfect. -------------------------------------------------------------------------------- Benoit Potier, Air Liquide SA - Chairman & CEO [59] -------------------------------------------------------------------------------- Well, thank you, thank you, Pierre, and thank you, all. So all together it was a solid first half, a good set of numbers with sustained sales and earnings growth and in this environment and assuming comparable economic environment again, we are confident in our ability to deliver another year of net profit growth this year. So thank you very much. Have a good break for some of you who do have break, and next meeting will be on October 27. Thank you very much. Have a good day. Bye. -------------------------------------------------------------------------------- Operator [60] -------------------------------------------------------------------------------- That will conclude today's conference call, thank you for your participation, ladies and gentlemen. You may now disconnect.
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