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Executives

Virginia Jeanson – IR

Benoît Potier – Chairman and CEO

Pierre Dufour – Senior EVP

Maëlys Castella – Deputy CFO

Jean-Pierre Duprieu – EVP

Analysts

Heidi Vesterinen – Exane BNP Paribas

Erik Karlsson – AKO Capital

Andrew Stott – Bank of America/Merrill Lynch

Stephan Kippe – Commerzbank

Neil Tyler – Redburn Partners

Rakesh Patel – Goldman Sachs

Jeremy Redenius – Stanford C. Bernstein

Marcus Diebel – JPMorgan

Peter Clark – Société Générale

Peter Mackey – Morgan Stanley

Markus Mayer – Kepler Cheuvreux

Patrick Lambert – Nomura

Air Liquide (OTCPK:AIQUF) Q4 2013 Earnings Conference Call February 18, 2014 4:30 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to the Air Liquide 2013 Results Conference Call. At this time, all participants are in listen-only mode, until we conduct the question-and-answer session, and instructions will be given at that time. To reduce the crackle on the line during the Q&A session, when you ask a question, we recommend that you switch off the sound of your PC and use the handset of your landline telephone. We thank you for your help and understanding. I will now like to hand over to the Air Liquide team. Please begin your meeting and I will be standing by.

Virginia Jeanson

Thank you. Good morning, everyone. This is Virginia Jeanson, Head of Investor Relations. Welcome to our 2013 Results Conference Call. We have with us today, Benoît Potier, Pierre Dufour and Maëlys Castella, who will present the 2013 performance and update you on our outlook for the business. Jean-Pierre Duprieu is also here to help answer your questions after the formal presentation.

Please note in your diaries that our First Quarter 2014 announcement will be on Tuesday, April, 24. The AGM will be on Wednesday, May 7. And the First Half announcement will be on Thursday, July 31. Please don’t hesitate to get back to Annie, Jérôme or myself, should you need any clarification on details after the call. And I now hand you over to Benoît.

Benoît Potier

Thank you, Virginia. Good morning everyone. I will start by just coming back to what we said during the Capital Markets day about our strategy. If you remember, we presented the strategy, and I’m on Slide 2, which is definitely to deliver growth. This growth must be profitable and it must be over the long-term. So we take decisions with a long-term vision.

How can we do that? By combining first, competitive base. And this base is made competitive through adjustments to market dynamics. Second, by investing and targeting our investment on growing markets. And we are not just talking about geographies, we are also talking about the market segments that are growing anywhere in the world. And third, by developing innovation to enlarge the existing markets, and open up new markets.

That being said, let’s have a look Page 3 on the performance in 2013. If we adopt five year perspective and track the activity more than the sales to clean sales and the revenue from the foreign exchange impact, we see that we have achieved 22% increase over five years, which gives 4.1% compounded annual growth rate, but if we consider that to 2009 was sort of exceptional year, then this is a 5.1% over four years, neutralizing 2009.

Pierre will come back later on the activity level compared with the IP, industrial production worldwide, and show that we have actually over-performed the IP Index during that period.

What were the underlying trends behind this activity? We have seen more of developing economies definitely over the period. We’ve seen more LI, Large Industry and Healthcare, because the outsourcing and the aging chronic disease care continue to expand and we’ve seen more technologies and more digital.

These trends will carry on, and as a matter of fact, we saw a return to a more supportive economic climate in the second half of 2013, which is of course good news for this year and the coming years.

When I take now a more quarterly view on Page 4, our growth is the sum of three components. Number one, the base; number two, the start-up and ramp-ups and the site of small business takeovers; and number three, the larger acquisitions or divestitures. What we see on the graph is that the second engine, the start-up and ramp-ups and site takeover has hold firm since 2011. Only the first one, which is the base, has absorbed the shocks of the double-dip after 2009.

The good news is that we have had in 2013, three quarters of positive growth in the base over modest, which was reinforced by several start-ups in December and even January. And I am thinking about China, Mexico, South Africa and Canada.

If I now go to the next slide and try to introduce on numbers, which will be developed by Pierre and Maëlys. I will just focus on sales, profits and dividends. My first observation is related to the foreign exchange, which accounts for 3.8% negative on sales. This is why we have put green number which is the number excluding foreign exchange. If we do that, if we exclude this foreign exchange impact, the year 2013 remains in line with previous momentum, with 3.7% on sales, 3.1% for net profit but 5.5% without change, ex foreign exchange, and 2% growth for dividends, which I would like to mention it the bonus share for one for 10, which has been announced and will be proposed to the shareholders for the AGM.

Our compounded annual growth rate over three years shows a positive leverage, both on net profit and dividend. I would say it demonstrates our capacity to grow in contrasted environments as we saw the growth of the base going from 5% in Q1 ‘11 to minus 3% in Q2, 2002 [ph], which was the previous slide. In this period, we’ve been able to go through this contrasted environment and demonstrate our capacity to grow.

I’d like now to hand over to Pierre for more developments on the activity. Pierre?

Pierre Dufour

Thank you, Benoît, and good morning everyone. I will now share with you the highlights of our 2013 activity in terms of sales in the various businesses and regions, but also in terms of investments in new projects.

Let’s start with the activity in our robust performance. If there is four numbers that you want to remember from this presentation, they are outlined on this slide. It’s 4% growth in Gas & Services, most of which is in the last three quarters showing a positive trend. It’s 9% growth for industries or Gases & Services to industries in developing economies with again a positive trend given the many start-ups in December and January as we indicated in the recent press release.

It’s 11% growth in Healthcare, most of which being in Western Europe, which represents 80% of our Healthcare business. And finally, the Electronics business is back to growth, plus 9% in the last quarter of the year, confirming the start of the up-cycle of that industry and the contribution of Voltaix.

On the next slide coming back to a comment that Benoît just made. If we agree that the world markets are linked to the IP Index, which is a good proxy, and we look at our growth against the World IP Index, you find that we have significantly outperformed the World IP Index for every quarter in the last 12 quarters. So our comparable growth is adjusted for currency and natural gas pricing and significant premature effects, but even with those adjustments, we have clearly outperformed the IP Index of the world as we know it.

At the Investor Day, we explained that our growth is better defined by markets and market drivers, rather than by merely geographic drivers. Now if we look at the first market driver, which is industry globalization and resource constrains, and we look at the major trends in that market, we have industrial capacity being modernized in Eastern Europe, resulting in a very rapid development of outsourcing with new start-ups and strong demand for IM capacity, resulting in sales up 35% and 15% respectively for LI and IM in Eastern Europe.

This trend is also true in South America, where IM sales are up 14% despite a tougher environment, in particular in Brazil. And IM in Africa and the Middle East is progressing 12% benefiting from a sustained demand, particularly in South Africa. Our big energy project in Saudi Arabia is on standby, ready to start as soon as the new Yasref refinery is itself up and running.

Gasification projects based on Chinese coal reserves, requiring large quantities of oxygen and/or some of our proprietary technology blocks are very active in China. You saw last week’s announcement of the doubling of our oxygen capacity in China. In the meantime, liquid and cylinder demand continues to rise over and above industrial growth in the Asia-Pacific regions.

Shale gas is boosting industrial demand across the U.S. and Canada, with on the one hand, strong volumes to our pipelines in the Gulf Coast as a result of our customers benefiting from competitive input prices, and on the other hand, higher liquid sales for oil and gas production, as well as for more general industrial needs in North America.

Appetite for innovation is also helping as Electronic sales are also up China and in the U.S. implying the start of the recovery cycle in the sector, as well as the contribution of our strategic acquisition in advanced materials, the designer range of ESGs more specifically in Q4 with the Voltaix acquisition. As a result, sales to industry in developing Asia and North America are both up 6%.

As far as the urbanization and demographics trend is concerned, the visible proof of this major trend is in the growth of our Healthcare activities in advanced Europe, up 10% for the year. Europe, which represents 80% of our Healthcare activity is benefiting from regular growth in Home Healthcare, supported by bolt-on acquisitions to increase local density. Growth continues to be very strong also in Latin America, where sales are up 20% from what is becoming a much more significant base to healthcare business.

The geographical view highlights positive trends in Americas and Asia as I’ve just mentioned, while Europe remains positive but just slightly. In Europe, strong oxygen volumes in Large Industries, sustained demand from Home Healthcare businesses and momentum in Eastern Europe are compensating for Industrial Merchant activity which remains a little bit soft in the West.

Growth in the Americas was positive all around, with stronger volume in Large Industries and particular in hydrogen; good volumes and solid pricing in Industrial Merchant; and the recovery in Electronics, confirmed by strong equipment and installation sales. The Electronics recovery is also visible in Asia, in China and Korea. In China, three start-ups in the fourth quarter and robust demand in merchant also contributed to the growth acceleration in the zone.

In the Middle East and in Africa, the activity remains strong all year, despite the political unrest, thanks to Healthcare and Industrial Merchant development, in particular in Africa.

I am now on Slide 10. All of our business lines were up in the fourth quarter. In Large Industries, volumes were very solid, with oxygen at plus 8% and hydrogen at plus 7% globally. The impact of the 2013 start-ups late in the year will materialize progressively in 2014. Electricity sales, in particular in European cogeneration were lower than last year.

Healthcare was also robust in the fourth quarter at plus 5%, without the impact of the LVL and Gasmedi acquisitions, which supported the activity progression for the four previous quarters.

Industrial Merchant, at plus 4% in the fourth quarter benefited from strong growth in developing economies at more than 12%, and a stronger positive pricing effect at 1.9% for the last quarter and 1.8% on average for the year. Thanks to robust American demand and double-digit growth in developing Asia.

In Electronics, the recovery is confirmed in the fourth quarter with an acceleration in equipment and installation sales in the U.S. and in China, and a clear pickup of gas sales at plus 10% helped by the Voltaix contribution.

Engineering & Technology also finished the year with solid project activity. Order intake was strong in the fourth quarter at EUR 667 million, including the signing of a major energy project in North America for a third-party customer. For the year, total orders ended up at EUR 1.9 billion, a level similar to last year. Sales recognition which depends on the progress of our third-party sales reached EUR 803 million, up 4% from last year.

I will now give you an overview of the investment activity in 2013. I’m now on Slide 13. Highlights of our targeted investment decisions which totaled EUR 2.7 billion in 2013, show that we secured future growth in all key markets. You have examples of these key investments on the slide.

But to get into a little bit more details on the investment cycle, our 12-month portfolio of investment opportunities remain at the same high level as before. It has been reduced to EUR 3.6 billion at the end of the year, as a consequence of a relatively high signing rate in the fourth quarter.

The portfolio at year-end is for 70% in developing economies and still contains a very high number of potential site takeovers for approximately 20% of the total amount. In fact, this year we’ve taken EUR 2.2 billion of new industrial investment decisions and closed nearly EUR 500 million of new acquisitions, which will support our growth in the future.

Net CapEx at EUR 2.2 billion, includes gross industrial CapEx progressing 7% at EUR 2.15 billion and acquisitions net of divestitures representing less than EUR 100 million. Center piece of the news is that we ended the year with 23 new start-ups in line with forecast and we’ve been particular to start-ups in China starting in Q4 as expected. Some of these had been ready for some months, but delayed due to client issues. It is a good thing that these investments can now become productive as planned. This enables us to confirm our 50 start-up forecasts for the two years, 2013 and 2014.

Slide 15 gives you a bit more color on our portfolio management strategy. We have reinforced our strategic presence in Electronics with Voltaix and continue to densify and diversify our Home Healthcare business throughout the world. At the same time, we have divested activities that were either non-core or no longer well-positioned strategically, again these movements to upgrade our overall portfolio of investments and positions.

This ends the activity review. I will now let, Maëlys, walk you through the performance review in detail. You will see it reveals an improved operating margin and net profit growth as published, despite the severe currency headwinds. Maëlys?

Maëlys Castella

Thanks you, Pierre. Here again on this Slide 16, we highlight the most significant achievements of the year, demonstrating our competitiveness. Our sales are progressing, while margin improved supported by very high level of recurring cost savings.

On the balance sheet side, thanks to a robust cash flow progression, the net debt is stable and gearing is reduced to 56%, supported by the active portfolio management, Pierre, just mentioned. End of last year, S&P has upgraded our rating to A+, another recognition of our solidity.

Looking now more precisely at the numbers. On Gas & Services, sales were up plus 4% for the full year as well as for Q4. Engineering & Technology also had a robust sales recognition level at 4.3% relative to last year. Other activities had been penalized again by the decrease of our welding sales, minus 10%, while our diving business ended the year with a very decent growth at plus 4.6%.

As a consequence at the Group level, sales are progressing by 3.7% for the full year, once again at constant exchange rate in natural gas price and plus 3.5% for the quarter. The gap between published and constant trade variation is mainly due to very strong Forex headwind of minus 3.8% and 4.9% for the quarter due to the strengthening of the Euro against more or less all the currencies in the world, and in particular the Japanese yen, the U.S. dollar, the Brazilian reis and the Canadian dollar.

Now we go to Slide 18. We have sales decreasing minus 0.7% as published. Purchases were fairly well under control at minus 1.9%. Personnel expenses are up 3.2% reflecting an additional 2,650 employees joining the Group during the year, while average salary increase remains very modest at plus 1.5%. However, together with other income and expenses, here again the charges decreased minus 0.4%.

The strong control of expenses is in large part due to record level of efficiencies generated during the year at EUR 303 million for the Group. It’s significantly above our EUR 250 million per year new objective. The deployment of our global purchasing programs contributes strongly and the balance being linked to industrial and logistic programs and the contribution of our past realignment plans.

As a result and despite the slight increase in depreciation linked to start-ups of the period, operating income recurring is up plus 1.1%. Operating margin is up 20 basis points from 16.7% in 2012 to 16.9% in 2013, whether we adjust or not from the natural gas pricing effect.

This improvement has been more visible for Gas & Services with a 30 basis points margin improvement. Inflation costs at plus 2.3% of the cost base are being compensated by price increase, which is a balance of a relatively solid trend in Industrial Merchant at plus 1.8% for the year and tariff decreases in Electronics and Healthcare, and also by strong efficiencies at EUR 291 million for Gas & Services only.

We have been able over the year to return one-third of these efficiencies as a contribution to operating profit improvement, which is perfectly in line with our long-term model.

Looking now at the bottom of the P&L, I would like to stop a minute on the non-recurring operating income and expense at plus EUR 26 million in 2013. What you add here is the balance of the capital gains of EUR 221 million recognized on divestitures, in particular of the sales of stakes in the French hygiene, Anios, and of course related to realignment plans and other accruals.

In fact the realignment plans, now in Western Europe and Japan amounted to EUR 128 million for the year, and will contribute from 2014. And they will significantly reinforce Group competitiveness for the years to come.

Financial costs are decreasing along with the reduction of our net cost of debt from 4.6% to 4% which benefits from the EUR 1 billion refinancing during the year at current market condition.

The average tax rate at 26.6% is once again reduced by non-taxable capital gains, when our recurring energy tax rate remains more in the 29% range. Finally, net profit Group shares is up 3.1% as published and plus 5.5% excluding Forex conversion effect, showing a noticeable positive leverage with the sales growth.

Earnings per share at EUR 5.28 are progressing slightly quicker, thanks to the 1.2 million shares repurchased and cancelled [ph] in H1.

Here we the debt figure. We have been able again in 2013, while pursuing our dynamic investment policy to strengthen our balance sheet and to improve our ratios. Thanks to strong cash flow at 19.4% of our self and through progression after changes in working capital requirements, which is in line with the net income progression, we had been able to finance our net capital expenditures.

Total dividends including dividends paid to minority shareholders and share repurchases, amounted to EUR 866 million. We also benefited from positive scope impacts in connection with the Anios divestiture and from a positive FX impact in particular due to a low Japanese yen. Therefore we ended up with a net debt level, which is stable for last year, triggering a significant improvement of our net debt to equity ratio from 58% to 56%.

A few words about our net debt. As you know, we financed our investments into the currency of future cash flow to protect ourselves from devaluation risks, in particular in developing economies. We now have a total net debt which is 30% in Euro and 32% in U.S. dollars. This does not only reflect the level of our investments in Europe or in the U.S., but also the fact that in other zones, we also have many Large Industry projects which are denominated in our currencies.

The renminbi part has also increased along with the development of our Chinese projects dedicated to local consumption and now amount to 14%. As mentioned before, cost of net debt is significantly down, thanks to bond issue refinancing in 2013 and to better management of cash in hand.

I now give the floor to Benoît.

Benoît Potier

Thank you, Maëlys. And I’m now starting on Page 23, with delivering long-term performance. Long-term means long-term, and this is why I’ve taken the choice to actually illustrate that with 20-years of Group sales, from 1993 to 2013. Over these periods, the compounded annual growth rate was 6.1%.

Over the same period, our margin ratio of operating income recurring to sales went up from 12.1% to 16.9%, which means that the improvement exceeded 20 basis points each and every year.

I think it’s a good illustration to what we mean by overall objective of delivering long-term performance, and this is also good illustration of our achievement in the past. Let me start with the first element I described earlier which was competitiveness. To be able to continue to deliver regular growth, we have based our strategy on three pillars for growth; competitiveness, investment and innovation.

Competitiveness is the first one. We usually report on efficiency gains, which together with price increase more than offset cost increase. And it is still the case this year with EUR 303 million of efficiency gains, as you heard before, which is way above the EUR 250 million of annual objective. And this is the last part of the graph. But we have also tried to highlight the productivity improvement by showing the operating income recurring per employee over time, which is 40% above 2003 level and this is to say 2.5% of productivity gain each and every year in the past 10 years.

Finally, our business is slowly moving from a labor to a capital-intensity due to essentially the introduction of technology in our solutions. Therefore, I think it is important to calculate also the resource intensity by taking for instance personnel costs and depreciation costs per unit of profit generated. This is what we’ve done in the right part of the graph. And in this regard the past 10-years have also improved tremendously.

And this is why we have had a regular margin improvement from 14.2% to 16.9% in the past 10 years.

On Page 25, the margin ratio for each business lines demonstrates that the overall improvement was a reality in all businesses overtime. The Large Industry business line maintaining essentially its margin level, despite a significant change in the mix from air gas to hydrogen and CO.

If I now go to Page 26. I would like to come to investments that are at the roots of growth in our business. Pierre and Maëlys presented our investment decisions and expenses in 2013. Over 10 years, it is key to remember that not only we have delivered revenue growth with a well-balanced CapEx to sales ratio, but we have also increased cash flow to sales in the 18% to 20% range, while maintaining cash flow to capital employed in the 17% to 19% range.

If we looked at the same ratio over 20 years, they would also stay within the same range. So high cash flow returns had been maintained overtime and fluctuations in the range are mainly due to CapEx intensity in the given year, not to any witness in the business model.

If I look at the return on capital employed on Page 27, the view is not that different as over 10 years, we stayed in the range 11% to 13%. And over 20 years, you could check that only one year was the ROCE below 10% and for 13 years, it was above 11%. Our capital employed is now well balanced with more than two-third representing industrial assets, either producing or whether under construction, and less than one-third being goodwill.

On the next Page, I’d like to come back on innovation. I mentioned competitiveness and investment, and now innovation. And for those who attended our Capital Markets Day, you know the importance we put on innovation given the three major trends we identified that will definitely shape our future. You are also probably familiar with our four initiatives for boosting innovation and reported in the slide.

From design to cost or recycling or large scientific projects on the left part, to hydrogen mobility, new therapies etcetera, we have embarked into a new mode of innovation, which is more urban, plugged to ecosystems and in line with venture capital approach. We expect to see the first results in a two to three year timeframe as for instance it is happening for the first stationary or mobility applications in hydrogen energy.

On Page 29, overall this year 2013 is on track with what we presented last December. We are after three years growing in phase with market, Large Industry and Healthcare being on target, Industrial Merchant and Electronics’ falling behind, but recent momentum in Q4 in encouraging, as Q4 saw a growth of 4% in IM, after two quarters of 4% growth and growth of 9% in Electronics. So the roadmap is robust after three years.

Outlook now. In summary, fiscal year 2013 has delivered the targeted performance in the backdrop of a slower economy, and our investment decisions on top of improved margins and efficiency gains are giving us the necessary confidence for 2014. And this is why barring a degradation of the environment, we are confident in our ability to deliver another year of net profit growth in 2014.

Just a word next slide on responsibility. Let me remind you our CSR commitment to act responsibly along three lines. First line is to serve customers and patients and contribute to society. We have highlighted two indicators; the number of patients taken care of and the progress we made in energy consumption for HyCO, two illustrations of our commitment to serve and contribute. Second, build relationship with shareholders and stakeholders. We’ve taken one indicator as illustration of the number of registered shareholders that grew overtime from 120,000 to more than 200,000 shareholders today.

The third one is to run our operations and develop our people responsibly. We’ve taken one indicator, which is safety and the frequency rate. We have tremendously improved the safety environment for our employees and our customers over 10 years. We will continue to monitor our indicators and reports on an annual basis on our responsibility.

Finally, sustainability is also part of our responsibility. Our actions are recognized by internal and external stakeholders as we can see and we’ve shown on the graph.

Thank you for your attention. I’ll be now ready with Maëlys, Pierre and Jean-Pierre to answer all of your questions.

Question-and-Answer Session

Operator

Ladies and gentlemen, if do have a question at this point (Operator Instructions).

Benoît Potier

And the first question is coming.

Operator

There will be a short silence sir, while the questions are being registered.

Operator

Our first question comes from the line of Heidi Vesterinen. Please go ahead with your question.

Heidi Vesterinen – Exane BNP Paribas

Yes, hello. Thanks for taking my questions. I wondered if you could comment on merchant utilization rates in Europe please. Some of your U.S. peers were talking about an increase towards the end of the year. And the second question is on Electronics. I wondered if you could tell us how much Voltaix contributed to the 9% growth. And it does sound like you are more positive on the outlook for the underlying business. Could you once again talk about your outlook by segment as usual please? Thank you.

Benoît Potier

I think Jean-Pierre is going to take the European question. The utilization rate in merchant is slightly above 60% as we speak worldwide. So this is quite low and this is why we have decided to readjust our capacities in limiting the number of new investments to be able to absorb the capacity that is available, and not yet sold on the market. But Jean-Pierre is going to be a little bit more specific on Europe. Jean-Pierre?

Jean-Pierre Duprieu

Yes, thank you, Benoît. Yes. You mentioned the utilization rate Benoît. It is little bit diverse depending on the countries. We have a better situation in Northern Europe as opposed to Southern Europe, which remains quite difficult particularly in Spain. But that being said, you are right, we’ve seen in the last quarter in liquid nitrogen for example, some recovery on this subject and some sign of growth showing that we may hit the bottom.

If I comment a little bit further on your question depending on the market, we see some sign of better growth in the segments, even like automotive industry for example, where the last indicator in January shows a 5% growth in automotive industry in Europe, which might be a signal of better loading of the year – of the plans given the need of liquid nitrogen, oxygen that they may have. That’s true also for transportation for example.

Even on metal fabrication, we have some signals of recovery. So overall, low rates – too low rate reason of the restructuring plan as Benoît mentioned, but also some positive signals in the end of the year, which are making us reasonably cautiously, but positive about the trends in the first part of the year

Benoît Potier

Your second question related to Voltaix. I am going to ask, Maëlys, to answer, just realize the overall number. Voltaix, as such represents today about one-fourth of the specialty gases sales in the world. So this is interesting. I mean clearly, we are increasing the portion of the high value products in Electronics specialty gases and there will be two benefits. Number one will be on the growth rate of the ESG; and number two will be, on the margin ratio of this segment, because those molecules are really high value-added molecules, but to be more specific, Maëlys, will be giving you the answer of your question.

Maëlys Castella

On the fourth quarter – so on the 9% growth for Electronics, Voltaix represent 4% which mean the rest of activity is growing by 5%.

Benoît Potier

Thank you. The next question?

Operator

Yes sir. The next question comes from the line of Erik Karlsson please go ahead with your question announcing your company’s name? Erik Karlsson AKO Capital.

Erik Karlsson – AKO Capital

Hello, it’s Erik Karlsson from AKO Capital. I had a question on efficiency. Efficiency accelerated in the second half of the year to almost EUR 160 million from EUR 130 million in the first half of the year. I was just wondering if you could help us how we should think about efficiency for 2014, please.

Benoît Potier

Well, we will not be committed to anything else than what we said during the Investor Day, because we think we have to think in terms of, as early as ahead. It’s always a little bit difficult to shoot for a very precise number. We said that the EUR 1.3 billion, which was an increase of 30% vis-à-vis the previous plan is the objective for the period. So it gives about EUR 250 million something per year. We have exceeded this efficiency objective in the whole year.

There is undoubtedly a portion which is now coming from the realignment plans. Out of the EUR 300 million, there might be around 20% of this amount coming from the realignment plan. And this is interesting, because this is exactly what we want to achieve. Make sure that wherever we operate in the world, our structures are differently adapted to the market dynamics, and we’ve seen that in Europe we had to – after the crisis we had to adjust our structures to market dynamics.

So that’s where we have. I think you should safely shoot for what we have announced the EUR 1.3 billion over five years. If we can exceed those numbers, that would be good news but to be on the safe side, I think you need to stick to the number we announced.

Erik Karlsson – AKO Capital

Very good. Thank you very much.

Benoît Potier

Thank you. Next question?

Operator

Our next question, sir, comes from the line of Andrew Stott. Please go ahead with your question sir announcing your company’s name.

Andrew Stott – Bank of America/Merrill Lynch

Yes, good morning thanks for taking the question. Yes, it’s around the portfolio of opportunities which has shrunk, I think about EUR 400 million year-on-year. Just which areas you are seeing that slowdown in opportunity if you like? And linking into this, Benoît, I heard you describe Large Industries is on plan, but I think 3% from the second half is still quite difficult to square with the base business that’s slightly up, and the number of new projects that are started up. So does this mean that Q1, Q2 of this year are going to be somewhat better, just because of the phasing, or is there something in the detail that I am missing?

Benoît Potier

No, I think you are not missing anything. I think you should judge the Large Industry business more on a one or two year basis, rather than a quarter basis. The Large Industries business is a project business. Everything is based on new projects, and our ability to generate new opportunities, be competitive vis-à-vis competition, sign contracts with customers, and show the profitability and the return. And once everything is being done, it takes time to build the plant and start up the plant.

There is a portion of the timing that we don’t control, when customer decides to delay their own start-up or when there is some delays in the overall plan. So I think you should not look at the 3% growth in the second half as a proxy for Large Industry growth, but this is a phase – and you don’t have to forget that we are more or less at the time when the project that should have been decided in 2009 – should have been built and started up should bring this ramp-up growth, and we don’t have it.

We don’t have it because we didn’t sign in 2009. So there is this four-year delay between – or time difference between decisions and ramp-up. And to me, that’s the only issue behind the 3%. We are confident. Large Industry is a good business. We can preserve the margin ratio. It is becoming I think a really long-term solid robust cash flow generating business, even more than before, because there are many opportunities that are related to the strategy of countries. And so I am personally very confident in this business line.

Now you mentioned that the portfolio went down from EUR 4 billion to EUR 3.6 billion. It’s life. It’s part in part because of the success rate we had, actually we signed business and this business disappeared from the portfolio, but the ups and the downs, the entries and the exits from this portfolio represent a significant number. So there are ups and downs, but this is way enough to feed the growth of the Large Industry and we are not at all concerned about the fluctuation of 10%.

I may just ask Pierre to add one or two comments on Large Industry. Pierre?

Pierre Dufour

Yes, the level of projects available for investment remains at roughly the same level as before. Just to give you a little bit more color, we’ve added in the period the EUR 5.7 billion of projects, we actually entered the one year portfolio, and EUR 6.1 billion of projects who exited the portfolio. Good chunk of those are projects that happen to be awarded in the fourth quarter. So the big lump of the awards plus a number of projects including a major one for almost EUR 0.5 billion which became sale of equipment at the request of the customers.

So we are not concerned about the portfolio. One thing about it which is clear though is that there is more large projects in the portfolio than we have seen before. So we might expect a little bit more swings in the future, but the overall level of opportunities is about the same.

Andrew Stott – Bank of America/Merrill Lynch

Thanks.

Benoît Potier

Thank you. Next question?

Operator

Our next question comes from the line of Stephan Kippe. Please go ahead with your question announcing your company’s name.

Stephan Kippe – Commerzbank

Yes, Stephan Kippe from Commerzbank. I have three questions. I had pitch sound problems, so if they have already been answered, I am sorry for that. Page 4, in terms of the base business development. Base business growth in the fourth quarter was a bit slower than in third quarter it looks. Is that mainly due to base effect from the year before, or could you just say how the sequential development of the base business was in Q4 versus Q3? The same thing on Page 9 for Europe. There has been quite a significant drop off of comparable growth from Q3 to Q4 in Europe, maybe also that the main contributors to that sequentially. And on Page 19, the cost increases of EUR 234 million. What are the main building blocks of that? From my estimate about a third about should be higher costs for personnel, but maybe the other main components of that costs increase? Thank you.

Benoît Potier

Okay. I can reassure you, none of your questions have been answered yet. So I will take the three of them. I’ll ask Jean-Pierre to answer the European question Q4 against Q3, and Maëlys on the cost, EUR 234 million.

I’ll take the first one. I think on Page 4, you definitely need a magnifying glass to see that there has been a difference in the base business. This is really nothing behind. It might be some base effect, base meaning comparison effect, because one quarter over the other, we may have some exceptional invoices and it may explain the difference, but if we look at just the sales for industry, Gas & Services sales for industry, just industry, and excluding Healthcare, I think we had a pretty good fourth quarter.

By contrast, it doesn’t mean that Healthcare was not good, but we may have some fluctuations in the Healthcare. So we are not concerned about this type of fluctuation in the base. You’ve seen on the same graph, Page 4, that the base business is positive. It has been the case for three quarters in a row. And it is between 0.5 point and 1 point. I mean fluctuations between 0.5% and 1% is just normal life.

We are more tracking 1% or 2% difference. That’s exactly what happened in 2012 and the first quarter of 2013. So there is nothing really fundamental or structural in the fluctuation of the base growth in Q4. That’s the answer to your first question.

Jean-Pierre, you’re going to take the second one on Page 9? The drop off of comparable growth in Europe?

Jean-Pierre Duprieu

Yes, it is a comparison effect with last year, where we have up and downs. And last year we have been stronger, so but sequentially Q3 compared exactly to – I mean exactly you compare wisely to Q4. So we don’t have a drop in activity. In other words, drop between Q4 and Q3.

Stephan Kippe – Commerzbank

Thank you.

Benoît Potier

Maëlys?

Maëlys Castella

Yes, on the increase of the costs, so the 2.3%. As you mentioned right, it’s the personnel costs that increased the most. As I mentioned, we have an increase of total people in the Group for more than 2,600 people, mainly from the acquisition, we realize part of last year acquisition in Healthcare and Voltaix, but we have also an increase of our base mainly in emerging countries and in Healthcare.

So that’s fully explaining the major part. We have also some inflation on the transportation cost, but we’re always working on that. It’s part of our efficiency to compensate those inflations.

Benoît Potier

And maybe an additional comment on personnel expenses. When we analyzed country-by-country and business line by business line, the personnel expenses, there is a visible improvement, wherever we have been adapting our structures. Now it is not that visible at the Group level, because at the same time we have boosted innovation. And as I explained, we’ve made sure that we were ready to actually penetrate the new markets. So there is an offset of the savings by the innovation cost that we have put in the ground.

Now, the innovation costs are now I would say at the right level. So as we go in 2014 and ‘15, I think we’ll see more benefits from the realignment plans coming into the P&L. But it is not – at this stage, this is not yet that visible.

Stephan Kippe – Commerzbank

Very clear. Thank you very much.

Benoît Potier

Okay, thank you. Next question?

Operator

Our next question comes from the line of Neil Tyler. Please go ahead with your question announcing your company’s name.

Neil Tyler – Redburn Partners

Good morning. It’s Redburn. Couple of questions please. Firstly, on your return on capital chart. Could you tell me, given your confidence of the temporary nature of the lack of growth stemming from 2009, do you think that return on capital, interpreted as you do all in terms of cash flow over capital employed has trough in 2013? Second question, pricing. Just going back to the operating income bridge. The second half for the year, pricing looks like it didn’t move forward a great deal, and slightly in contrast to your comment on IM pricing having improved. So presumably prices in Electronics and/or Healthcare went backward slightly in the second half of the year. So could you perhaps give a little bit more color on that? And then finally, on site takeovers. You mentioned the larger number of site takeovers in the portfolio of opportunities. Is that a step change, is that a structural change? Do you think there are going to be more of those going forward, or is that just something that’s slightly exceptional reflecting just the current portfolio and nothing more than that?

Benoît Potier

Okay, I’ll take the first one. Maëlys will take the second and maybe Pierre will take the third one. So it is undoubtedly, on return of capital employed, this is a temporary situation. We know that we have decided investments in the past five years, in the end of the period. All projects are good projects. There is nothing wrong in the decisions we took.

The quality of the customers in sites is good. We have a good confidence that it will bring the sales and the profits linked to those investments. So I would say that definitely this low part of the range is more, I would say, the bottom and not definitely the top. Now we never know exactly where we are going to be from one year to the other, because it depends on highly on the number of start-ups and the ramp-up of our customers. So it is related to the market, but fundamentally the portfolio of the past investment has been strong, and we think that we’ve reached a point that should be more or less stabilized.

Now I cannot promise of course, because there are always some uncertainties. Now if I take a two to three year view, there will be start-ups. We have, say 23 in 2013. And more than 25, probably around 27, to complete the 50 start-up over two years. We are well on track. Some of them will be modest, but all those will be quite substantial. So as we go, we should see the benefit of all those investments coming into the P&L, and it should definitely have the return on capital employed to stabilize in the middle of the range.

We will make efforts on the targeting of our investments in the coming two years. We’ll make sure that we still generate growth, but would be probably a little bit more even discipline in the priorities that we allocate to the different projects, so that we control the overall amount of investment CapEx, I’m talking in the next two years, to make sure that the ROCE is well maintained within the range.

So that’s the policy of the Group. And I think you should not be too worried about return on capital employed. This is well under control. Pricing, Maëlys. And then the site takeovers.

Maëlys Castella

Yes, on pricing on the IM side, we mentioned that the pricing effects was for the year 1.8%. And in fact in Q4, we add even a better performance at 1.9%. This is re-contrasted depending on the region as we mentioned in Europe, despite the difficult environment, we still have been able to revise price increase at 0.5% for the year and Q4 was actually higher level at 0.7%.

Americas has been more stable for the year, so around 3.6%, and Asia with 1.1% for the year. And we have an acceleration in Q4. So maybe on your question, the pricing effect of course in Electronics, as we’ve mentioned, has been negative. And in Healthcare also, and maybe the one was been more degradating over the quarter is Healthcare with larger drop at end of the year on the last quarter.

And as you know Healthcare is really depending on the different region. So it’s around between minus 1% and minus 2%.

Benoît Potier

Thank you. Third question was related to site takeover. Pierre?

Pierre Dufour

Yes, there is no real step change, Neil, on that issue. You remember we used to have nine takeovers in the portfolio, then it was 10, now it’s 12. So it’s a little bit more every year. We seem to be able to dig up more opportunities, but it’s not, I would say a huge change. The reason why it’s a little bit higher percentage of the portfolio this time in value is because we’ve had these exits from the portfolio in the fourth quarter. So we divide by a smaller number, but apart from that, there is no real step change in the number of these – or value of these takeover opportunities. There is only a continuing increase in the number of them, but it’s not significant.

Neil Tyler – Redburn Partners

Okay. Thank you very much.

Benoît Potier

Thank you. Next question?

Operator

Our next question comes from the line of Rakesh Patel. Please go ahead with your question announcing your company’s name. Mr. Rakesh Patel, your line is open.

Rakesh Patel – Goldman Sachs

Hi there. Just couple of questions for me if I may. First of all, if you can just dig a bit more deeper into the EUR 300 million of efficient base which you’ve managed to realize in 2013. You talked about the 20 basis points improvement in margin that you’ve achieved nearly every year over the last decade. And I wondered whether we should actually expect a bit more in 2014 and ‘15, given those efficiencies and the retention rates? And then finally, I just wondered if you could give us an update on the Yanbu project, because I think in the past you’ve talked about EUR 300 million of revenues in its first full year sales. Should we now think that 2014 as being its first full year, or should we still think about that being as a more 2015 impact? Thanks very much.

Benoît Potier

Okay. I take the first. Pierre takes the second. Of course every time you give something, people will ask for more, but that’s life. We know that by heart. So when I said I just looked at the past and make your calculation just to illustrate the point, that when we talk about regular improvement in margin because of efficiency gains, and because of the productivity and the good utilization of resources, it brings results.

And I think the 20 basis points is clearly good illustration. We are not committed to improving the margin each and every year, but it also relates to the business mix that we have, and the business mix depends on the opportunities that we find in the market. So we are a little bit cautious in not promising things that may be different.

Now that being said, what we have been able to do in the past, improving really the heart of the operations is still on the agenda. We still think there is a lot of things to do in the future by really adapting on a continuous basis of structures to markets. And if we are successful, which we think we will be, we should be able to generate additional improvements in margin as we go. But there is no promise for the future in that particular indicator.

Yanbu. Pierre?

Pierre Dufour

Yes, the Yanbu project. Actually you might hear us talk about the Yasref, which is the name of the customer, Yanbu being the name of the location. The project from the early heat perspective, our hydrogen plant is complete. It’s ready for commissioning. And its awaiting utilities, which need to come from the customer. The customer is building this $20 billion or $15 billion refinery.

They are now expecting to deliver utilities somewhere in the third quarter. And they are expecting to start the refinery hopefully in the first quarter of 2015. They will have needs before that as they commission their own facilities, but we don’t really expect a full year before starting before the first quarter of 2015. The progress is good from their side. So we have no reason to hesitate.

So 2014 is going to be a year where we basically wait for the customer to be ready and maybe deliver a bit of revenue, but not much. The real revenues – the order of magnitude you gave is still about right, and that’s going to start in the first quarter of 2015. Now that’s going to be interesting, you talked about margins. Because of the very high price of energy being fed to this project, we will have a big increase in sales. That’s going to be noticeable at the Group level.

We are going to have an increase in the ROCE of the Group, because this investment is now in the balance sheet, and will only start to deliver in 2015. And probably a little decline in the operating margins, because of the very heavy weight of energy into that mix. So we will communicate little bit more precisely later in the year on those impacts, but it’s an illustration of what Benoît was mentioning. The business mix and the start-ups in the given year tend to sometimes modify the vertical ratios and the ROCE in a way that’s noticeable.

You may remember when we started up the cogeneration plant in the Netherlands in 19 – it must have been ‘99 or so, around that. We had the same situation. And we had one year drop in operating margin, which was completely artificial. And due to the fact that there was a lot of pass through energy in that project. So the same thing will, to a lesser extent will happen in 2015, but the project is a good one and it’s a great success and it will start to deliver on all lines of the P&L in 2015.

Rakesh Patel – Goldman Sachs

That’s really helpful. Thank you very much.

Benoît Potier

Thank you. I think we have six questions. So we will try to have short questions and also short answers. Next one?

Operator

The next one comes from the line of Jeremy Redenius. Please go ahead with your question announcing your company’s name.

Jeremy Redenius – Stanford C. Bernstein

Hi, it’s Jeremy Redenius from Stanford Bernstein. Thanks for taking the questions. I just had a few simple questions related to the ROCE chart on Page 27. Could you just give us a sense of the urgency in the organization about improving ROCE? We see from this chart, it’s at 10-year lows. And are we at the point where variable compensation for the senior team will actually be going down this year, because I know it’s part of your variable comp, and we’re seeing a negative trend in this metric for the past couple of years. Also what would have to believe to see this ROCE climb back over 12%? Is this just a matter of letting the new projects start-up and having those come through on-time to actually get us to the 12% or is it going to take much more than that? Thanks very much.

Benoît Potier

Okay. There is a sense of urgency, but not really a rush, because we know our business is long-term and we know the impacts of any investment decision on ROCE short-term. So it’s not really urgency. It’s high sensitivity to ROCE. We never – I mean we drive the business on the basis of return. So we are very sensitive to return, but that’s not really urgency. It doesn’t matter whether you gain 0.10 or 0.20 points in ROCE, just for improving ROCE. What is important is the business you build overtime. And that’s why I talk about long-term growth.

Now that being said, we have a discipline and this discipline is still very present in our minds. Compensation, variable compensation definitely linked to ROCE. So whenever there is a drop in ROCE, we, the management team is penalized. We are penalized due to the performance in ROCE.

Then back to 12%. If we stop investing for two years, there is absolutely no problem. You’ll see the ROCE coming up. We’ve seen that in Large Industry business many times in the past. So the question in our business is the balance between growth and return. And that’s what we try to achieve. I hope I answered your questions.

Jeremy Redenius – Stanford C. Bernstein

Yes, thank you very much.

Benoît Potier

Thank you. Next question?

Operator

Our next question comes from the line of Marcus Diebel. Please go ahead with your question announcing your company’s name.

Marcus Diebel – JPMorgan

Hi, it’s Marcus Diebel from JPMorgan. Just on pricing and obviously very strong in the Americas. The IM pricing 4% in 2013. Is there any potential that this might accelerate even further? Just a quick comment on that one. And then on CapEx, the EUR 2.2 billion investment decisions as of now, where you might see this to go into 2014 and ‘15. And then the question, where I probably you won’t get an answer but I’ll ask it anyway. The consensus currently factor in between 6% to 7% on a compounded growth for Gases & Services. Benoît, could you give us any comments as of your knowledge today. What services – could you give any comments on that number if possible?

Benoît Potier

The pricing in Americas. Pierre?

Pierre Dufour

Yes, pricing in America and the U.S. and Canada has been hovering around the 3.5% and 4% now for a good number of years. I think it’s about what the market can take. And I don’t see a significant uptick from that going forward. It’s still a pretty healthy cliff, because it’s somewhat higher than inflation. So I don’t see it going up significantly in the future.

Benoît Potier

The CapEx EUR 2.2 billion in 2013. We expect to have two years around more or less the same numbers, maybe slightly down. We have a policy for the next two years to absorb the CapEx that we spent in the past years and make sure that the investments produce what they should and not to over-invest in the next two years. Now that being said, if we have good opportunities of course, we’ll see that and invest. So it should be that far from the EUR 2.2 billion, maybe slightly less for each year for the next two years.

The consensus, we normally make no comments. It’s way too early. I think we need to wait a little bit in the course of the year to see how the economy develops, but I don’t have any comments at this stage.

Marcus Diebel – JPMorgan

Okay, thank you.

Benoît Potier

Okay. Thank you. Next question?

Operator

Our next question comes from the line of Peter Clark. Please go ahead with your question announcing your company name.

Peter Clark – Société Générale

Yes, good morning. Société Générale. Just had two quick questions hopefully. I heard what you were saying on the volume trends in Europe. I know it’s the commentary about Southern Europe. It does seem a little bit lighter than it appears in terms of the performance. Just wondering if there is an element of the restructuring, the realignment in that sort of volume growth, or is just what’s happening in the market at a particular time? And then the second question talking about more information coming up, obviously in Investor Day, lot of information. Just wondering on the 2016 to 2020 timeframe. In the investments slides, you were talking about a lot of growth in Western Europe on Healthcare. I calculate about two-thirds of the regional spend was in the Healthcare area, which was a lot of money I calculated over EUR 1.5 billion. Just wondering for that sort of spend obviously you’re seeing bolt-ons. What sort of scale of bolt-ons? Are they going to be purely the homecare area looking at moving more into the hygiene and building backup? So just going back to the Investor Day for the second question. Thank you.

Benoît Potier

Okay. First question, Jean-Pierre will take it. I’ll take the second one.

Jean-Pierre Duprieu

The volume trends that you mentioned, lighter than it appears, are nothing to the restructuring. The restructuring is there to adapt ourselves to the volume after 2008, but it’s not impacting our volume as such. Now the volumes are recovering at the end of year. We are relatively confident that there will still pick-up during the course of this year. And then the difference you might see is linked to the different footprint in Europe. Well it’s true that there is a recovery, we’re expecting is much lighter in Southern Europe compared to Northern part of Europe. That would be the explanation.

Peter Clark – Société Générale

Okay.

Benoît Potier

In terms of the next phase, I mean 2016 to ‘20. Yes, Healthcare is basically a growth factor for us. It does not require that much investment. I mean Healthcare generally speaking is less capital intensive than other businesses, because we actually take product, and in the value chain, the product and so the cost of production is less than in other businesses.

We are not expecting a drastic change in the capital intensity. So if we have a lot of investments in the coming years, it means that it would be accompanied by lot of growth, but the link between investment and growth will be there. Do we have a lot of opportunities for bolt-on acquisitions? Yes. The market is definitely highly fragmented.

Today, we have also the ability to shape the type of those portfolio that we want to have in Home Healthcare in particular. There are sub-segments that are growing much faster than others, and we try to position ourselves on two things. One is to the sort of density of business in a given region that is really bringing a lot of value to us. So that’s one. And second, we are trying to position ourselves on the fast growing product and services to patients. And this is why we went from oxygen to sleep apnea to ventilation to diabetes and to other therapies, because all those patients suffer unfortunately from multi-pathologies. And when you serve them at home, you need to supply nearly all services, which of course is very good for the patient, because there is only one person talking to him.

This is also highly efficient for us, because there is only one person going to the home of the patient. So we are trying to build really a highly efficient business which will not require too much investment in the future, just what you have today as an average.

Peter Clark – Société Générale

Thank you.

Benoît Potier

Thank you. Next question?

Operator

Our next question comes from the line of Peter Mackey. Please go ahead with your question announcing your company’s name.

Peter Mackey – Morgan Stanley

Good morning everybody. It’s Morgan Stanley. I’ve got three quick questions hopefully. You’ve talked about a bit of step-up in R&D costs and certainly central costs were behind H2 than H1. Can you give us an idea, should we annualize that H2 rate, please? Could you talk about the 27 projects you are expecting this year? Are there any sort of particular oddities about the phasing of those projects, or if not, smooth during the year. And are you able to – I doubt it, but are you able to give us any indication what you think the start-up and ramp-up effect might look like for 2104? And a quick question on the U.S. margin. I may have missed something slantingly obvious, but it looks like the U.S. margin stepped up quite considerably in H2 versus H1. Just wanted to make sure I haven’t missed some effect there please?

Benoît Potier

Okay. The first question on R&D. We calculated that the global innovation costs along the year increased by around 9% just for the year, which is a good illustration of the effort. It’s not going to grow by 9% every year. I mean as I explained, we had a step-up which was, bring our R&D at the next level, because we need to prepare for the future. So that’s why we probably had a higher effect in 2012 and 2013, and it would be more in line with the sales in ‘14 and ‘15. So the increase is more behind us than ahead of us. That’s what I have in my – check with Maëlys.

Maëlys Castella

Yes, the total amounts we consider – the total innovation spending for the year because we talk – and again the total innovation as you mentioned it’s larger than that, the EUR 265 million for this year.

Peter Mackey – Morgan Stanley

Okay. Thank you.

Benoît Potier

The second question is that the phasing of the 27 projects. I mean I’ll ask Pierre to answer this question. Pierre?

Pierre Dufour

Yes, as usual we get in trouble answering that question, because the number changes quarter-over-quarter all the time. So I don’t really have an intelligent answer to give you. We have a plan and it’s going to happen probably slightly different than planned. The plan is reasonably even throughout the year, but the phasing is never so easily predictable, especially on a quarter-to-quarter basis.

We expect a higher amount of sales from these start-ups and ramp-ups in 2014 than in 2013. We expect something well in excess of EUR 300 million of impact on our sales.

Benoît Potier

And just the last part of your question, phasing of the start-ups in 2014 should be more balanced in first half than second half. There is about 17 and 10, 12 in the second half. So 17 in first half and 10, 12 in the second half. But you never know. It depends also on the customers. So you have to be a little bit conscious about that.

U.S. margin. Pierre?

Pierre Dufour

Yes, the U.S. margins are good. They are good in every business line. They are good because the volumes are high, so which gives us productivity. And these volumes really help out again to generate the productivity. Pricing is good. Nothing really – the mix is good. So nothing particular except that it’s been a good year in managing the overall portfolio of business we have in the U.S.

Peter Mackey – Morgan Stanley

Sorry, should I think about as looking at the full year margin as indicative of the ongoing level rather than the H1, H2 split?

Pierre Dufour

It’s difficult to say. We just had a terrible month weather-wise in January, which is going to depress margins for the first quarter. So it’s hopefully difficult to say. But let’s put it this way, our margin in the U.S. are as good as we hope them to be and we keep to manage them in that way.

Peter Mackey – Morgan Stanley

Thank you.

Benoît Potier

Thank you. Next question?

Operator

Our next question comes from the line of Markus Mayer. Please go ahead with your question announcing your company’s name.

Markus Mayer – Kepler Cheuvreux

Yes, Markus Mayer from Kepler Cheuvreux. Thanks for taking my three questions. And hopefully they’re the quick ones. Again on Southern Europe and the recovery. Do you expect that – do you see the year a negative impact for the margins as then your customers might come then to take-or-pay levels or even above? That’s my first question. Another that correlates with this. As was mentioned, the industry – when European contracts from, in particularly as new customers are…

Operator

Markus, you could talk a little bit louder and move close to this thing, because we really can’t hear you?

Markus Mayer – Kepler Cheuvreux

Okay. Hopefully, now works better. So again – should I repeat my first question?

Maëlys Castella

Yes.

Operator

Yes, please.

Markus Mayer – Kepler Cheuvreux

First question was if you expect a negative margin impact from the Southern European recovery, then your customers coming back from below take-or pay levels to take-or-pay or even above take-or-pay levels? And the second question is then your European contracts for your Air Separation Unit, and particularly for the steel industry up for renegotiation after 15 years. Do you expect that several of these contracts will fall away as the steel capacity in Europe should be reduced long-term? And then the last question is basically also on the recovery. You said that there is further trends of recovery at the metal fabrication of the electronics. Do you see further trends of recovery in other areas, and how do you see currently the Asian markets in particular and also in 2014 versus current trends you currently see?

Benoît Potier

Okay, thank you. Jean-Pierre, I think is going to take the first two questions.

Jean-Pierre Duprieu

So Large Industry contract in Southern Europe. I mean Large Industry is Southern Europe is limited compared to what it is of course in Northern Europe, Benelux, France, Germany. That being said, the comment I made earlier about Southern Europe are more dedicated to IM business than for LI business. We do not expect with the visibility we have to have some negative impact on the take-or-pay contract in Southern Europe so far.

To your second question, we are – I mean we consider that as far as the steel industry is concerned, certain number of restructuring has taken place. We are positioned now in the Europe where we feel confident that we should not have a further decline in demand or closure of plant as far as our footprint of the steel industry is in Europe. So that’s our visibility about this subject now.

Benoît Potier

As far as the other areas apart from Electronics and in particular in Asia, in terms of recovery, the Large Industry is a no-brainer. We have projects in the portfolio. It’s a matter of success rate. And I am pretty confident that Air Liquide has everything it needs to really be successful. The Healthcare, the global trend is also very positive. It’s all about volumes and the ability to generate new volumes, to generate further efficiencies to absorb pricing pressure, but I think we’ve been facing the situation for years, and we know how to deal with it when you don’t have ruptures which we don’t have today.

So the real question is related to Industrial Merchant. When I look at the different segments, the only one which is really flat as we speak is the so-called Craftsmen and Network, I mean the small welders, the welding business, the craftsman, the small fabrication where we have really a very small growth or no growth, but when you look at the other segments, automotive and fabrication globally worldwide is coming back.

So this is positive probably 2% to 4% in terms of end-market growth. The food and pharma business is also growing. And I think there are even more opportunities in the business for the future. The materials of energy business with all the recycling and the management of both energy savings and natural resources is giving the IM business also opportunities. And the end-markets should grow also in the 2% to 4%. And the technology and research, electronic components and the like, and fiber optics markets are doing quite well.

So we expect further growth in those markets. So overall, the IM business is positive if we look at the future with just one portion which is flat, which is the basics to run that business. So I hope it covers the potential recovery.

Markus Mayer – Kepler Cheuvreux

Perfect. Thanks so much.

Benoît Potier

The Electronics business – Pierre, why don’t you say a word about the Electronics.

Pierre Dufour

Yes, very quickly the semiconductor segment is doing well. The industry is expecting close to 90% utilization rate in 2014, from 85% last year. So that’s looking good. Flat panel displays are probably going to be suffering again with a decrease in utilization ratios. In photovoltaic, the end-markets are growing 20% a year. And the projected CapEx for that industry is projected to go up by more than 30% to 40% a year for the next two years. So two out of the three segments in the Electronics have pretty strong outlooks.

Benoît Potier

Thank you. I think we’re going to take now the last question.

Operator

The last question comes from the line of Patrick Lambert. Please go ahead with your question announcing your company’s name.

Patrick Lambert – Nomura

Yes, good morning. Patrick Lambert from Nomura. Thanks for taking the last questions. Very quickly, can you just give us some clarity on the Anios disposal impact in Q4, and what you see in next year? First question. The second question, the outlook for cogeneration of steam. I guess it’s mostly in Europe, but maybe I am wrong, maybe the weakness. Can you comment on that for 2014? And again also on Europe, I remember in Q3, you were mentioning refineries being weak. Is that still the case? How do you see hydrogen markets in Europe and overall refinery business in Europe for next year? Thanks.

Benoît Potier

Thanks. The Anios disposal was mainly due to a focus issue. We had two different companies, one in France, one in Germany. Anios was most specialized in certain type of products in the markets. In France, it was highly French, not that international whereas Schülke in Germany is actually more international positioned, slightly differently in the hygiene business, probably with a higher R&D portfolio and this is – and of course we own 100%.

So all in all, we decided to focus more on the Schülke business and decided to agree with the family actually to divert the Anios portion. Since we’ve done that, Schülke is doing quite well, and I think we are pleased with the outcome, both for the previous shareholders and also for Air Liquide.

Second question about the cogen and the outlook. We have actually agreed with some partners to divest one or two cogen in Europe. So the cogen business will be a little bit different because of this divestiture. For those cogens that we kept in the portfolio, they are doing well, running well, and delivering the type of return that we expected. The cogen business is typically a business with one contract that the energy situation in Europe is fluctuating, changing. And so for those we did divested, we were not sure that we could really add value to the asset for another term of 15 years. And that’s the reason why we decided to divest them.

But for the remaining cogen business in our portfolio, we are confident that we will be delivering the type of profit that we expect.

The refining market in Europe. It is weak. There will be more reshuffling, but we are not supplying all of them. I think we tend to save the refineries in large basins, where we didn’t supply hydrogen not only to the refiners, but also to the chemical industry, which is the case in northern part of Europe.

In Southern France – it’s also the case in Germany in Ruhr Area and in some locations. So I would expect no real big change in the refining business for us in the coming years, because I think some of the closures have happened already. And we are not expecting a big impact in the future. I think it covers nearly all the points.

So thank you all. Thank you for listening. And we’ll have our next meeting in April for the first quarter results. Thank you very much and have a good day.

Operator

Ladies and gentlemen, thank you for your participation. This concludes today’s conference. You may now disconnect your lines. Thank you.

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