Air Liquide's (AIQUF) CEO Benoit Potier on Q2 2014 Results - Earnings Call Transcript

Aug. 3.14 | About: L'Air Liquide (AIQUF)

Air Liquide SA (OTCPK:AIQUF) Q2 2014 Earnings Conference Call July 31, 2014 4:30 AM ET

Executives

Virginia Jeanson – Head of Investor Relations

Benoit Potier – Chairman and CEO

Fabienne Lecorvaisier – Vice-President Finance and Operations Control

Pierre Dufour – Senior Executive Vice-President

Jean-Pierre Duprieu – Executive Vice-President

Analysts

Jeremy Redenius – Sanford Bernstein

Christian Faitz – Macquarie

Heidi Vesterinen – Exane BNP Paribas

Rakesh Patel – Goldman Sachs

Thomas Gilbert – UBS

Peter Clark – Societe Generale

Neil Tyler – Redburn Partners

John Klein – Berenberg

Peter Mackey – Morgan Stanley

Thomas Swoboda – MainFirst Bank

Virginia Jeanson

Good morning, everyone. This is Virginia Jeanson, Head of Investor Relations. Welcome to our 2014 First Half Results Conference Call. Benoit Potier and Fabienne Lecorvaisier will present the first half performance and outlook and Pierre Dufour and Jean-Pierre Duprieu are also here to help answer your questions. I remind you that the next announcement of our third quarter will be on October 24, October, 24.

Thank you and I now hand you over to Benoit.

Benoit Potier

Thank you, Virginia. Good morning to everyone and thank you for being with us for this first half conference. Overall, I would start by saying that the activity level is progressive – is progressing smoothly. Our performance is in line with our full year outlook and this is really solid set of numbers.

We are going to explain to you how they were made and how you can actually view them essentially in a nutshell when we look at the different zones Americas and Asia-Pacific are doing very well with double-digit growth in this two regions.

The electronics segment has rebounded and we also enjoyed some startup and ramp ups of new units during this first half. Obviously, the as-reported numbers were affected by currency translation and Fabienne will come back on that and explain how it happened.

And I will also say that during this first half we had a consistent delivery of efficiencies once more €150 million for the first half which is a proof of the good management of efficiencies and costs. And I will come back later on the backlog and the investment strategy of Air Liquide.

Let me first start with the Slide page 2 with the activity level. What’s interesting to see that the activity level defined as being the revenue adjusted for the number of days and excluding foreign exchange and natural gas effect, when you look at the graph you see that the progression of the activity was quite regular since 2012.

There are some – there is some seasonality in quarters, but the full quarter moving average which is the red curve show clearly the trend which is a smooth and regular growth.

The activity is sustained as I said earlier, in Asia and Americas, and comparatively weaker in Europe, of course, when we translate that into comparable growth on the right side of this slide, we see that the comparable growth is 4.7% in the first half which is above all semesters since 2012.

On Page 3, we can split the growth actually between the base business on the one hand, the startup, ramp ups and site takeovers, including also small acquisitions, and significant M&A.

Clearly, the contributions from startups and ramp ups is solid, at around 3% during the first half of the year. The good news is that the base business is still positive during the second quarter.

It’s firmly positive in Japan which was a question mark but really we saw firming up Japan and there was a question mark after the close of the year, the financial year in March. North America is also doing very well, and, as I mentioned earlier, electronic recovery is visible. I’d like just to highlight one point. We normally give the numbers of the impact of natural gas and we don't have an electricity impact which is usually very high.

In this first half it’s higher than usual. So we would like just to highlight the impact on the days which is about minus 0.5% in the second quarter. And so there is, in the base business, there is an effect on the base business due to electricity impacts. But as you know, it goes up and down.

The slightly lower base business in the second quarter as the comparison basis in 2013 was much higher. So there is clearly a base effect in the growth of the base business. M&A impact was modest during the first semester. It should pick up a little bit in the second half as we have already announced as an example new acquisition in the home healthcare sector.

And we also have during this first half the impact of annual disposal which is the hygiene business in France, and as a result of that you have in the first and second quarter a significant M&A impact which is negative.

Overall, when we look at the P&L, and Fabienne will come back in details on page 4, and when we exclude the foreign exchange effect and the major M&A effects this is a 5% semester.

In sales, in operating income and in net profit, we actually run the business on the basis of 5%; 4.8%, 5.2% and 5%. What it says is that at the operating income is slightly above Group sales growth, we have a positive margin effect which is only 10 basis points and 39 basis points for gas and services.

The 5% increase in net profit which is slightly less than operating income is a result of in particular higher tax rate, but I will let again Fabienne to come up on that.

So, finally, it’s very solid. It’s well in line with our expectations, and when we take more distance and we look at the last two or three years, this is more solid as we grow. And in the last five half years, this is the best growth rate in five harsh years since the beginning of 2012. I hand over now to Fabienne and I'll come back to talk about the investments.

Fabienne?

Fabienne Lecorvaisier

Thank you, Benoit. Good morning everyone. Thank you very much for being with us. In fact, in Q2 the growth sources that we identified in Q1 are being concerned. As mentioned by Benoit, developing economies, China in particularly are much more dynamic than last year with a global 14% growth.

At the same time Americas continue to be very strong with a 10% growth. As a good piece of news of course, in mature economies is the recovery in Japan. We've continued growth in Q2 resulting in more than 6% sales progression for the semester despite the VAT increase.

Finally, the upturn in electronic cycle was also concerned with plus 12% in H1 supported by higher specialty gases sales but also robust equipment and installation revenues. It is also important to mention that the slight improvement in IP worldwide continues to be reflected in our gas and services sales growth with a sustainable level of our performance.

For H2 we are, in fact, confident in the robustness of the activity in North America as well as in the continuing improvement in China and Japan when positive signs are visible in Northern Europe.

We’ve been seizing yet again a strong ForEx headwind in H1 at minus 4.2% resulting in slightly negative published sales. However, gas and services comparable sales for the period are up 4.7% and Group sales are up 4.8% which is a clear improvement again compared to previous periods.

To be noted, the ForEx negative impact should come down going forward in the year. Our full-year estimate is negative 3% to 3.5% impact on published sales. The activity in the various zones is characterized by push in momentum in Americas and Asia-Pacific. North America is up close to 9% in H1 and South America is still posting a 15% dynamic growth, supported by a solid Brazil at plus 7% driven by large industries and healthcare and significant developments in Argentina and Mexico.

In fact, large industries volumes have been strong across the zone, in particular for hydrogen and merchant remains solid. On top of this the Electronic business, supported by strong gas sales, by the Voltaix acquisition and by equipment and installation contracts in the US, is up nearly 50%.

Asia-Pacific at plus 12% benefits from dynamic large industries in particular in China and Singapore and from the continued recovery of the Japanese market. Industrial merchant is also accelerating in particular in developing Asia on the electronic business, which represents now more than 20% of gas and services sales in the zone, also remained robust, with clear improvement in Taiwan and Singapore. In the Middle East growth has been hampered by the instability in Egypt, while Africa is up 11%.

Moving to Europe, the global European performance is showing a slight decrease at minus 1% penalized in particular by non-recurring items, a low electricity pricing and some divestitures from last year.

At the same time cylinder sales in Southern Europe remained relatively weak and the healthcare growth has been somewhat moderated this semester by price decrease in France and Spain.

However, we have positive signal in Northern Europe supported by strong hydrogen volume and we continue to focus on growing segments in Eastern Europe with high single-digit growth in Russia or for example, offshore services or AUM for which sales have nearly doubled compared to H1 last year.

Looking at the various businesses, all of our gas and services business lines have demonstrated robust growth in H1 despite a less favorable comparison basis and for Q1 alone. Large industries are up 5% for the semester supported by startups and ramp ups in developing economies including Latin America, South Africa and China.

The volumes have been relatively strong with oxygen progressing 6% and hydrogen up 12% in particular in the USA and in Northern Europe. Healthcare is progressing 4% in H1 despite a low contribution from bolt-on acquisitions and significant tariff decreases in France and Spain in Q2.

Home healthcare alone continues to progress, at plus significant and developing economies are up 15%. Merchant continues to grow in the 4% range with close to 10% progression in developing economies as well as in Japan, showing a promising recovery despite low inflation in mature countries the price effect has remained positive at plus 1.3%.

And finally, recovery in electronics is more than confirmed with a global 12% growth supported by equipment and installation sales at plus 8% and strong gas sales at plus 12%.

To be mentioned, our ALHOA high-tech line sales are up 50% over the period. The engineering and technologies’ order intake at €541 million is significantly lower than last year, as a consequence of controlled investment decision at the Group level on one side and of strict selectivity with third-party’s activity on the other side. Sales are up 14% along with the regular progress of the projects under execution.

I will now move to the financials which are fully in line with our 2014 outlook as outlined by Benoit in the introduction, we’ve been able to increase our comparable sales by 4.8% while generating €152 million of new efficiencies and raising our operating margin by 10 basis points. Net debt has slightly decreased compared to last June level.

The P&L impact reflects our efforts to enhanced competitiveness in published figures expenses have been decreasing more rapidly than sales, in line with strict procurement control and continued adaptation plans.

Depreciation is also under control along with capital expenditure management. As a consequence, operating income recurring is showing positive leverage to sales and operating margin, at 16.7% of sales is up 10 basis points compared to H1 last year which is fully consistent with Air Liquide 1090 and with our continuous improvement objectives.

This margin improvement is even stronger for gas and services, with a 30 basis point progression. The inflation of the cost at 2.3% of the cost base is only partly compensated by the pricing effect which is positive in all business lines except for healthcare impacted by tariff decreases in Q2 as already mentioned. Therefore the 19% margin is supported by €143 million of new efficiency for the gas and services alone, of which we’ve been able to retain more than 40%.

Just as a complement to the margin volume and analysis I would like to stop for a moment on Europe and Japan, which are the main regions where we are adapting our strict choice to the new market environment.

In Europe, the margin is back on the rise and close to 20%. I think it’s also worth mentioning that Europe remains a very strong cash flow provider for our worldwide development. In Japan, the adaptation plans are resulting in a drastic reduction in the resource intensity.

Looking now at the bottom of the P&L operating income is up 2.7% as published and more than 8% on a like-for-like basis as a result of much lower exceptional expenses than last year. In fact the accruals for adaptation plans were limited to €13 million in H1 to be compared to €50 million last year.

Conversely, taxes were much higher than last year with a 29.3% effective tax rate due on one side to mix effect and also to a non-recurring tax expense linked to the divestiture of our stake in industrial gases in Korea.

However, we’ve been able to deliver slight improvement in net profit as published despite the ForEx impact and the various 2013 divestitures. Excluding ForEx and adjusting for the impact of the annual divestiture last year, net profit is up 5% showing again a positive leverage to sales.

The net debt at the end of June stands at €6.8 billion, slightly below last June levels. The cash flow after change in working capital requirement is stable excluding ForEx and is hampered by the disbursements linked to the implementation of the adaptation plans which were accrued last. The industrial CapEx are €934 million or 4% lower than last year, reflecting a stricter control and the efforts to better manage and load our existing capacities.

Net financial CapEx at €8 million of the balance of bolt-on acquisitions and divestitures consisting mainly in the sale of our 40% minority stake in the industrial gases in Korea.

As you know, Air Liquide pays 100% of its dividend in May resulting in an unfavorable seasonality in the June debt level. Nevertheless, the gearing adjusted for such seasonality is at 57%, more or less unchanged from January – from December 31.

The H1 return on capital employed is slightly under our target range at 10.8% impacted by the strong backlog but also by the negative ForEx impact excluding ForEx impact, results stands 11% at the bottom of our target range and will increase as current growth projects ramp up.

Thank you for your attention. I will now hand over back to Benoit for a review of the project finance and of our most recent development initiatives.

Benoit Potier

Thank you, Fabienne. So, let me just come back on what is happening on the developments front. I would like to highlight some of the initiatives that the Group is taking to prepare future growth. All those initiatives are of course in line with the presentation we made at the Investor Day last December.

I’d like also to mention before I start, the selectivity that we had during this first half on our new investments which is in line with what we announced earlier.

On Page 20, we have as you know quite well, we have three different types of investments. We invest in the core business and this is no surprise is, is to grow capacities, sign long-term contracts with our customers and this is true for a large industry like in the energy conversion field, this is true in merchant business for distribution purpose, this is also true in the electronics segment.

We invest in the second category of project, which is the so-called adjacent markets. And this is related to those markets that are just emerging and really a low as to grow essentially in new business models not existing ones. And of course, we are also preparing, this is the third category, the future with I-LAB and the ALIAD venture capital organization.

If we look at most of the investment opportunities amounting to €3.4 billion, presently, most of them are still in the core business. Examples are new investment decisions that we took in the US, in OCI – for OCI, which is a project for methanol plants.

Initially, we took in China for CSC in the electronics segment and another one in Brazil for pulp and paper contract. So most of the opportunities are in the core business and today our investment decisions are also at €750 million, most of them in the core business.

We didn’t have a lot of acquisitions in the first half. We expect to have bolt-on acquisitions in the second half to actually balance overall the year.

When I look at Page 21, the backlog, the backlog was €2.7 billion at the end of December last year. It is €2.6 billion today, so slightly lower because we had essentially more start-ups than new decisions.

But it’s more or less stabilized as it require high level and it should allow us to generate about €1.2 billion in sales after full ramp up of all the contracts.

I decided to take three different examples of initiatives in three different zones. If you take the US Gulf Coast, this is typically large industry core business, energy transition and shale gas opportunities. Our market today estimate that up to $100 billion of proposed new investment will be made along the Gulf Coast. 25% also decided and if you look at what we signed the OCI contract.

This is, as I explained typically major oxygen contract on the pipeline benefiting from the unique position that Air Liquide has with these long pipeline system. But this is also an interesting illustration of the combination of the gas position we have in our pipeline but also the technology position we have with Lurgi.

And in this case we were able to combine the oxygen contract with technologies in methanol production. So a very concrete example of the strategy that we had when we purchased Lurgi in 2007. I’d like also to mention the building up a hydrogen cavern which is close to Beaumont and which will be the world’s largest hydrogen cavern in the world connected to our hydrogen pipeline system.

In Europe, it is a totally different picture. The growth will definitely be boosted with new developments. And I've just picked up three segments where we see growth. The first one is the home healthcare sector, with the treatment of diabetes. This treatment actually is growing at 11% in the first half.

So, we have pockets of growth in the home healthcare clearly that are bringing new opportunities. The offshore service which is also managed as of Aberdeen is growing by 80% in the first half. Now this number is quite high. But it’s just a good illustration of our ability to capture some pockets of growth in the market.

And the third example in Europe is the hydrogen mobility we announced that we would build the first nationwide network of hydrogen refilling stations in Denmark. Denmark is another country in Europe that has decided to promote the electric car technology using hydrogen and Germany, as you remember was one of the leading countries, now we have Denmark.

And as you know there are other countries in Europe like the UK, Switzerland and others that will also promote this technology. Now, all those new developments are supported by investments in innovation and technology and we announced in the first half our decision to actually reinvest in our Paris-Saclay research center.

And we very – also recently announced another one in China. But that’s another geography. So by combining the market approach with the technology, strong technology support we think we will be able to capture new growth in Europe.

A word on Asia on Page 24, when we just look at iron business in both Japan and China, we have growth. The growth is above 5% in the second quarter in Japan. And this is more than 10% in China.

So growth is back in iron in Asia. That’s really good news number one, and second when we go beyond this traditional core business growth, we have also sources of growth ALOHA, and the new precursors are clearly a vector of growth. We've doubled in the first half in Japan. I visited Japan recently and talked to many players in the hydrogen mobility field and it’s a very exciting initiative which is taken at the national, the government level to promote hydrogen in Japan.

And most of you have seen the announcements from Toyota to actually put on the market in California in 2015 the first car based on hydrogen technology. We have also, by the way, introduced a new healthcare cylinder in Japan which is a great success which proved that in those traditional markets you still have ability to generate growth.

In China, apart from the research center, we have lot of core conversion projects and so they should allow us to grow and continue to grow in China. So, overall, the outlook and the first half, the summary in the first half is good activity level progressing smoothly since the beginning of 2012.

Our performance in line with a outlook that we had for this year both in sales and performance in the P&L, the efficiencies in particular and profits. We’ve been a little bit more selective in the first half in our investment to focus on those projects that will bring efficiency, synergies and growth to Air Liquide.

And there is a strong backlog. So, we have potential for further growth as we go. So in this context, we maintain our objective for 2014 which is bearing a degradation in the environment. Our ability to deliver another year of net profit growth in 2014. Thank you and we will start the Q&A session.

Question-and-Answer Session

Operator

Thank you very much. (Operator Instructions)

Benoit Potier

So first question.

Operator

Yes we do have questions coming through. Just one moment. Thank you very much. Our first question comes from the line of Jeremy Redenius from Sanford C. Bernstein. Please ask your question.

Jeremy Redenius – Sanford Bernstein

Hi, good morning, everybody.

Benoit Potier

Hi.

Jeremy Redenius – Sanford Bernstein

This is Jeremy Redenius. Thanks for taking my question. I have three questions. The first one, I noticed ROCE was down year over year, if you don't adjust for currency flat if you do. Can you talk about when you would expect to see some inflection there? Is this a H2 thing, H1 next year as Yanbu starts up. I just would like to get your perspective on the timing there?

And secondly, could you update us on the construction in progress figure on your balance sheet at the end of H1? And then, thirdly, seeing the currency headwinds in the first half, expecting them to continue through to the second half. Is it a matter of taking more pricing to offset these? Is that’s something that you were unable to do in the first half and we are aiming to do in the second half or are there other levers you are looking at pulling? Thanks very much.

Benoit Potier

Right, and I take the first one and I ask Fabienne to answer the second and also the third one. The ROCE, the ROCE is down, but this is mechanical as you know. This is made of two portions or two parts, one id the net earnings and second capital employed. We still have on our balance sheet some of our past investments that have not yet started up.

So, mechanically when start up, we will get the earnings generated by those investments. So we are not concerned about our ability to manage the ROCE within the band of 11%, 13% as we announced during the Investor Day. It’s a matter of having all these contracts started up and producing. Each and every contract has been signed with good return.

There is no concern about that. So that some of those projects should generate to the expected return. The timing will depend on the ability to actually start up the plants and depends more on our customers and as for the large industries. For the merchant market, we invested in liquid plants in the past three four years.

This is over now. We are more in the phase where we load the plants and invest in trucks and tanks and all the logistics related to IM. So, we will invest less actually in the merchant business and everything should play in favor having the ROCE being stabilized in the first stage and then growing back in the range of 11% to 13%.

Now the foreign exchange is important, because when mechanically, when you can’t play the return on capital employed in a given period, the foreign exchange plays on the numerator to some of the average foreign exchange for the semester which is one thing and the denominator is capital employed, which is just evaluated on the basis of the end of the semester.

So there might be a gap and that’s why we gave this 11% excluding foreign exchange to just be fully transparent on where we are. But it should improve as the plants are starting up. Construction in progress and the effect of foreign exchange and headwinds, Fabienne?

Fabienne Lecorvaisier

So, work in progress in the balance sheet is at €2.65 million at the end of June which is nearly stable compared to the end of the year level. So we had of course project starting on investment being completed and we had new ones decided. So it’s not exactly the same but the amount is not changing much.

Coming back to the ForEx effect, you realize it’s only a conversion effect all of our business are local. We continue to have a lot of pricing action as I mentioned 1.3% positive pricing in merchant which is made of stability in Europe, 3.9% in Americas, stability in Asia-Pacific and also a rise in Africa, Middle East.

We also have positive pricing in electronic this semester which is very good news, because we have not seen that for a while. So we continue locally of our pricing action and it has no direct link with the ForEx situation.

For the second part of the year, the ForEx headwind will smooth down a little bit because as you know, as in Q4 last year, that you already appreciated again the other currencies, the effect will be lower than what we are at. And, independently we continue to promote as many pricing actions as we can in all of the countries where we are present.

Benoit Potier

Thank you very much. Next question.

Operator

Our next question comes from the line of Christian Faitz from Macquarie please ask your questions.

Christian Faitz – Macquarie

Yes, thanks for taking my question. Two questions, if I may. First of all, can you give us some more detailed guidance on the tax rate for the full year 2014? And then the second question would be how are your industrial gas operations in Northern Europe performing, particularly in large industries, for example, the Thyssen contract, things like that? Thank you.

Benoit Potier

Again, I will take the first one and I get the help of Jean-Pierre for the second question. Fabienne.

Fabienne Lecorvaisier

So, the increase in the tax rate this semester is due to certain number of effects. There is a non-recurring effect which is the tax impact of a divestiture in Korea. So this one is over. But there are recurring effects, the mix effect with Japan and America has been growing well.

These are the two countries where we have the higher tax rate. So we have a mix impact. We also have lost a certain number of tax credit that we had in previous year. So, we expect the tax rate for the full year to be somewhere between 28% and 28.5%.

Benoit Potier

Thank you. The European situation, I think the slide that Fabienne presented about the three different markets in Europe, north, south and east is important. This is mainly related to industrial activities.

And when you look at this slide, you see that we have growth in Northern Europe, we have growth in Eastern Europe and we have a slight decline in Southern Europe. So definitely, Northern Europe is doing better. It is improving in most of the countries. Business-wise it’s rather contrasted.

We still see some projects being decided in Northern Europe, in Benelux for instance and we continue to sign new business in large industry. Depending on the country liquid situation is globally improving the cylinder activity remains rather low in terms of growth.

So it’s as if the small recovery was happening more in the liquid business than in the cylinder business, which is telling us that the nature of this slight recovery is not the usual one. We have the mid-size companies that are doing better. This very small ones are still suffering a little bit.

So that’s the general feeling we have about the industrial activity. Now the healthcare activity in terms of volumes are doing well. We have a price pressure that we know that we anticipated. But overall, it should stabilize and we should be able as we go to benefit from the volume growth in the healthcare sector.

Now I would like Jean-Pierre to be a little bit more specific about Northern Europe. Jean-Pierre?

Jean-Pierre

Yes, and particularly about the large industry in Northern Europe. I think that we see an area around Rotterdam, Antwerp and which is particularly active, with a positive development and positive growth in this region and we are particularly leveraging on our pipeline system in the region, which means that we are without entering specifically income of about one customer in particular.

Overall, the activity is in Northern Europe, good in large industries in Europe leveraging on our pipeline in Benelux and in Germany.

Christian Faitz – Macquarie

Thank you very much. Very helpful.

Benoit Potier

Thank you. The next question.

Operator

The next question comes from the line of Heidi Vesterinen from Exane BNP Paribas London. Please ask your question.

Heidi Vesterinen – Exane BNP Paribas

Yes, good morning, I have two. So, first, on the slightly lower portfolio of opportunities, in the release you said that you are adapting your development initiatives due to the geopolitical context. Can you clarify what you mean by this? And I wondered if Air Liquide is being more selective, or are overall opportunities decreasing, or a combination of both.

And then the second question, you highlighted the electricity impact on the top-line. Recently there was some news on EDF reducing electricity costs for French industrial users. Should we expect this to have a material impact going forward? Thank you.

Benoit Potier

Pierre may pick up the first one and I pick the second one or Fabienne will take the second one. Pierre?

Pierre Dufour

Okay what we mean that, Heidi is that, there is regions of the world today that are not doing so well from a geopolitical situation, that’s probably an understatement. We all know what’s happening in Ukraine and sanctions in Russia. We see what’s going on in Libya.

We see what’s going on in Syria and in the Near East in general and in quite a few other places. So we have investment opportunities in these regions that will basically put on eyes, because it’s just not a proper time to invest in those areas.

So that has reduced our portfolio of opportunities a little bit, because these opportunities basically have moved from a current portfolios which is decision within the year to a long-term opportunities which will reveal that when the situation is more appropriate. So this is the explanation.

Benoit Potier

Thank you. Fabienne the comment on EDS, EDF, Exelsium and the French situation?

Fabienne Lecorvaisier

Well, yes, the negotiation that just to play between Exelsium showed EDF, the French government a more focusing on the future price of electricity for the tenures to come. So we won’t have any immediate impact.

On top of that, you need to remember that for those Exelsium volumes or at least for most of them, we are back to back with customers, which mean that there is a impact to customers. So, it won’t impact us in 2014 at all, but should guarantee us a price of electricity which is more in line with the market for the years to come.

Benoit Potier

Which, if I translate that into the environment – the business environment for France, I think it’s positive because it will give more competitiveness to our customers and as you know, we are connected to our customers. We supply directly, even if the pass-through mechanism is protecting us somehow about the fluctuations, it’s good to see that your customers are becoming more competitive as a result of the price of electricity.

My second remark is related to electricity, it’s just a fact that normally, we do not isolate the electricity impact, because it’s quite small. We normally adjust by this natural gas effect. This time, we had a 0.7% negative effect on the European growth as a result of the reduction in electricity price in Europe and we thought it was significant enough to highlight it, so that you can read the growth in Europe with the right glasses.

This is most of the time, escalated. So, up and down, this is 100% escalated for a large industry and whether well escalated from merchant but with timing issue. So, this drop in electricity is significant during the first half to be highlighted but it’s not really a problem for managing the business as such.

Heidi Vesterinen – Exane BNP Paribas

Thank you very much.

Benoit Potier

Thank you. Next question.

Operator

Our next question comes from the line of Rakesh Patel from Goldman Sachs, London. Please ask your question.

Rakesh Patel – Goldman Sachs

Good morning, everyone. Just couple of questions, if I can. Just relating back to your comments from Heidi, I wondered, perhaps if you could give us an update on what is going on in Russia, given the geopolitical tensions and your relationship with Severstal.

Secondly, in terms of the status of the Yanbu project, is it fair to say that we should start seeing uplift in the second half and more meaningful into 2015? And perhaps you could give us some color on how the margin should evolve on that project.

And then, finally, in terms of the efficiencies it looked as though the number was around EUR83m for the second quarter. Should we think about that as being the run rate for the remainder of the year? Thanks very much.

Benoit Potier

Right, I take the first one, Pierre will take the second and Fabienne the third one and if I am – I need help, Jean-Pierre will help. The situation in Russia, a nutshell. Russia doesn’t represent more than 1%. It’s actually less than 1% of our sales. So this is not significant in terms of risk overall for the Group.

We have a little bit more than 700 people working in Russia. We have nine sites operated by Russian teams. Only I think about 20 expatriates which is very few. So this is really a local business. We are doing well. We have recently started up a new plant for Severstal.

So, as – so far, the local situation has not been affected significantly or even slightly by the situation. We have invested. We operate locally. We supply to local customers and so we don’t have to export equipment from Western Europe to Russia. Now we are of course, monitoring the situation rather carefully. We are in touch with our teams there.

The steel production is still normal. We have not seen a volume impact on Severstal or chemical or electronic customers. So, I would just summarize by saying the situation from our perspective is no more in Russia, nothing very specific to say now.

Of course, we are rather vigilant, cautious not to do things that would be – I mean, not fully aligned with the traditional way of running business and we are of course monitoring the situation between US, Europe and United Nations and Russia. But nothing specific to say at this time. Yanbu, another question now about Russia?

Rakesh Patel – Goldman Sachs

No, no, that's perfect. Thanks very much.

Benoit Potier

Okay, Yanbu, Pierre?

Pierre Dufour

Yes, the Yanbu project as you probably know, we have been mechanically complete for a number of months. We are waiting for the refinery to actually start up. We should be seeing first hydrocarbons in the refinery sometime between the end of this year and early next year which will allow us to really start up.

We have a partial fee that’s owed to us parting in the fourth quarter and which was negotiated when we signed the contract which is basically going to cover our cost while we are waiting. And we are expecting to start to ramp up in the first quarter of next year.

So there will be more significant revenues starting first quarter of next year if the refinery construction continues. Now one thing that just a piece of warning which we’ve given before, but I just want to take this opportunity to repeat, depending on what feedstock the client actually gives us, the sales are going to be highly variable, because the feedstock is basically pass-through.

So if we have an expensive feedstock we will have a very large amount of sales and if we have very cheap feedstock like natural gas then we will have a much more modest level of sales but the profitability of the project is unchanged, the profitability on capital is unchanged.

It’s only a matter of what the mechanical impact or the arithmetic impact of the cost of the feedstock come to the sales. So we should start again to see our cost covered later this year and start to have a ramp up in sales next year.

Rakesh Patel – Goldman Sachs

Great.

Benoit Potier

Efficiencies, Fabienne?

Fabienne Lecorvaisier

So, efficiency, to that deal, Q2 number is quite high. We always have higher efficiencies in Q2 than in Q1 probably because we have more availability of the teams at that time of the year to work on the efficiency project.

So I will not look at Q2 as a run rate reference, but you can probably look at H1 as a run rate preference. I would tell the €152 million of efficiencies that were generated. Approximately, €35 million are derived from the adaptation plan that we had accrued for in the P&L last year.

And of course that is going to last for approximately two years as we indicated to you two years payback. So H1, certainly can be a run rate reference for the full year.

Rakesh Patel – Goldman Sachs

Okay, that's great, thank you very much.

Benoit Potier

Thank you. The next question.

Operator

Our next question comes from the line of Thomas Gilbert from UBS, Zurich. Please ask your question.

Thomas Gilbert – UBS

Good morning, Fabienne, Virginia, Benoit and Jean-Pierre. Four people, four questions. The first one on coal conversion. You touched on it in the portfolio of opportunities discussion.

Can you just maybe go a little bit more into detail, the Chinese government has recently announced to regulate on environmental concerns and on the projects. Can you just talk through what that means, probably positively, for your engineering and your gas business?

I thought I was delighted that Lurgi technology deployed in the United States. Can you leverage Lurgi also in China, or is it just very competitive with the Chinese engineering companies there, if you can go into a little bit of detail that would be great?

The second question is a financial one. On the Korea divestment you touched on the impact on the cash flow and balance sheet and on the tax. Can we imply that the divestment was done at book value, hence, no impact on other operating earnings or losses in the – above the pre-tax profit?

And the third question is just coming back on the electricity discussion, can you – obviously, the Germans are importing cheap electricity into the Benelux. What does it mean for the outlook for the cogeneration revenues over let’s say a two year period?

And then finally, can you comment on argon pricing around the globe, specifically in Asia has been very weak I think for the solar and that's now coming back. I don't know whether if this is relevant for you, but if you just can comment on that specific technical gas that would be helpful. Thank you.

Benoit Potier

Okay, Pierre will take the first one, coal conversion, Pierre?

Pierre Dufour

Yes, we have been very active in the coal conversion in China, Thomas. And we’ve seen waves. We’ve seen the coal getting converted in fuels in – and chemicals and now in scientific natural gas. So we’ve been very active and very successful in that field. Leveraging the Lurgi technologies, absolutely you are right on that of course there is always competition.

But there is – but Lurgi gives us a unique competitive advantage on the Chinese market in the chains of process units that are required to convert coal into something useful. So, and one project we announced last year where there is eight process units being invested by – for a customer in the nylon business and six of them are proprietary technologies of Lurgi. So, yes, we are leveraging it with good success.

Regulations on environment, the Chinese today are looking at reducing the kind of pollution that we use to have in our countries, 30, 40 years ago. So sulfurs, so nitrous oxides, toxic oxides, particles and that sort of things and the production of synthetic natural gas from the far away provinces and shipping that natural gas to do the domestic fuel usages in the big cities is a huge win for them from an environmental perspective and they are pushing that.

And that’s creating opportunities which we are taking full advantage of. So, yes coal conversion for us is a good opportunity in China and we are leveraging Lurgi.

Thomas Gilbert – UBS

Thank you.

Benoit Potier

Thank you and I take the second question about Korea. The very specific question was, is it sold at book value? The answer is yes. So, we didn’t have a big capital gain. Now, I’d like to come back on the reason why. We had a partnership where Air Liquide was a minority partner for a while.

We’ve been able to on other products, develop another actively in Korea and we were reaching a point where it was better for the future to actually sell this minority stake that we had in DIG which was more – I would say traditional approach to the market and reinforce the sort of new approach that we have with new products, new technologies and this is the reason why we decided to so.

Now, we did that more or less at book value. So it was not really a big capital gain in the game and we had a tad impact out of Korea, because the sale locally is showing a capital gain.

So we had a negative tax impact, but overall, this is clearly an ability to now grow the business with a different approach a different strategy and I think it will benefit in the future our existing – other existing activities in Korea. Electricity, and the co-gen impact, there are two things in the co-gen business.

We have developed in Air Liquide the co-gen business which is a well balanced business between steam and power. We balance the steam production the best we can and so we sell the steam to customers on a long-contract. The electricity which is co-generated by this steam production with gas turbines is either sold to customers to energy producers and they sell them directly to the market.

So our co-gen business are true co-gen business and they have been very good business over time. The fact that we decided to sell two co-gen one in Spain and one in France was just the fact that we reached the end of the contractual period. But this remains a rather good business when you can balance steam and power.

Now, my last remark on electricity in Europe and the fact that, yes Germany is importing power, there is of course another phenomenon in Europe is that as a result of key natural gas in the US, and the political choice being made in different countries in Europe, Germany, today has no nuclear and it’s importing more coal out of the US than gas because the price of coal in the US is so low.

As a result of the shale gas that Germany is better of importing coal than gas. And what it means for the European gas power plants, gas based power plants, we’ve got most of them are down.

So there is a sort of effect on the power market produced from gas, which is very significant but the co-gen business that we have put in place is rather different because we have balanced heat and power for customers. So I don’t know whether I am clear, but this is the fundamental difference between a pure co-gen business and a power business based on gas.

Thomas Gilbert – UBS

Extremely helpful, thank you.

Benoit Potier

Okay, argon pricing. The specialist of the argon pricing is Fabienne, so I’ll ask her to actually answer the question.

Fabienne Lecorvaisier

It’s true that argon pricing has been going up in Asia over the period as the local capacity in some regions is reducing progressively, on the another end, we add new capacities in North America developing, so on a worldwide basis, we don’t have any significant argon pricing effect in our sales.

Thomas Gilbert – UBS

Thank you very much.

Benoit Potier

Thank you. The next question.

Operator

Our next question comes from the line of Peter Clark from Societe Generale, London.

Please ask your question.

Peter Clark – Societe Generale

Good morning everyone. Yes, two questions. First one, Asia-Pacific, where you've got the first-half sales growth up 8.9% I think on IM, with Japan up 9.6%, emerging markets up 13.6%.

You make reference to the fact Australia is weak particularly on pricing, but it is very small for you. So I'm just trying to reconcile the numbers there, because if I look at Japan and emerging markets in Asia-Pacific I get a plus 12%, yet you're reporting plus 9%. So I can't believe it's all Australia unless it's been disastrous.

And then the second question on GSI South. I'm presuming that includes France, where you put that in the slide. Just wondering what's going on in France at the moment in terms of the underlying business in IM and also in the on-site business?

And also actually a caveat to that or an add-on to that, obviously, Messer claim to have a strong competitive position which has been slightly enhanced by the Praxair swap. Are they the number two in France where you come up against now or have been? Those are the questions. Thank you very much.

Benoit Potier

Okay, thank you. I think Fabienne, you can just sort it out between the different countries in Asia and the country had a different number. Fabienne?

Fabienne Lecorvaisier

Yes, sure. So, globally for Asia, we have industrial merchant growing 9%. Japan, 9.6%, China as above 15%. The rest of developing Asia is a little bit more modest and Australia, to be clear this a slight decrease at minus 2%. And so, just to have – the magnitude are for Japan for approximately. And I think it works.

Peter Clark – Societe Generale

Okay.

Benoit Potier

It should work, if it doesn’t work, you pull back, pull back directly, Fabienne. And just in South Europe, yes, of course, it includes France and I am going to make a general statement and Jean-Pierre will come back on the competitive situation asset claiming that they have improved their situation.

France has resisted very well overall since the beginning of the crisis. So if you look at the situation, we had before 2008, and how the volumes and generally speaking, the industrial activity in the France resisted actually better than most of the countries. Now, the effect on the rebound is also now visible.

As a result of a better resistance, we are not benefiting today from sort of momentum, new momentum in Northern Europe. So, France is more or less stable. The as reported numbers for France are slightly down because we have the power effect, because we have the disposal of the co-gen business.

But if you look at the recurring business, it is more or less zero. It is flat. And we have a difference, clearly between bulk business and cylinder business. What I said earlier about sort of picking up in bulk is also visible in France. But we have not found again a good and healthy cylinder business.

It’s still to come and we expect to see that in the coming months or years, but we have not seen that yet. Jean-Pierre, could you be a little bit more specific?

Jean-Pierre Duprieu

Yes, I will not make the comments about the position of the competition. That being said, yes, Messel has an position with Praxair swap. It’s a limited number. It’s a limited position.

So overall, they could certainly be in the number two to add with the other German competitors in France, that’s what I could say, is it the strong reinforcement of the position? To a limited extent, yes, but not so significant I would say.

Peter Clark – Societe Generale

Not, sure, it's a small deal. Yes, thanks very much.

Benoit Potier

Thank you. Next question.

Operator

Our next question comes from the line of Neil Tyler from Redburn London. Please ask your question.

Neil Tyler – Redburn Partners

Good morning. And a couple left, please. Firstly, on your third slide, the one illustrating the revenue contribution quarterly, it looks as though the contribution from startups and ramp ups is declining. And I wonder, if you can give us some sort of picture as to why that's the case given the CapEx backlog and particularly looking forward, excluding Yanbu, how you expect that to develop?

Related to that, the operating profit bridge slide, comparing the volume and mix contribution on that slide to the revenue contribution from comparable growth points to a drop through of single-digits. And I wondered if you could explain whether that's because a lot of the start-ups and ramp ups are yet to break into profitability at that level?

And then, finally, on the healthcare market in Europe, the pricing trends that you described (Inaudible)

Benoit Potier

Are you with us? So, are you still with us? So should we? No, so we lost you. I may start – take, yes, take a next question and we will come back as soon he is back online. So next question please.

Operator

Our next question comes from the line of John Klein of Berenberg London. Please ask your question.

John Klein – Berenberg

Yes, hi. Good morning and thanks for taking my questions. I've got two of them. The first one is on the healthcare price cuts in Spain and France. Would you be able to give a broad percentage if you would put that on a year-over-year comparison for the first half in terms of the price cuts?

And the second question is on the Americas margin you're citing higher transportation cost. If you compare the Americas margin that you had in the first quarter to the second quarter -- you don't report first quarter. But if you could give us a bit of a feel for how that developed between first quarter and second quarter? Thank you.

Benoit Potier

Okay, Jean-Pierre, can you just draft the healthcare pricing issue please?

Jean-Pierre Duprieu

Yes, you have a difference between Spain and France regarding pricing. In fact in France the impact is negative, pricing is significantly negative in med gas in medical gases for hospital whereby in the rest of Europe and Spain, in particular it’s more on home care, and home healthcare the pricing is negative.

To give you an order of magnitude, the home healthcare is negative for the first half of the year. Year-on-year, this is minus 2%, minus 3% overall the home healthcare prices decreased. And for medical gases in France is more in the range of 5% to 7%. So, overall, the price decrease we are talking about is in the range of – for Europe, overall it’s minus 1.5% minus 2% that’s what we are talking about.

Benoit Potier

Okay, and the second question is the margin evolution, Q1, Q2 in the US. Maybe Pierre you can give a business view and Fabienne you may add a word.

Pierre Dufour

Yes, most of the impact was in the first quarter. There is a bit of a residual impact in the second, but most of it was in the first quarter.

Benoit Potier

Okay, Fabienne?

Fabienne Lecorvaisier

Well, nothing to add.

John Klein – Berenberg

Okay, thank you. Thanks very much.

Benoit Potier

And this is really in Americas, globally, this is really a merchant. And this is why, this is focused on the situation, the weather situation particular in the first quarter. Next question and I don’t know whether we have Neil Tyler back on line, but we will make sure that we make a brief answer to his questions if he has the ability to listen for the answers. So next question please?

Operator

Our next question comes from the line of Peter Mackey from Morgan Stanley, London. Please ask your question.

Peter Mackey – Morgan Stanley

Thanks very much. Good morning, everybody. Most answered; I've just got a few little ones and then one slightly broader question. Just following up on John's question there on transportation costs and your answer, would it – are you suggesting that the margin was getting back to the sort of 2013 level towards the back-end of the second quarter in the Americas? That's question number one.

Question number two, I wonder if you could just make some comments around the engineering margin and how you think that's going to be looked in the second half of the year? And I guess both of those questions really contribute to my third, which is, in H1 you saw some growth, 3% growth in published EBIT.

Last year it was impacted obviously, by some exceptional charges. That growth was largely offset by the increase in the tax rate and at the net level things were flat. In the second half of the year, you benefited from significant net exceptional gains at the EBIT level. Your tax rate is going to be a little bit higher year-on-year.

Can you talk us around the dynamics, the drivers that gave you confidence that at the bottom-line you can still grow net profits in 2014 please?

Benoit Potier

Okay. Transportation costs and the margins, we’ll be back and the margin we had in 2013 Fabienne, would you like to take this one?

Fabienne Lecorvaisier

Well, to the margin in industrial merchant in the US has been impacted by logistics cost in particular due to the weather in the Q1. We also add an increase locally in electricity pricing.

And we have started price campaign. So it will take a little time before it ramps up than a little time before we come back to last year’s margin in industrial merchant. However, we are confident in our ability to continue to improve margins at the Group level.

Benoit Potier

And to be more specific about the US situation in the first half, clearly when you look at the numbers, we had a sort of seasonal effect in the first quarter. Clearly, the cost increase and the volumes were down because we were not able to deliver products to customers because of the weather conditions.

So, the margin drop in IM US to be very specific because all other businesses actually increased their margin ratios. This situation is rather exceptional. So we should progressively go back to a level a sort of average level, not that we may reproduce the margin level that we had necessarily last year.

But overall, we are confident that the situation is going to improve in particular in the US and more generally as Fabienne just said, we are managing the Group, so that we can progressively improve our margins year-after-year.

The second question about E&C margin, we typically say that E&C margin is anything between 5% and 10%. This is the case right now. We – it depends on which project we are invoicing and so, it’s always difficult to predict with a good accuracy what the level is, but we feel confident that the engineering margin ratio should stay between the 5% and 10% and overall on the year maybe in the middle of this range.

That’s’ our expectation for the year. The third question, Fabienne you would like to take this one, because it’s related to tax and our ability to manage actually the cost on part of the P&L.

Fabienne Lecorvaisier

So, looking at the bottom of the P&L, we will continue of course to grow ourselves to improve the margin. Then you mentioned that last year we had the number of exceptional expenses in particularly to the realignment that were compensated by capital gains. So, all in all the balance was not that significant.

We expect a similar situation this year. We have a balance between exceptional expenses on the exceptional profit and then we should add a tax rate as I said before that will improve a little bit in H2. Therefore we are confident in our outlook.

Peter Mackey – Morgan Stanley

Sorry, if I can just come back on that, I think your comments there about being balanced at the exceptional line was at the full year stage. Of course, in the second half of last year, it was very positive.

And I'm just thinking, if I were to look at the – if we were to ignore the effect in the first half of the exceptionals and think on a full year basis, in essence, you saw, pretty much flat EBIT and that flat EBIT was then would have been impacted by the higher tax rate. So if you were to have flat EBIT at the full-year level the higher tax rate would actually drive lower net profits.

Fabienne Lecorvaisier

Well, the objective is not to add flat EBIT for the full year. You can be sure. You are right, if you look t the first half, we have approximately €40 million less in exceptionals and €40 million more in taxes. And that will clearly be much better balanced in H2.

Peter Mackey – Morgan Stanley

Okay, thank you.

Benoit Potier

Okay, I suggest that we take Neil’s questions, I will jump to the first one immediately and ask him maybe to repeat his second one, because it was a little bit unclear. First question Neil was related to the revenue in Page 3, slide page 3, yes, and the start-up ramp ups have dropped a little bit. I just want to say that, it’s more the bolt-on acquisitions that were very small in the first – in the second quarter.

But the start-up ramp up effect or impact is quite stable. So, the difference between and Q2 was more related to less smaller bolt-on acquisitions. Yanbu, should actually benefit the P&L, slightly this year, because we have an agreement with a customer that should just help us to bear this investment while the customers have not started yet.

But the real start-up should be mid next year more or less. The third question, Neil was related to the healthcare pricing, maybe Jean-Pierre should add a word about that. Jean-Pierre?

Jean-Pierre Duprieu

As I mentioned earlier, we have an impact which is mainly on hospital business in France and mainly on home healthcare in the rest of Europe, in the range of minus 1% minus 1.5% and we have lack of M&A contribution for the first part of the year. We are though confident for the second half of the year for a certain number of reasons.

We have a very good momentum in home healthcare. Today with a number of patients which is growing in Europe at plus 5% and we have reached 1 million patients served in Europe, which is an interesting step actually where 1.3 million patients were worldwide.

We have new the acquisitions that will contribute for the second part of the year. And we think that we have reached probably the bottom in terms of price decrease in Europe.

And on top of that, prices outside of Europe and business outside of Europe is experiencing a very good momentum and I would mention particularly South America. So that’s what I mentioned – I wanted to mention regarding the healthcare market.

Benoit Potier

Thank you and related to the bridge slide, and the volume mix single-digit drop, Fabienne, would you like to address that?

Fabienne Lecorvaisier

It’s true that the volume mix addition is relatively modest in H1. We had a contribution of start-up ad ramp up in terms of sales which is in the €120 million range and that should increase ramp up significantly in Q2 – in H2, sorry.

Benoit Potier

Neil, have we answered your questions, because you are online?

Neil Tyler – Redburn Partners

Partly, yes.

Benoit Potier

Partly?

Neil Tyler – Redburn Partners

I mean, the last one particularly it's – yes, I suppose the question is, of that €120 million of start-up and ramp up, presumably there's very little profit contribution from that, so we should be comparing the profit drop-through to what's left effectively?

Fabienne Lecorvaisier

Yes, well, it’s true that the additional profit comes with ramp ups, not with start-ups because it takes in sometime to be at the full profitability. So the ramp up number is more in the €100 million range and will increase again in the second part of the year.

Neil Tyler – Redburn

Great, okay, thank you. And thanks for coming back to me.

Benoit Potier

Thank you. Next question and maybe it will be the last one, next.

Operator

Our next question comes from the line of Thomas Swoboda from MainFirst Bank Frankfurt. Please ask your question.

Thomas Swoboda – MainFirst Bank

Thank you very much indeed. Most of my questions were already answered. So, one still left. And I was just thinking about your previous comments on CapEx in the problem areas and the investments you have done in the past. So, trying to look into the CapEx-to-sales ratio going forward could you help us with a decent number?

I guess we must be at the peak in terms of CapEx to sales. What number would you picture for the next years, please?

Benoit Potier

Well, if you look at the historical achievement of Air Liquide, we’ve been fluctuating anything between, I’d say 12% and 15% CapEx-to-sales. But that’s with a decent mix. As we grow, we have still a lot of opportunities in the larger industry business which has a higher CapEx-to-sales ratio, because it’s very investment-related.

We are also growing quite fast in the home healthcare which is much lower capital-intensity. But as we make acquisitions in the home healthcare, we have a CapEx-to-sales ratio which is a little bit higher than the average for this business.

So altogether, I think if you make a calculation, the CapEx to sales in the first half was about 12.5%. It was 14 plus in 2013, last year. So, I would say that, as we go, it should be probably a little bit higher than 2012, probably in the range of 12% to 13% CapEx to sales for the full year.

Now, this is based on assumptions that the acquisitions are more or less normal. And I am talking about the overall Group. Now the numbers I gave, 12.5% and 14% are just for the industrial CapEx, which is a little bit different. So, if you have to plan, I think it’s 12% to 13% for industrial CapEx plus the bolt-on acquisitions.

Thomas Swoboda – MainFirst Bank

That's very helpful. Thank you.

Benoit Potier

Thank you. So maybe it’s time to close this conference call. So, thank you very much for all your questions. We are happy to have you online. Clearly, as a summary, when you look at the numbers in depth it's a solid first half. It's a solid second quarter. We had definitely a headwind in foreign exchange.

But it could revert and the good news about growth in the US that we had very recently, I think last – yesterday, is good news for all us. Maybe it will affect the dollar euro exchange rate and maybe well, it should have a sort of rebalancing in the currencies. If it happens it will help. But, when we look at the past four quarters, actually we had a good growth.

It’s not yet where we would like to be. But we are working on new initiatives and new developments that should contribute in the coming years. So we are quite confident for the mid-term. Thank you very much and have a good day. I think the next meeting Virginia, will be…

Virginia Jeanson

24th of October.

Benoit Potier

Thank you. Thank you very much.

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