L'Air Liquide S.A.

Good morning, everyone. This is Aude Rodriguez, Head of Investor Relations.

Thank you for joining today’s conference call. Benoît Potier will present the highlights of the year, and Fabienne Lecorvaisier, 2018 performance and the outlook of 2019.

Mike Graff is also with us and he will participate in the Q&A session. Our next announcement for first quarter 2019 revenue will be on April 26.

Let me now hand you over to Benoît.

Thank you, Aude. Good morning to everyone.

Thank you for being with us for our fiscal year figures. The agenda this morning will be around three themes.

First, growth and the qualification of the growth, which is profitable, consistent and responsible growth, and I will cover that. Fabienne will come back in detail on the performance and show you how solid performance is and we will talk about the outlook and of course be ready for question-and-answer.

I’ll start with slide -- page 4, by just looking at the highlights. If I start with the growth and sales growth in particular, this is the highest growth since 2011.

And as a matter of fact, also the fourth quarter of last year was the best quarter of the year. We’re today, in terms of growth rate, above the top of the NEOS subjective range, which if you remember was between 4% and 6%, just slightly above 6.

If we look at the operating income recurring, there is a continuous improvement in the margin ratio with 30 basis-point improvement, and this is in line with historic record, leading to Gas & Service operating income margin ratio, excluding energy, improved by 30 basis points as well at 18.6. The return on capital employed improved by 60 basis points, if we just eliminate the foreign exchange during the year, and I'm sure Fabienne will come back to that point.

So, this is very much in line with NEOS target of being above 10% in 2021-2022. And finally, I think, the record level of investment decision, which increased by 22% is also a highlight of the year.

We were highly selective in our investments, not to be in particular overcapacity, but we had plenty of opportunities, we had many new contracts and signings in large industry and electronics in particular, and this is where the increase comes from. And we also had many opportunities to invest in GMT, the deep tech portion of our portfolio to open in particular new innovative market.

If I look at the next page, the sales growth and the series of semesters that we had, you can see on the left part that both group and Gas & Services enjoyed a pretty good and robust growth in the first and second half of last year. And if we split this growth of 6% between the different business lines, Industrial Merchant would bring 2 points.

Each of the other business lines, making Gas & Service the large industry electronics and healthcare will each bring 1% more or less, and the remaining 1% will be equally split between E&C and GMT. So, it’s a very well spread growth across business lines.

And, this is why we think this growth is really robust. When we look at the outlook for the first half of ‘19, it is true that we are today in an uncertain environment with particular trade issues, if not war between U.S.

and China with Brexit and with possible reduced momentum in industrial production. But, as of now, we have seen no significant impact on our sales.

So, yes, we’re cautious, but we still think that the outlook for ‘19 is good. And when we look at the right part of slide, market by market, you can see that in large industry in particular, chemicals and oil and gas actually posting good prospects for the first half.

So, we are pretty confident. In IM, the metal fab segment is doing very well and is still promising for this year.

Other segments, like construction, energy or food and pharma are also well oriented for first half of this year. And the electronic in particular the IC, integrated circuit our part of the business is doing very well.

You will see the numbers in details with Fabienne in a minute, but the fourth quarter was really an excellent one. And prospects for this year are still very good.

Page six, when we look at the performance more down into the P&L, talked about 30 basis points including energy for Gas & Services margin ratio. When we look at the net profit, you will probably remember that last year we had a tax impact in U.S.

that we precisely quantified at 171 million, if I remember correctly, particularly around 200 million. If we exclude that, we had weaker net earning recurring days.

And on that basis, net profit grew by 4.2%, with a negative foreign exchange. If we eliminate that effect, it’s actually grown by 8.7% like for like.

The net debt is down significantly, Fabienne will come back to that with gearing being now in a more comfortable zone of 69%. And it’s quite an achievement when we look at the Airgas acquisition, what we did after the capital increase.

In two years, we actually brought back debt to really normal level. And the return on capital employed is as published 8%.

But, if we eliminate the difference in foreign exchange between the average rate and the end of the year rate, it’s actually 8.3, which is well in line with the NEOS objective. So page seven, it leads us to make a proposal to the shareholders to actually grant another bonus share, 1 for 10 in October this year, the last one was in ‘17.

In ‘17, the dividend was also increased from €2.60 to €2.65, which then as a matter of the bonus share, led to a distribution increased by 12% in ‘18, cash wise. So, we have decided to go back to this policy of granting a new bonus share 1 for 10.

At the same time, we maintained a dividend of €2.65 per share. The payout is now at 55% in 2018, but we have not changed our dividend policy, which is a regular distribution of dividend.

When I’m back, page eight to investment, this is a preparation of the future. 2018 was really a record year in terms of decision.

We were above €3 billion, €3.1 billion, exactly. You have on the map a split in the different geographies between America 40%, essentially oil and gas and chemicals in Gulf Coast, also one important decision in California actually to serve -- to invest in new liquid hydrogen plant to serve the hydrogen energy market in California.

40% in Europe, which is also good news; we had several large industry opportunities. And Asia, you would see that it’s mainly electronics where the market is still investing significantly.

And of course, we tend to serve the top tier of the market with the largest IC manufacturers in the world. How do we invest, we try to reinforce our presence in our key basins because this is where the added value to customers is at the top, but also the economy is better because we have the existing base to rely upon.

The second strategic orientation is to position ourselves in growing markets. This is true in so called developing economies, thinking about East Europe in particular but it’s also true in electronics, I mentioned that in Asia.

And we are trying to open new innovative markets. And my reference to the hydrogen liquefier was related to GMT in particular but we will also continue our investments in biogas.

So, the focus for ‘19 will be on the NEOS objective, in particular on growth. Our growth needs to be profitable, needs to be consistent and needs to be responsible.

Profitable, I think we just described how we invest and where. We also intend to strengthen our efficiencies.

Fabienne will give you the details in a minute. Essentially, we will increase our program, our yearly program of efficiency from 300 million to 400 million.

It’s possible because now Airgas has joined the group; the synergies are more or less behind us; and it will be possible to integrate Airgas into the efficiency program of Air Liquide and we will keep our focus on return on capital employed. Growth must be consistent.

We have a good business model, resilient business model, and we will continue to sign contracts with our terms and conditions that are very solid. We will also make a focus on innovation and digital, because digital will be a good way of bringing more efficiency and more agility to the Air Liquide organization.

And finally, because we published our climate objective in last November, as you know, we want to reduce our carbon intensity by 30% in 2025 compared to 2015. We will do it by working on our assets but also by developing low carbon solutions for our customers and by being engaged into ecosystems.

And the Hydrogen Council is of course hub of this engagement. So, this is what I wanted to highlight.

I will now hand over Fabienne.

Thank you, Benoît. Good morning, everyone.

We will now review the detailed figures. Gas & Services stood at 5.2% for the full year on a comparable basis, benefiting from a high activity level all around the world, which has continued to strengthen quarter-after-quarter.

In fact, 4Q sales were up 5.6%. 2018 has also been a year of recovery for engineering, thanks to stronger order book, even if operating profit only came back to positive in the second part of the year.

And the same time, you see that Global Markets & Technologies, which gathers our most innovative products and services were close to 30% up. As a result, mentioned by Benoît, group sales at €21 billion are up 6.1%, the group sales that we have not seen since 2011.

We of course continue to watch closely the macroeconomic indicators and in particular, the industrial production evolution. As mentioned again by Benoît, most of our markets remain very well oriented and the trend we observed in Q3 continued in Q4 with a stronger pricing effect.

The foreign currency impact was negligible in Q4 as with the year before, resulting in a minus 3.6 negative impact for the full year, slightly softer than what we initially anticipated. Conversely, the energy price showed a higher increase in Q4 at plus 2.4%, so full effect for the year at plus 1.3%.

You’ll remember that due to the past four energy closes in our large industry contracts, the higher price of energy increases probably still, but does not impact profit, and therefore creates mathematical deficit in the published operating profit and sales ratio. Growth has again been strong across geographies and business lines in Q4.

I would like to mentioned Americas at plus 6%, including a very solid performance at Airgas; developing economies at plus 13%, driven by China and Latin America; and the acceleration in Asia plus 9%. In terms of business lines, merchant under the current progression has carried the above the historical average in Q4.

Development of the big business, in other words, the growth excluding start-ups and ramp-ups as well as acquisitions has been exceptionally strong throughout the year and notably in Q3 and in Q4 at plus 4.5%. Let’s now go little deeper into geographies to comment on the Q4 activities.

Americas, our largest zone is up 5% with the full year and has been improving quarter-after-quarter. Q4 was up 6%, thanks in particular to high growth in Industrial Merchant above 5% with a strong activity in all countries including the U.S.

and Canada supported by bulk, one side and packaged based sales, launch of new offers and active pricing campaign. Electronics, up more than 20%, was also outstanding with very strong Advanced Materials and Equipment & Installation sales for our major customers.

In Europe, the full year growth was at 3% with a slight slowdown in Q4 due to hydrogen turnaround in Large Industries. Industrial Merchant remained strong, plus 5%, benefiting from stronger volumes, in particular to provision [ph] and retail and improved pricing at [indiscernible] in Q4.

Healthcare grew more than 5%, driven by home healthcare volume in diabetics in particular. Asia at plus 8% for the full year has been boosted by activity in China and in electronics along the year with Q4 at plus 9%.

In Q4, Large Industries benefited from three start-ups, including Fujian. Merchant continued to be strong in China, despite the pricing effect slowdown and [indiscernible] Japan decreased slightly.

Electronics was particularly strong in Q4, above 20%, with gas staying at plus [technical difficulty] and very high Equipment & Installation. Africa, Middle East and India, impressive growth in 2018 supported by the start-up of our huge oxygen plant for Sasol in South Africa.

Apart from that in Q4, we had a solid level of merchant activity in the Middle East at Egypt and India. Prices in healthcare were boosted by our recent acquisition in Saudi.

If we look now at the business line, merchant gets improving around the year, both in terms of mix with packaged gas ramping up and pricing effects reaching 2.5% for the full year, thanks to an acceleration at 3.3% in Q4. End markets are well oriented and mostly driven by publication as well as technologies and research and professional.

Large Industries is supported by start-up and ramp-ups strong and steady demand for Airgas in Europe and Asia as well as hydrogen demand in the U.S. Main variations from one quarter to another come from turnaround or incidents penalizing for example our Q4 by more than 2%.

Healthcare benefited from the expansion of Home Healthcare in all of our markets, with close to 10% growth in Q4 and from high medical gases in the U.S. As already mentioned, 2018 has been an outstanding year in all segments of electronics, and Q4 has been particularly strong, with Carrier Gases at 9%, Advanced Materials at 6%, and equipment and installation at [indiscernible], while we continue to sign new contracts in the U.S and in Asia.

Engineering construction as well as global market and technologies were not only marked by high sales growth but also by a further increase in the order intake. Engineering ends up at 807 million of orders with approximately 6% coming from the book, and global market and technologies are 460 million, a record, driven by advanced cryogenics and biogas.

If we look now at the performance evolution, we see that plus 3.3% as published, purchases are up more than 7% in connection with the increase in energy pricing and mix of activity. Personal expense and another expense show conversely a very modest increase, thanks to efficiencies and tight management of spending.

In fact, at group level, headcount growth, excluding scope, is less than 1%. Amortization is slightly down due to the ForEx and also reflect the renewal of several contracts linked to existing assets in our main industrial base.

Thus our operating profit recurring at 3.45 billion is showing a slight positive leverage excluding energy impact, 10 basis points at the group level. As you know, despite some recovery in the second semester, the operating profit for engineering and construction remained negative for the full year.

Improvement is therefore stronger for Gas & Services with operating margin to sales at 18.6% excluding energy, progressing 30 basis points, in line with our NEOS objective. We’re pleased to announce that the Airgas synergies are about to be fully delivered.

We were at $290 million at the end of December and $300 million are reached more than one year ahead of schedule. Cost synergies at more than $230 million already exceeded initial forecast and the revenue synergies continue to ramp up.

However, we are now switching to run mode with no further follow-up at synergy but inclusion of Airgas into our Air Liquide efficiency program. In terms of efficiencies, we are also better than the objective at €351 million for the year including a first contribution from Airgas amounting €30 million.

Industrial Merchant remains the company’s first contributor with more than one-third of the total efficiencies. At the group level, industrial and logistic program delivered 50% of the synergies, procurement program 30%.

[Indiscernible] around energy optimization, digitalization and mutualization of back office needs and reorganization then account for 20%. As explained by Benoît and speaking in particular the acceleration of development opportunities on innovation, we have decided to strengthen our efficiency program, which will contribute to secure the fulfillment of the NEOS return on capital employed objective.

So, from now on, the yearly minimum objective will be €400 million per year of sustainable cost base. 50% of the increase will come from the extensive inclusion of Airgas in the program and 50% will come from more reorganization and neutralization of assets and back office fees needs as well as enhanced leverage on digitalization in the Air Liquide legacy business.

I’ll finish with the P&L. Net profit recurring is up 4.2% as published, and close to 9%, excluding ForEx, showing a positive leverage to sales growth.

Non-recurring operating income and expense at minus €162 million includes cost linked to the positive integration of Airgas and to reorganizations around the world as well as provisions to cover exceptional geopolitical. The decrease in financial cost is linked to an exceptional gain recorded in Q1, following the reorganization of the U.S.

debt but also to current management and from the progressive reimbursement of the Airgas pre-acquisition debt. Excluding exceptional gain, average cost of debt this year is at 3%, down from 3.2% last year.

I would also like to comment the income tax rate at 24.9%, a 3% decrease last year, in fact 2% is coming from the U.S. tax reform and1% from exceptional items like the impact on deferred tax of the tax reform in the Netherlands for example.

The performance is also very solid in terms of cash flow and net debt. Operational cash flow is up 10.9%, thanks to free cash flow generation and active working capital management; net CapEx at 2.3 billion or 10.8% of sales, the balance of industrial CapEx, only slightly up to last year, lower financials on much lower divestitures.

Despite higher dividends and the negative 236 million ForEx effect, net debt is down more than 800 million and even 1 billion excluding ForEx. Year-end gearing is now back to 69%, a very sustainable level, given the consistency of our cash flow.

The return on capital employed evolution is also aligned with the NEOS objective. The published return on capital employed is at 8%, but the improvement to last year is 60 basis points, excluding the ForEx impact.

And we are still committed to come back to a 10% of ROCE. Benoît mentioned the development opportunities.

The global portfolio of projects to be decided in the next 12 months is stable at Q3 level at €2.6 billion, which means that projects awarded has more than compensated by new opportunities, which is very good news. Decision at 3.1 billion, the highest ever, benefited notably from a very level of signing in our business for Large Industries, for electronics in particular in China, Taiwan and Singapore, and new technologies for biogas and hydrogen mobility.

We ended the year with 17 start-ups, 7 in Q4 including 3 significant projects in China and one in Singapore for a major electronic customer. Project backlog is slightly up and reflects the acceleration of investment opportunity as the new projects signed have more than compensated the increased number of startups in Q4.

Projects included in this backlog, once ramped up, will generate approximately 900 million of additional sales. The global 2018 contribution to sales of start-ups and ramp-up of new units €270 million, supported in particular by the ramp up of our very large oxygen unit for Sasol in South Africa.

The Fujian project in China finally started in December after obtaining all necessary permits and satisfaction of technical and performance. The unit is running at capacity and the customer is [indiscernible].

For 2019, our forecast for the start-up and ramp-up is above €200 million and includes Fujian even these discussions are still ongoing regarding the commercial terms and conditions of the contract . Therefore, we’ll update you at the end of Q1.

I will conclude by reminding you the highlights of the 2018 performance. Strong growth, continued margin, and return on capital employed improvement, and acceleration of business development.

In 2019, we'll continue to focus on growth and operational excellence as well as on innovation. We will significantly extend our efficiency program and continue to enforce our position in the key industrial business [ph] of the world.

Therefore assuming a comparable environment, we are confident in our ability to deliver net profit growth in 2019. Thank you very much for your attention.

We will now open the Q&A session.

Hi. Good morning.

Gunther Zechmann at Bernstein here. Can I start on the margins and development, especially in Gas & Services division there?

You discussed 30 basis points improving, excluding energy. Is there anything in there that's holding it back?

If I look longer term through history and you've always guided to about 20 to 30 basis-point continuous improvement in your operating margins. You overachieved on the synergies from Airgas.

As you say, the growth is strongest in eight years and should come with some operating leverage. So, why would margins not expand?

I know it's a greedy thing to ask but why would they not expand more than those 20 to 30 bps historical run rate?

Thank you for your question. First of all, I would say that 30 is at the top of the range, if we just look at the 20, 30, the fact.

There are always ups and downs. But, what we saw last year was the underlying improvement which was pretty strong.

So, it's always difficult to just look one period of time and say because we have XYZ, we need to measure it during the same time frame. What we are trying to do is to see business line by business line, and I would say geography by geography where we are, and there were fundamentally more positives than negatives.

When we have as an example a lot of E&I, we have of course margin ratios that are less -- not as good as the average of the group, that is one thing. There are always also I mean geographies, and when we look at the margin improvement by geography, we can say that both in Europe and in the Americas we could measure a significant increase in terms of basis points in margin.

The improvement was in the range of 40 to 50 basis points for both Americas and Europe.

In fact, excluding scope, it’s 50% -- 50 basis points.

So, scope is -- the small scope is always up or down, so it may play a role of 10 basis points in general. And we had one section in the U.S.

with the ARI business from Airgas, which was divested, and it had a slightly dilutive effect on the margin. So, without going in too many details, it’s true that in Europe and America we have the result of efficiency and synergies.

In Asia Pacific, we had a lot of E&I and the result was that the margin was actually slightly down, but it’s nothing to be concerned about. And in Africa, Middle East, we had a significant difference in margin.

Actually the margin ratio was down as a result of the different fuel used by our customer in Yanbu. You know that they can use either liquid fuels of natural gas or fuel gas from the refinery.

And depending on the fuel they use and it’s their choice, we have a margin ratio, which is very different. So, in Africa, Middle East this is clearly the impact of that fuel mix used by the customer.

So, all-in-all, when we made the analysis, we had a pretty strong margin improvement. And we think that it’s going to be there as we go.

And when we add on this additional efficiency boost that we want to obtain at a group level of 100 million efficiency per year, so from 300 to 400, we think that the margin ratio is going to improve and to improve more in the high part of the range than the low part of the range. I hope…

Thant’s very helpful. Thank you.

Color on what was the achievement for the year.

Yes. Can I just ask a follow-up as well?

The pricing in Industrial Merchant has been very strong for quite some period now. What is your outlook there for 2019, please?

Well, it depends always on capacity available on the market demand and offer in general. What we can see as we speak is a quite strong pricing situation or environment, both in America and Europe.

America, I would say is more or less usual, it’s more or less strong, but it's always good. And it fits well with the market situation.

Europe is more unusual and it was a good news to see a much better pricing in Europe. Asia is slightly down or down -- not down, it’s still positive pricing but the pricing is less strong in the past.

It comes from China in particular, but we still enjoy a positive pricing in merchant. There is no reason to see a fundamental change in pricing as we go, at least in the first half of this year and more generally in 2019.

So, we are confident that the pricing is going to be good this year. When we look at the loading of capacity, merchant in particular, when we look at that over the past five years, we’ve improved significantly loading of our plans by 600 or 700 basis points, so 6% to 7% of loading which is I think a good sign that pricing may remain where it is today.

First, on the very strong comparable sales growth in electronics in Q4, I would like to get a better understanding on this. You mentioned strong growth in E&I.

Was there any other reason behind the strong comparable sales growth? Do you think there was some business shifted from Q1 2019 already into Q4?

And if so, can you quantify that effect? And, the second question is on the delta between the operating recurring income and the reported EBIT, on a full year that was a minus 162 million, and I think the market is expected only minus 30 million because of the first half.

What is the remainder after this 162 million burden? And is there any link from these one-time costs to the announced increased efficiency savings of 400 million in the year 2019, these were my questions.

Thank you. The first question, I’ll ask Mike actually to cover your first point because it relates first to the business environment in Americas, which today represents 40% of the group and also relates to electronics.

And Mike is actually supervising electronics business worldwide. Mike?

I guess, a couple of key points. From an electronics standpoint, we continue to see a ramp across all the key businesses in electronics throughout the year.

The performance in Q4, clearly the E&I portion was very, very significant and a significant contributor to our results. But, we also saw clear strength in both Carrier Gases and in Advanced Materials.

Both Carrier Gases and the Advanced Materials piece ramped. We saw significant uptick in Carrier Gases start-ups and ramp-ups in Singapore; we saw it in Taiwan; we saw it in China; we actually saw it in Japan as well.

We also saw in the Advanced Materials business, significant double-digit growth in the quarter with rapid uptick in Taiwan; we saw rapid uptick in China; and significant growth in Korea as well. And I think this exemplifies, both the continued advancement in the advanced technology nodes as they ramp up among our customers and also in terms of the development of 3D NAND and a significant growth in the portfolio of memory.

So, that is utilized in both our Advanced Materials and also for the 3D NAND, as you begin to look at the uptick in our enScribe gas offer, which meets the technological needs and sustainability needs of our customers as well. So, I think it’s all of those things that combine and then we continue to see that growth, continue to be leveraged as we move into 2019.

We all see the statements by the various companies. And we know that there's some deferral of some projects but we still see very significant spend and expect production growth in the 2019 timeframe as well.

And on top of that, if I may, Mike, and when we look at the portfolio of Air Liquide, we actually have majority, significant majority of our portfolio with ten, seven top customers. So, the predictability that we may have on those customers is as good as the dialogue we have with them.

So, it's not just spread across the board, it's something that is well understood and we have a great good discussion about not just the near term but the need for long-term with them. And this is why we think that the electronics segment is actually here to contribute significantly to growth that we did last year and it will in the future.

The second question, I’ll ask Fabienne.

So, your second question was about the non-recurring operating expense by €162 million. So, in there, you would find a cost for realignment plan for 65 million approximately.

And you're right, this is going -- this is contributing today to our efficiency program and will continue to contribute in the years to come. What else do we have in there, we have approximately €30 million of cost linked to the Airgas acquisition and integration, including the cost of the retention LTI plan that we implemented for the top management of Airgas.

We have approximately €20 million of provisions for political reach, and that in particular included €20 million linked to the exit of Iran. We had few engineering contracts that were going on in Iran.

And following the sanctions, we had to close those contracts, so that had the cost. We also have a small provision for hyperinflation in Argentina.

Then, the rest of it is miscellaneous items including acquisition cost, including the special bonus we had to pay to French employees following the recommendation of the Macron government. These things are non-recurring.

So, I would say, what is recurring is really the cost of the Airgas retention plan and the realignment plan. So, for next year, we should be more in the 100 million range, or under.

On this side, all together.

On this side all together non-recurring operating expenses.

Thank you. Next question?

Hello. Good morning Benoît and Fabienne for taking my questions, two if I may.

The first was more on your onsite growth outlook. You talk about having more than €300 million in growth for the Large Industries 2019, I was wondering if you can talk us through the risk to that number, and also potentially clarify the comment you made around the delayed start-up and contract dispute related to the Fujian plant?

And my second question is more on the macro. So, the latest macro data points have come in quite weak and your business model tends to be later cycle.

Just wondering where you see the greatest risk in 2019. Thank you.

Globally, I would say that the start-up, ramp-up should actually deliver what was planned in principal because this is well-known. Most of the plants if not all the plants have already started that and there is more ramp up.

In any year, the ramp-up is bigger than the start-up is -- plants are running. So, the risk should be limited.

There is one in this number, which is the Fujian plant. I think, Fabienne explained what the situation was.

Let me just come back a second. The plant is up and running.

This is a big plant. The efficiency is there.

All the fulfillment tests have been completed satisfactorily. So, the customer is taking the product.

So, we have started the invoicing in December. And in the 300 million, the Fujian impact is included for the year 2019.

Now, there are still discussions with the customer on terms and conditions of the contract, which is the delay that we are talking about. But in principal, on paper, I would say the plant is there, it’s running, the product is in the pipeline and the consumer -- the customer is consuming products.

Discussions will go on. Any other type of risk, macro risk that we may see in ‘19, of course, the Chinese situation, number one as a domestic economy and number two, as power -- an economic power in the world in particular, and its trade and relationship with the U.S.

are risks. Even if the growth in China, the domestic growth is slightly under what it was last year, it’s still pretty strong.

And with a 6.5% or 6% last year, GDP growth in China, Air Liquide was able to grow by at least 2 times December. So, we have a leverage actually in a country like China.

Why essentially, because China is developing high-technologies, it’s catching up many fields, Mike mentioned electronics, but it's also true in the more usual applications. And I can tell you that our innovation center, which was opened a year ago, we are doing very well, with a lot of customers are visiting it, and we are signing many contracts as a result of that.

So, China is not just one or two single segments, it’s all across the board that this country is offering us a lot of opportunities. The trade tension or war between the U.S.

and China, we have not seen any significant impact so far. It might happen, it might be worst but we are more cautious than concerned, to be honest at this stage.

And we still think that domestically and also with the export out of China, the opportunities will be there in ‘19. The rest of the world, honestly, we see geopolitical risks in nearly all countries.

But so far, to be honest, we have not seen any serious impact on the business. So, this is why we’re starting the year being confident in the economy, at least for the first half of this year.

The second half is probably a little too early. But all in all, it should be a good year for growth Air Liquide.

The first one is again on the outlook. After this record 2018 year and so far no significant impact on the demand from trade war.

Why have you only kept dividend flat? Does this indicate your caution on 2019 or 2020?

And additionally, could you also explain the assumption, the outlook of this comparable environment? Does it mean you expect basically the same environment than we’ve seen in the record year 2018?

That’s my first question. Second question is on this additional 100 million synergies.

Maybe I’ve missed it, but could you help me on the retention rate and what are the costs of these additional 100 million efficiencies and also provide inflation assumptions for 2019 in particular on the personnel costs. And then lastly, as you’re among the strongest companies for gases demanded by refineries and also -- and have oil recovery and -- for oil industry, do you already see a negative impact from the lower oil price or do you expect this to see this year?

Thank you.

Okay. I will take the first one, ask Fabienne to talk about the second one, and maybe Mike to share the burden, take the third one, if I may.

The dividend policy must be looked at not just on the value of the dividend but the amount of money of cash that we distribute. And it’s important to remember that the distribution is -- is the multiplication of the dividend by the number of shares.

And when we increase the number of shares by giving a bonus share, we defiantly increase the future distribution. So, that’s the distribution that we’ll look at more adjust dividend.

I think, the fact that we announced a bonus share for October this year will implicitly increase the dividend next year and the normal assumptions. And so, we implicitly pass on a positive message on the outlook and on ‘19, but also on ‘20.

Otherwise, we would not decide to distribute 1 for 10. Every time we will have a 1 for 10, if we don’t change the dividend or the face value of the dividend the following year, we increase distribution by 10%.

And I think that’s the real answer to your question. It’s for a distribution policy than just a dividend policy.

And that’s my best answer to your question. It’s not linked to caution.

But, we also have to look at the payout, which is a very important parameter when we decide -- the payout today is 55% on that basis this year. We tend to say that long-term and on the average, payout of 50% is fine.

We are already above and so we just need to take that into account when we decide each and every year what the distribution of the year should be. And that's my best answer to your question….

Could you also maybe comment on the comparable environment?

The second one related to the cost, the additional €100 million efficiency, Fabienne?

As I explained, approximately 50% on the efficiency will come from the inclusion of Airgas in the program. A lot of this efficiency at Airgas will be cost-led, it’s more extending the reality procurement program, some of the reality optimization processes.

So, it should have a very limited cost. On the Air Liquide side, we will continue to mutualize our back offices.

That of course has a cost, which will be covered in the non-operational expenses in the restructuring cost, but it should not inflate what you have seen in the last few years. In terms of retention, you know that historically our average retention has been 30% for the efficiencies.

Of course, we have the objective to progressively increase this rate. You know that it is very dependent from the inflation assumption because when we have a lot of inflation, usually it takes a little bit of time to adjust the pricing.

And therefore, we use some of our efficiencies to fill the gap and then the retention is under. When the inflation goes down, we have a good chance to have a retention which will be higher.

In terms of inflation, what we plan for 2019 is something under 2% for Q1 and a little bit more for the full year, closer to [indiscernible].

Thank you. Mike, on oil price?

I think, in terms of oil pricing in all of our parts of the business that touch oil, I think first of all, just from a refining standpoint and continued uptake of hydrogen in the refining process, that's been very strong, and we continue to see a lot of strength in terms of refining and the uptake on hydrogen. In terms of, I would say, the oil well services piece, the liquid nitrogen into the fracing space, that's been low all year with lower oil prices, especially up in Canada that's had somewhat of a year-over-year impact there.

But, the reality is, I think all of the players in the fracing space have continued to develop technology and efficiencies and drive in a 50 or $55 oil, especially in the U.S. we continue to see rapid growth in hydraulic fracturing and the development of everything around it.

So, we continue to go ahead and see the equipment supply into that space continue to grow. Within Airgas all the markets have been strong throughout the year.

In the fourth quarter, there was a slight decline in the energy and materials market, somewhat maybe affected by oil price, offset by a very significant increase in continued construction activity for pipelines as well as power plants and also the continued ramp-up of chemical investment and spending associated with construction activity. So, overall, I think we've seen continued growth and evolution despite the fact we may see oil price down at $50 or $55.

Okay. And coming back to my first question…

Thank you. Next question?

Good morning, everybody. Thanks for the presentation, thanks for taking questions.

It was mainly coming back to the first question on margins. And I wanted to ask it in a different way.

If you look at the construct of the P&L, you’ve done an incredibly good job on fixed cost side. So, both your selling costs and your what you call other, which I guess is the rest of central cost is down 60 basis points as a ratio to sales.

Where you’ve struggled in terms of coping with energy cost inflation but also clearly other inflation is COGS? So, your COGS year-on-year are up 150 basis points almost as a ratio.

The question is, as you look in ‘19, how much of that variable layer of costs do you think could come down, not just because the oil price but maybe other pressures, or do you think that you’ve got another sticky year in the area overall? Thank you.

Yes. I think, Fabienne will answer that question.

It’s true that our COGS year-on-year are growing weaker than sales. So, you have been [Technical Difficulty] but this is also [Technical Difficulty] so, this is not really an issue.

As you know, most of it is pass-through. The second component is a mix of businesses.

When you have a very good performance at Airgas, when you have very good performance in equipment and installation, the purchasing part, purchasing component is much stronger than for businesses, and I give the sale of oxygen for example. So, this is inflating our purchases, as you can see India, India continuing, and that’s why we have purchases growing quicker than sales.

So, this is going to be very dependent on the mix of the business. On top of that, you have the recovery of E&C, very strong growth of GMT.

And there, again, you have two businesses, which have a margin, as you know, which is lower than the average of the group. E&C was still losing money in 2018 for the full year, even if we were positive in H2, and global markets and technology as a margin which is quite volatile as for innovative activity, which is more in the 8% to 9% range.

So, when we grow this business, and this is essential for our development and for our future, of course, it has also a dilutive impact on the margin. So, if you look at all our Gas & Services business side, we have an increase, then there is a mix of the product.

When merchant goes up very rapidly, you know that merchant has a lower margin than Large Industries. So, it has also an impact.

So, on one side, you have improvements in each geography and each business side; and then, you have the mix that plays a quite a lot in the -- compared with this margin at the group level.

Additional word if I may. This is absolutely the reason why in 2018 you have this analysis of fixed cost on one hand and cost to of goods sold on the other.

That being said and independently from the business mix that will be where it is, out of the 100 million of additional efficiency will be targeted on those costs where we can act. And I think if we did a good job on the fixed cost so far by maintaining G&A and the structural cost at a low level, even though there is always things to do, we know that, part of our target for the new -- our boost in efficiency program will be around cost of goods sold, and this is where we think we have a bigger potential.

So, there is further to come.

First one is more related to CapEx and opportunities, 3.1. Will it be possible to get a split between Large Industries, Electronics and others, a bit more granularity on where this 3.1 will go and the outlook for CapEx for 2019?

First question. Second question, regarding corporate costs, which were a bit lumpy, bit higher in H2, and you cited the R&D and the digitalization impact.

How could we forecast 2019 in terms of corporate cost? Is that largely done or you see that a bit more sustained into 2019 in terms of R&D spend?

Third question about IFRS 16. I haven’t seen any -- maybe I haven’t read everything, but have you commented on any impact of IFRS 16 in ‘19?

And I think I’ll stop there.

Thank you. I think Fabienne is going to take most of the questions.

Fabienne?

So, on this 3.1 billion, we’ll talk about the split between the business lines. So, 30% in Large Industries, it is a bulk of it, as usual more than 30%.

We have around 30% in Industrial Merchant with various projects around the world and investments at Airgas. And Electronics represents 15%, which is quite a large; it’s more than stake of Electronics in the total group base.

In terms of CapEx, payment of investment, what we’re going to see next year, we’re going to see an increase, of course. We should spend 10% to 12% of sales range, but more to the top of the range than to the bottom.

Corporate costs, do you want to continue? On corporate costs, clearly, we will continue to increase R&D on digitalization.

We are spending more in R&D and innovation than our competitors. As far as very specific strategy of Air Liquide, this is going to continue.

Digitalization is also essential to the development of our customer base but also to the improvement of our cost and on the development of efficiency. We’re digitalizing a lot of process and this is also contributing to efficiency.

H2 [multiple speakers] high growth for those two expenses. So, we should come back more to the average of the year that you’ve seen for the full year.

In terms of IFRS 16, in the appendix you have the explanation of the main impact. So, the impact on data is going to be quite strong between 1.3 billion and 1.5 billion.

Then, you know that the leading cost will be replaced by depreciation and financial cost. So, it should increase EBITDA before depreciation by approximately 100 basis points and then you'll have a consequent increase in the depreciation and improvement around 10 basis points should be visible at the operating profit level.

And then, you'll find there is an increase in the financial expense. Then, we should have a negligible impact on the units.

On the date, it's not an issue for our rating as the rating agencies were already taking those adjustments into account. But, it will increase net debt as presented in the balance sheet.

Just an additional comment on innovation, if I may, and I guess it relates to corporate cost. Innovation, it is true that in the past five years, nearly 10 years, if you include the U.S., we have renewed or we will have renewed most of our innovation centers.

We started in ‘07 with Delaware innovation center and then we had Shanghai, we created a new one in Shanghai; we renewed and inaugurated our main innovation center in Paris, Paris-Saclay, last year. This year, we are going to commission the Japanese one, which moves from Tsukuba to new Yokosuka place.

And we still have one in Germany and one in Grenoble, which are two smaller development centers that will be renewed. But in 10 years, we would have renewed all the innovation system of Air Liquide.

Going from R&D, purely R&D to more innovation with startups and ecosystems. This is a major effort, it has a cost, not that we have increased the OpEx significantly but we have what we need now to really work well for the next 10-15 years.

That's point number one. And we are really very, very proud of it.

And we think it's really essential for the years to come. The second point is digitization.

We are spending more OpEx today than we are generating savings, but it's coming. The SIO, the smart innovative operation program is bringing fruits already.

It has been implemented in France, in Asia, both in Shanghai and in Kuala Lumpur, and it’s a work in progress in the U.S. So, I would say that in less than two years, we’ll have the significant benefit of the digitization of Air Liquide as a group on the assets and the customers and on the ecosystem being really implemented.

So, what you see today is a cost, but it's for an investment and what will come is more innovation and more savings, thanks to the digitization. So, it's a little bit patient money that is invested, but we're pretty convinced that it will really bring the savings that we are expecting for the years to come.

Mike wanted to add something.

If I could just add one thing in addition to the benefits from a digital standpoint and the long-term benefits from R&D, just as one example. I mentioned Advanced Materials earlier.

So, if you go back 10 years ago, that was nothing in our portfolio; and today, it is a very significant driver of our electronics business. And the spend, the opening of the DRTC in Delaware, the continued evolution in Tsukuba in Japan have directly contributed to the advances that we've been able to develop technology wise to develop these molecules that are now basically cornerstones in the technology roadmaps of the key players in the integrated circuit base.

And I think it’s one clear example where we take that R&D spend and we more than monetize it in terms of creating new businesses and profitable growth.

Thank you, Mike. So, we have few questions.

So, we will try to be very short. And please ask one question not several, if you can, so that we can cover most of them before the end of this conference.

Next question?

I would like to circle back to the margin development in the gases business, please, and ask two questions related to that. Firstly an interpretation question.

Is it right to -- given your previous comments to look at the margin development as underlying improving by somewhere between 40 and 50 basis points? And then the mix effect, perhaps removing 10 to 20 on a year-on-year basis.

And then, the second related question when we talk about the extended efficiency program, historically you have always framed the objective of those programs for as being efficiencies and pricing in aggregate to offset cost inflation. And I just want to ask if that’s still the case and the 400 million really largely reflects a larger overall cost base or are you now targeting a large net saving gain over the next few years?

Thank you.

Thank you. Very clear.

Fabienne?

The improvement of the margin, 40 to 50 basis points underlying, if you look at Americas, if you look at Europe, we have effectively delivered 50 basis points improvement. Then, you see that Asia is decreasing, and this is clearly a mix effect; and well, the Africa Middle East is a very special event that we won't find for the years to come but it’s not creating that much on group margin.

And then, we have E&C and GMT that we already discussed. So, I think yes, it’s fair to say that the underlying is stronger than what you see at the group level.

The efficiency program is used to compensate the gaps between inflation on cost and inflation on price; that has been the case over time. But over time, we have also managed to retain part of it to improve our margin -- our long-term margin improvement between 20 and 30 basis points partly due or partly the consequence of this efficiency program and this is going to continue.

As I said before, the objective is of course to have the maximum retention every year. The average over time I think has been around 60%.

We have a stronger objective to increase that. But, once again, it will depend from the inflationary context of one year to another.

Yes, hi. Very two quick ones.

So, one is one FX. Any early read on how you think FX impact will be for maybe Q1 and 2019 in total?

And second question is, can you give us some sort of flavor of how much is Electronics part of the 300 million plus start-up revenue in 2019?

Fabienne ForEx impact, 2019?

Yes. ForEx is always quite difficult to predict.

What we anticipate in Q1 is to have a flattish ForEx more or less. It’s what we see right now in the operation.

For the full-year, we anticipated still negative ForEx between 1% and 2%. But honestly, I don’t know.

So, I think, for Q1, we are probably quite right. For the rest of the year, what we have in our budget is between minus 1 and minus 2.

Did you say flat for Q1?

Fabienne, do we split the expected additional sales coming from start-up ramp-up by business line, normally?

No, we don’t.

Okay. So Electronics…

The Electronics, the contribution of start-up and ramp-up in Electronics to €300 million is strong because you have a lot of start-ups between €80 million range. We don’t give those numbers, but of course we look at it.

We make an exception this morning. Right?

Okay. Next question, and then the last one.

Yes. Good morning.

I made it at the end. Thank you.

I just want to clarify. You said obviously no significant impact on sales, firstly that there’s been no significant impact on the sort of bidding activity.

And then, secondly, really for Benoît, in terms of responsible growth in reducing the carbon intensity, just wondering does that mean it takes you really out of future Chinese gasification projects now, unless this carbon capture with them? Thank you.

The bidding activity actually is good. I just explained that in the 2018 decisions, we had 40% in Americas, 40% in Europe and 20% in Asia.

What is pretty sure in terms of impact from sales, not necessarily this year but the following years is that Asia is going to remain strong because of the Electronics segment. And I’m pretty sure that North America is going to be very strong because we have already a significant number of existing customers or new customers coming to us and to the industry, talking about new projects they have.

But the timeframe for those projects is totally different from the sort of short-termism that we have to face today. We are looking at ‘19 and ‘20 and our projects are actually starting up in ‘20, ‘23.

So, when we look at this five-year time horizon, we are very confident that the bidding activity would translate into sale. If Mike can add anything, I think that can illustrate what I suppose from the electronics in U.S.

I think, looking at Electronics, clearly, we signed nine carrier gas projects already this year -- or I should say, last year. And clearly that’s going to continue to ramp up and continue to grow the business, primarily in Asia and somewhat in the U.S.

as well. So that's very clear; it’s very significant.

And as you know, those ramp-ups occur a lot quicker. We don't need as long of a lead time there as we do in the typical Large Industries project.

In Large Industries, especially looking at the Gulf Coast, we have startups that will be coming on certainly in 2020 and 2021, and there is a number of new projects that are in process and project development as we speak. We’re clearly very deep, as I mentioned at the end of the third quarter into that second wave of chemical business development activity.

And we see it all throughout the Gulf Coast, and there's no doubt there will be continued opportunities for growth there.

On your second question, it's clear that there is a link between gasification station and CO2 emissions. I mean, this is fact.

We are now engaged in a more responsible growth. So, we will look for each and every new investment at the emissions situation, and we will take that emission -- new emission into account when we decide, doesn't mean in practice that we would be necessarily out of gasification business, but we will think twice before we engage into a new project.

And I think it's by the way rather long term because anything linked to CO2 is actually 2030 or 2050. So, it's really long-term.

But, that being said, we make a link between gasification and responsible growth. And we are not necessarily going to jump on every single gasification project in -- wherever it is, China or elsewhere in the world.

We are committed to carbon intensity reduction by 2025 and we will do what is necessary to meet this objective, including being more cautious on gasification projects. That’s the best I can say.

I think, we are reaching the end. I don't think we can take any more questions at this stage and we're sorry, but there will be further discussions between the team, Fabienne and all and the analysts and investors.

So, feel free to come back to us later in the day in London and in the following days wherever we are. So, thank you very much.

Conclusion is that ‘18 was a good underlying year, the best since 2011. I think, we are well-prepared for the future years.

Airgas is behind. We can now boost our efficiency program, we can grow, and we will be combining all those components to deliver a sustainable, profitable and consistent growth in the years to come.

Thank you very much. Have a good day.