L'Air Liquide S.A.

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

Thank you for joining our conference call today. Benoît Potier will present the first quarter revenue and Mike Graff will focus on our Electronics activity, its transformation and strategy.

Guy Salzgeber is also attending the call and he will participate in the Q&A session. In the agenda, our next announcement for half year 2019 results is scheduled for July 30.

Let me now hand you over to Benoît.

Thank you, Aude. Good morning everyone and thank you very much again for joining the call.

We're happy to report another strong quarter for Air Liquide. Our sales growth remains high at plus 9% on 5% on a comparable basis.

The market environment remains supportive with inflections in some segment, but continued solid demand in other, and there we try to give you more color on this in a minute. Our reinforced section plan for increased efficiency and performance are launched and will ramp progressively throughout the year.

Cash flow is strong at more than 20% of phase and we pursued our business development initiatives in a very dynamic environment. Let's come back to the context.

Thanks to the strengthening of the U.S. dollar we now benefit from a ForEx tailwind close to 3%, conversely the energy impact is softening, thanks to a slowdown of natural gas pricing mainly in Europe, which are certainly being beneficial to some of our customers.

In terms of market compared to what we presented to you mid-February, we see an inflection in Construction notably in the U.S., apart from that most of our markets remain well oriented. If we look more precisely at the figures, Gas & Services are up 8.4% as published and 4.8% comparable despite one less business day in Q1 compare to next year.

Engineering opportunities progress its stabilization in terms of seasoned margin with €150 million of additional auto intake. Global market and technologies continue to be strong supported back techno sales and by a 50% of increase in our biogas sales with an order book, which is also slightly above last year.

The period has been very active again for adequate. I already mention the focus on performance, but we also inaugurated our new innovation center in Tokyo together with our Electronics customers.

In terms of gross initiatives, we completed the acquisition of Tech Air in the U.S, which is very good news for the development of Airgas and we extended our relationship with Severstal in Russia by signing a new long-term oxygen contract. And last but not least in line with our climate objectives, we decided to build the world's largest electrolyzer in Canada following our equity investment in Hydrogenics at the end of last year.

All the businesses still show very solid growth with merchant at 3% but remember we have one less working day. Large Industries and Healthcare are plus 5% and Electronics double digits.

In terms of geographies, a strongest performer of the quarter again Asia supported by the strong restart of China after Chinese year notably in merchant and electronics together with developing economies at large -- in Large Industries segment. The growth of our big business excluding the contribution of startup advantage remained solid at 2.9% despite one less working day as most of our units are well loaded.

The contribution of the new unit is closed to 2% slightly higher than from previous quarters. Let’s now go around the world, Americas at 2% are penalized by high 2018 comparison basis in Large Industries and by the meeting working day at Airgas.

However, volume demands remained strong in particular for hydrogen; and Merchant continued to be supported by solid metal fabrication market and pricing. This cap provision is high above 7% notably in the U.S.

and Latin America while Electronics up 15% thanks to gases and equipment. Europe at plus 3% benefits from strong hydrogen demand in Benelux, startup in Turkey and Kazakhstan as well as from growing cylinder volumes and further enforced pricing effect.

At a scale about 5% continues to be supported by high homage care with rapid growth in diabetes in particular. Asia is up 13% thanks to ramp up in large industries in China and solid demand in Australia and Singapore notably.

Merchant is strong again with higher volumes everywhere except in Australia and positive pricing. Electronics continues to post weaker growth in connection with new carrier gases contracts, advanced material progression and equipment and installation delivery.

China alone is progressing double-digit in the four business lines. Africa and Middle East is back to steady growth post-Sasol startups impact.

Industrial Merchant is progressing very well in the Middle East, Egypt and India. In terms of business line, the performance of industrial merchant is really reassuring given the fact that we have one less business day is driven by oxygen and hydrogen and cylinder volumes and high pricing at 3.3% driven by Americas and Europe.

Large industries is of course benefiting from startups, but also from high hydrogen volume up plus 12% and solid oxygen and nitrogen. Healthcare growth is above 5% driven by Europe and Americas.

America is up 8% despite the minus 1% price effect supported in particular by respiratory therapies and diabetes. Med gas is solid, notably in the U.S.

thanks to proximity care and to the launch of the Air Liquide’s small offer in the Airgas network. I would like now to stop one moment on Electronics.

You asked us numerous questions about the growth in this business line and about its sustainability. For that, I will hand over to Mike Graff who will provide on Electronics.

Thanks Fabienne. Over the last 15 years as you can see, we’ve transformed our electronics business, increasing our value to the industries through the introduction and growth of innovative offers and advanced materials and in larger more efficient and reliable plans to produce the alter pure gases which are really our lifeblood for our customers fabs.

Our services specialty materials and equipment businesses are also provide critical products and services for the industry and enable more touch points to strengthen the relationship with our customers and drive greater value for them. Overall, our business has more than doubled over this timeframe with a clear and intentional focus on growing our offer in high value differentiated products which enable customer technology advancement and positioning Air Liquide as the leader in Electronics.

Our business is diverse across Asia, the U.S. and Europe with strong positions at the integrated circuit market as well as in the flat panel display industry.

Production volume along with the shift in demand to more advanced nodes continue to drive our materials business and the mid to long-term forecast remain very promising. 2018 was another strong year with a record level of investments to support new production that will enable our customers' growth and continue to expand our technologically advanced offer.

This clear and intentional focus on innovation is driving solid growth along with strongly enhanced and sustainable margin improvement. We continue to leverage our core strengthen and advance their separation technologies and industrial operations to provide large, efficient and reliable plants to meet the ever growing needs of the industry.

Our knowhow and global presence provide a strong backbone for project execution and operational support to ensure continuing safe, reliable and consistent supply to each of our customers. On the Advanced Materials front, we've leveraged our strong technical capabilities and our growing network of material scientists and chemists to work within the semiconductor industry to drive innovation in a time of technology advancement that realizes evermore on materials and our highly specialized gases offer.

Over time, we have developed a strong collaboration and partnership with Tier 1 customers and OEMs to drive winning solutions that benefit the entire ecosystem. Looking forward, the advances in the electronics industry impact our lives more and more each day.

Connected devices are now common and impact not only our personal lives, but access to big data is driving the digital revolution in all sectors of the world from healthcare to basic industry to transportation to education to the financial sector. The proliferation of new applications along with the maturing of the industry has reduced the historic cyclicality seen in the early 2000s especially in integrated circuit market, which accounts for almost 90% of our Electronics business.

And in many respects, this is really just the beginning. The digitally connected smart society will become even more of a reality with five GNA enabling enhanced connectivity in the next few years.

Artificial intelligence will drive new ways of working, new ways of working, new ways of learning and new ways of communicating. All of these key industry drivers and more are enabled by technology advancements in the electronics industry and early key helps to enable this.

Fabienne, back to you.

Thank you very much, Mike. I hope that following this short presentation you now better understand what the good levels of our electronics business are and why we pretty confident in its future development.

Let's look now about the performance. As mentioned at the beginning, additional action plans are mostly launched to be able to deliver more efficiencies and to strengthened the performance and will start to deliver in Q2.

Our efficiency programs are also underway at Airgas. For Q1, we have delivered €77 million of sustainable cost reduction, aligned with the planned seasonality.

Climate related initiatives continued to represent approximately one-third of those efficiencies and include energy optimization, logistic management and reduction of cylinder leakage for helium in particular. We remind you that our newest objective is now to each €1.5 billion cumulated.

This will of course enable us to improve our margins and return on capital employed, but also to finance increased digitization and innovation efforts to secure our futures. Cash flow also remains very solid at 23.3% of sale.

Business development continue to be extremely active as shown by the 12 months portfolio of business opportunities, which is slightly increased again with new projects more than replacing the awarded one. Signings were also strong with significant investment decision driven by energy transition in Canada and Norway and regain momentum in regional M&A.

The acquisition of Tech Air closed in March, will reinforce Airgas positioning and generate high synergies. We started a seven unit in Q1 of which three in electronics.

The contribution of start-ups and ramp at €103 million is driven at usual by large industries but also by electronics and once again by energy transition. Start ups fully are concerned and therefore we maintain the initial forecast for more than €300 million that is contribution including Fujian in China for 2019.

So in a few words and that’s a conclusion, we enjoyed another strong quarter in terms of activity and we will in force our focus in performance while continuing to be very active on new investment opportunities. On this basis, we of course confirm outlook which is to deliver net profit growth in 2019.

So, this is what we wanted to share with you this morning. Thank you very much for your attention and we would like now to open the Q&A session.

I had a couple of questions. The first on industrial merchant, the pricing was up 3, organic was up 3.

So, obviously, volumes are flat and I hear on the day trading days that’s probably 1.5%. Still seeing a bit like relative to how you're traveling through Q4.

So, I guess, the question is to you Fabienne. You've mentioned that it's in sort of inflection point in construction.

So just wonder if could elaborate on that? And whether there any other softer spots that you store in Q1 relative to February comments?

That’s question one. Question two simple one.

Is there an update on the Fujian contract?

Well, thank you. It's throughout IM for first half.

It's true that this is progressing. The pricing more are less line aligned.

We're really a missing what's in there, I think that continue for approximately 1% of sales, so if we're are the same number of working days progression of IM will be 1% higher. Another point to be taken into account is that.

In the pricing component, you have the medium component you know that globally the helium market is relatively is tight. And then, we have this strong helium pricing as the other competitors.

So, this is also playing on the pricing. Apart from that, I will assure the volumes are growing, the pattern is a little bit different from one geographically zone to another.

So maybe we start with Asia and then hand over to Mike and Guy for few words about IM and the other region. So in Asia, we have the strong volume growth.

Surprisingly, it’s positive but clearly lower than natural in China. In particular, we continue to grow high double-digit.

We deploy our cylinder offer and this has increased very significant, but this is also true in most of the zone. We have the positive growth in Japan, which is not always the case.

It’s like slowdown in Australia but apart from that, Asia is strong and Asia is strong in all markets. Maybe Mike a few words about Americas now?

Sure, I think in the Americas, first of all I’d say that metal fab continues to be strong whether that’s Airgas whether that’s Canada. I think for the Americas, industrial markets continue to drive growth especially more in the long investment cycle businesses as you know the machinery and heavy equipment.

Even though automotive is slightly out peak, it still remains at very high sustained levels in output. And we continue to see factory investment, but the continued focus more on automation whether that’s automated cutting, welding or in parts positioning.

Fabienne mentioned construction and I think it’s really a mixed bag here. There’s a good backlog of projects I think spend on the Gulf Coast especially for petrochemical plants and LNG terminals, continues to be quite strong and that it continues to grow and evolve.

I’d mentioned before that we had a number of pipeline projects, power plant projects and infrastructure projects in geographies that were outside the Gulf Coast, and they’ve really come to a close. And there’s other projects that are being considered but they’re not sanctioned yet, so that’s what I think we see a bit of a difference in the weakening and construction in that particular part.

Energy chemicals continues to see strength especially in the chemicals or refining space and that’s not only construction. That’s continued routine maintenance and turnarounds and a number of other activities that go on at the sites.

In the non-industrial segments I think the food and beverage markets especially continue to be strong and continue to grow similar to last year. Life science is well for that matter.

And I think that given the fact we saw one less working day. The other areas is hard goods and the safety products and that’s where to think.

They are at a very high level as we end the year and they continue to stay at that high level, but in a more stable range.

Thank you, Mike. Guy, you have a few words about the situation in Europe.

Thank you, maybe just a few additional words about Europe and giving a little bit of color what is happening also in Europe. We also have a significant pricing contribution.

We have been ramping up the pricing now from all over last quarters in 2018 and the first quarter of this year also reaching levels of 3.2% which is quite positive. Europe is also impacted by a working day effect that also explains some of the less volume contribution.

However, what I would like to say maybe that, from a market point of view, yes, there were some markets particularly in the automotive industry that are little less dynamic. But we see a lot of renewal and new market is really boosting.

Particularly in the food and pharma industry, the biopharma markets, the convenience food industry is really growing now with more and more new freezing and chilling applications, which is all related to the changes of how people want to get their food in the cities in particular. So, we see all that really as a new gross driver and that are really starting to mature now.

The other thing that we’re really experiencing now in Europe is the change that the digital is brining to the why people are working and expecting to be, let's say, trading and doing their business with Air Liquide, more and more of our package cash business is going through digital channels up to 20% even in certain geographies. So, it's becoming very significant, leading to some very positive I think contributions in the future in terms of, not only how we interface with our customers, but also how we are able to create efficiencies through digital.

Thank you, Guy. The second question was about Fujian.

So in Fujian, the plan continues to run at full capacity. The customer continues to offset the -- to off-take the product, and the discussions, negotiations are still going on.

So, not much more to tell you than what we already mentioned in February when we published our full year.

Thank you to all of you Fabienne, Mike, Guy, Aude. And one follow-up question on your statements on Electronics.

Can you explain to me the 50% sales trough in E&I in Asia Pacific in Q1? And maybe can you also help me to understand, did you gain some market share in overall Electronics?

And did you do some price hikes in Electronics? And the second question is on the competitive landscape in general in industrial gases.

And it is probably too early to ask, nevertheless I tried it. Two months ago, the merger between Praxair and Linde was approved.

Did you recognize that the behavior of the new Linde is different from former Linde i.e., is there more price discipline in bidding processes? Or is Linde now trying to increase any prices investor merchant even more aggressive than we did before?

And the final question is on engineering and how confident are you to return to breakeven this year and to reach all your normal going forward because I see that the all the intake is down by 23% in Q1?

Okay. So, first about Electronics, maybe I'll hand this one to Mike.

Sure. Thanks Fabienne.

Martin, I think there are several aspects in terms of the growth and evolution in Electronics. First of all, I think that we saw roughly 14% growth obviously as Fabienne said, following on roughly 18% in Q4 2018.

And a lot of this is driven by recurring sales and what we see is, carrier gases continue to grow significantly, especially with all of the new projects that we signed in 2017 and 2018. Recall, we had very high levels of investment in Electronics in both years.

So, we see double digit growth in carrier gases for the quarter roughly, roughly 13%, which is really one of the key drivers of growth that we see. The other key driver of sustained growth is in advanced materials.

And that's similarly, the similar level of significant double-digit growth both in the U.S. and Asia, serving our Tier 1 customers.

We also saw the ramp of the enScribe etch gas offer that we spoke about previously with the startup of new production facilities in South Korea. So, both of those really underpin significant level of organic growth at almost 16% overall.

E&I continue to be strong. It's not as strong as it was in the fourth quarter of last year, which was roughly 50%.

It's in the 30s, but continues to be a driver of growth as well. But the long-term, even as I mentioned in my discussion, I think that the growth in carrier gases, the growth in advance materials really underpin the future for us.

Well, thank you Mike. In terms of impact of the Linde-Praxair merger, it's probably a little bit early to say.

I will remind you that country-by-country as in most of the case is of Linde part has been resold or the Praxair part has been resold. We still have the same number of competitor in the market.

In terms of new Linde behavior was not seen much different from the moment. You know that we've always been in the very disciplined market and we expect it to remain that way.

In terms of Engineering & Construction, sales from one quarter to another, is not really a proxy as you know that we recognize most of the sale at the end of the contract. Yes, we're going to be a vigilant this year.

We may be slightly negative in H1, but we will be carry positive for the full year and we expect to come back progressively hopefully in 2020 or if not in 2021 to the average margin we add in engineering historically. Let's say between 5% and 10% and preferably in the high part of the range.

In terms of order intake, we are the very active portfolio in engineering as well. We're expecting from signings.

I think the fact that the order intake is slightly down in Q1, should not be -- should not create any worry.

First question, can you give indication of the margins we should expect from the 100 million of years of orders that you signed for the maritime industry by 2020? Should we more assume a G&MP type profitability or more an Alfa Laval type of margin?

And what region are you helping to be? And the second question, a simple one.

I don't think I've seen it in the press release. Can you give a number for the book-to-bill in the equipment and inflation business that you had in Q1 comparable to the 1.0 that it was at year end place?

Okay. So, in terms of the sale of the maritime Turbo-Brayton turbine that was the object of the release of this week.

It's really a very profitable business, not all of the businesses are at this level in global market and technology. You know that simply the most innovative business, we can have strong discrepancies between the value segments, but this one at least it's advanced cryogenics technology and the advanced cryogenics technology segment.

We have margin which are fully in line with the group average margin. In terms of geographies, it's mostly sales out upfront but which are exported all around the world.

In electronics, we have a book-to-bill at 0.7. So, we can expect E&I to stabilize over the months to come.

Hey, good morning, and few from me please. Back to the pricing development in the industrial merchant business particularly in Europe, the extent to the year-on-year change and even excluding the helium market and it seems to be at the top end of at least of what’s been experienced previously.

And aligned to Guy's comments on digital efficiencies, is there any reason that you can point of this point where we shouldn’t interpret this momentum as presenting the possibility that you can exceed your typical expectation of raising margins by 200 to 300 basis points? And that’s the first question.

And second question back to the Fujian contract, you said that there haven’t been much further development on top of what you mentioned in February. Does that mean essentially the customer hasn't paid you yet?

So, Guy, are going to improve your margin by 300 basis points with digital?

So maybe back a little bit on the pricing in Europe. So, yes, we are experiencing now a high end pricing contribution during the last two quarters.

I think when you look at the inflation rate in Europe, at the beginning when inflation started to go up particularly with the energy pricing, we were in a sort of catch up mode. Now, clearly, we are at this period of time where fundamentally we have a positive leverage on the inflation overall.

So, we should indeed be having an improvement of margins. This being said, the digital applications I think are essentially going to create value first towards the customers and the way they want to operate with us.

I think that’s very fundamental. We see changes of their expectations in the market.

And of course, we expect those applications also to improve our own operating modes in the future. So, that’s what I can probably say around the pricing and the digital, how it is currently being developed in Europe.

Thanks, that’s helpful.

Thank you, Guy. So back to Fujian, I think I explained in February that the discussion and dispute we had with the customer is about the recognition of the performance test.

So, the customer claims that the performance test is not valid although it has been checked and validated by an official third party. And therefore, he's paying what he had to pay under the test period when we claim he should pay according to the commercial terms of the contract for no more operating period.

So, we still have the dispute about the level of the monthly payment. That’s right.

Okay, so just to clarify. So, you’ve invoiced them and the like-for-like that you’ve reported is based on your invoicing and what you believe is due.

And can you just help me in understand how much of the like-for-like growth in Asia? What the contribution was from Fujian ramp up in Q1, please?

Well, we are not going to disclose the numbers, but the growth in Asia is very strong even excluding the Fujian contribution.

Good morning. Thank you for taking my questions.

My question relates to hydrogen as offshore. I was wondering in the GM&T division, all of the contribution of hydrogen as fuel compare to available biogas in terms of sales?

Okay. So, at the moment, if we look at global market and technology, 50% of sales are advanced technologies, and approximately 25% of the sales are biogas and hydrogen, what we could call globally, key mobility.

It a view that at the moment, the bulk of it is with biogas and the hydrogen sales remain much more modest.

Yes. Good morning everyone and thanks for taking -- there're two questions.

Actually, the first one is around electronics and probably for Mike, I don't know. But the Advanced Materials of course is a business that can go up and down more so than the carriers.

Just how stable you think that business is? And then within that on the Electronics side, obviously, the Versum deal now having been agreed with just Merck.

Just how you see the competitive landscape particularly obviously on the gases side there and the advanced materials sales evolved in? And then secondly on just clarify on the North American volume situation for industrial merchant.

From what you're saying, if we strip out the note the negative day drag, which I think will still make the volume. You're saying you expect the volumes to move positive again from Q2 because there was some one-off effects as well and some temporary market drags.

Just clarify that? Thank you.

Mike, I think they're all yours.

Okay. So, I think first of all on the Electronics materials, this is obviously a growth factor for us and I think there is several aspects to this that will continue to drive their growth and we don't see it is being a cyclical.

We see that it is actually enabling the continued evolution of the more technologically nodes. All of the investment that is going into new fabs to go ahead and produce integrated circuits whether that's in logic or that's in memory.

As you go to these more advanced nodes require more carrier gases and more advanced materials and so, we see that continuing to ramp. And as the industry itself utilizes these capabilities, not only does it grow in terms of the overall volumes driven by the industry, but the actual architecture of the chips is evolving.

And so traditionally, when you think about the production in terms of integrated circuits, you talk about that in million square inches of silicon which looks at the diameter of the wafer produced and a number of wafers produced. What is happened in chip architecture is we're going from two-dimensional geometrics to significant three-dimensional growth.

And as you grow in three dimensions with multiple layers, you begin to utilize more advanced materials and more carrier gases in order to go ahead and produce that same vapor. I will take a for a perfect example of this right now is in 3D NAND, which is evolving as a significant driver in memory.

And the current evolution of 3D NAND and the current production capability, the architecture is a 64-layer design. So, I think about a KitKat on a nano scale was 64 layers.

That 64 layers is going to evolve to 96 layers in the coming year and half. In two years that likely is going to revolve 128 and then grow from there.

So we see actually is this growth continues a significant drive forevermore demand for the advanced materials along with the carrier gases and our enScribe gas offer. In terms of the volumes in North America, we actually saw as I pointed out, positive volumes in this quarter as well and we expect to see continued growth in volumes.

The various sectors, the various markets as I pointed out have different patterns of growth. Some of it is more lumpy liking construction which can grow very significantly, depending on the number of projects that are sanctioned, which was very significant last year and still is underpinned by what happens on the Gulf coast, but we do expect to see continued bombing growth in that area.

And then the Versum deal?

In terms of Versum, I mean, we've seen the evolution of Versum in Merck. I think that clearly for everything that's been said that the focus is on the continuation of the utilization of a Versum and the integration into Merck, which has a clear strategy.

I think we'll wait to see how that evolves and I think that I’m not going to speak for them in terms of their strategy and how that’s going to move forward.

Inner change few.

No, we continue on a clear path that I outlined. We're very driven continue to develop a highly advanced technical offer whether that's in the offer of carrier gases whether that's in the growing evolution of our portfolio of advanced materials that are critical to the technology roadmaps for the advancement of the increasing technological architecture of the advanced nodes as well as the evolution of our enScribe gas offer.

That is not only the next generation of etch gases to meet the exacting requirements of the nano scale, but also provides a very sustainable offer in terms of greenhouse gas emissions.

Okay. So, thank you very much again for joining us this morning.

As you've seen for us again a pretty good quarter. Most of our markets remain well oriented even if we have contrast between one region and another.

We're confident that extensively explain by Mike that our growth in Electronics is sustainable, but with margin which is very strong as well. So for us, we start our Q2 with quite a lot of confident.

Thank you very much for your attention and we talk to you soon. Have a good day.