Q4 2022 Air Products and Chemicals Inc Earnings Call
Speaker 1: 2022 and still have significant cash flow to support our growth opportunities. I would like to point out that on slide number 11, which is still my favorite slide, about three quarters of the decline since the peak margin was due to higher energy costs passed through, which increases our sales but does not impact profit. On slide number 12, you can see a summary of our management principles, which I have shown to you every quarter in the past eight years. These principles have guided and will continue to guide our performance as we go forward. And we intend to follow these policies consistently as we go forward. Now please turn to slide number 13 for a brief overview of our latest green hydrogen project that we announced recently. We took another significant step forward toward a clean hydrogen future by announcing our investment of about $500 million in a new green hydrogen project in Messina, New York, located on the banks of the St. Lawrence River. The facility will produce about 35 metric tons of green liquid hydrogen using almost 100 megawatts of hydroelectric power.
Speaker 1: provided by the New York Power Authority. We are excited about this project since it broadens our renewable energy sources to include hydropower in addition to solar and green energy.
Speaker 1: It also demonstrates the growing support for the energy transition in the United States.
Speaker 1: which has been further reinforced with the passage of the Inflation Reduction Act.
Speaker 1: We are actively pursuing.
Speaker 1: other project opportunities for green hydrogen in the United States, driven by this world's leading legislation.
Speaker 1: I look forward to sharing more information about these projects as we go forward.
Speaker 1: Now please turn to slide number 14.
Speaker 1: As you know, we announced our Sustainable Aviation Fuel project with both energy in April .
Speaker 1: This project is another great example of the investment opportunities.
Speaker 1: that is further supported.
Speaker 1: by the Investment Reduction Act legislation.
Speaker 1: We are, as a result of that legislation and the incentives put for sustainable fuel aviation.
Speaker 1: We are expanding our scope.
Speaker 1: And now we'll increase our investment from $2 billion to $2.5 billion in this.
Speaker 1: project.
Speaker 1: We still expect that this project will be completed by the end of 2021.
Speaker 1: will contribute more than the minimum returns that they have promised you before.
Speaker 1: Projects like these are aligned with our energy transition strategy and will continue to drive our earnings now and well into the future.
Speaker 1: Now with that, I would like to turn the call to Melissa Schaffer, our CFO .
Speaker 2: Thank you, Stacey. As Stacey mentioned, our business performance performed very well despite the macroeconomic challenges this fiscal year. Our onsite business, which generates about half of our total company sales, once again held firms while our merchant team successfully managed through the significant energy cost increases.
Speaker 2: Our people worked hard to overcome supply chain challenges across the region.
Speaker 2: keeping our facilities running and our customers supplied.
Speaker 2: I would like to thank the entire Air Products team for their hard work and a job well done.
Speaker 2: Now please turn to slide 12 for an overview of our full year results.
Speaker 2: Underlying sales were strong, up 14%, with significant contributions for both price and volume.
Speaker 2: Overall, price increased 6%, which corresponds to a 15% increase in our merchant business.
Speaker 2: Year over year, price improves every quarter in our three largest regional segments and across most of our major product lines.
Speaker 2: Our volume grew 8% driven by improved hydrogen, new plants, merchant demand, and increased sales equipment activity.
Speaker 2: EBITO is up 9% due to favorable price.
Speaker 2: volume, and equity affiliate income, which are partially offset by a higher cost and unfavorable currency.
Speaker 2: EBITDA margin was down just over 400 basis points and was negatively impacted by over 400 basis points by energy cost pass-through.
Speaker 2: which drove approximately half the total sales increase, but added no profit.
Speaker 2: The impact of the energy costs passed through was particularly noticeable in the Americas and Europe , where we have a meaningful hydrogen business.
Speaker 2: Our OCE has climbed steadily in the last five quarters, reaching 11.2%, which is 110 basis points higher than last year.
Speaker 2: We expect ROC to further improve as we bring new projects on stream and continue to put the cash on our balance sheet to work.
Speaker 2: Adjusting for cash, our ROCE would have been 13.6% this quarter.
Speaker 2: Now please turn to slide 13 for a discussion of our full year EPS.
Speaker 2: Our full year adjusted EPS from continuing operations was up $1.39, or 15%.
Speaker 2: Volume was favorable 80 cents and was particularly strong in Asia and the Americas.
Speaker 2: The increased sales equipment in our corporate segment also help drive higher volume.
Speaker 2: Price more than offset the significant energy cost increases.
Speaker 2: And 81 cents.
Speaker 2: driven by our strong price action in our three largest segments.
Speaker 2: Our other costs were 84 cents unfavorable and were driven by external factors such as inflation and inefficiencies caused by COVID restrictions in certain parts of China.
Speaker 2: as well as a supply chain disruption across the region.
Speaker 2: We also incurred additional costs purposely to support our future growth.
Speaker 2: These include resources required to develop projects and bring them on stream, as well as investments and facilities such as a new helium storage cavern, which will generate significant value in the future.
Speaker 2: We continue to closely monitor our costs and our focus on productivity actions across our businesses.
Speaker 2: Currency lowers are earnings by 24 cents or 3 percent as the U.S. dollar strengthens against most key currencies in the later half of the fiscal year.
Speaker 2: Since the revenue and costs are denominated...
Speaker 2: and their respective local currencies, this is primarily a translation rather than a transaction impact.
Speaker 2: Equity to affiliate income was up 74 cents, primarily due to the first phase of our design project, which contributed as we committed.
Speaker 2: Our effective tax rate was 18.2%.
Speaker 2: was 70 basis points lower than last year. And we expect an effective tax rate of 19 to 20 percent in FY 2023.
Speaker 2: Interest expense was lower, adding 5 cents to earnings.
Speaker 2: primarily due to a reduced debt balance.
Speaker 2: Now please turn to slide 14 for a view of our fourth quarter results.
Speaker 2: In comparison to last year, we achieved double-digit growth for both sales and profits as our teams worked hard to overcome considerable macroeconomic headwinds.
Speaker 2: Each region found its own success and achieved better results through its respective key drivers.
Speaker 2: which will be detailed later in the regional review.
Speaker 2: Underlying sales are up 17% with about equal contributions from both volume and price.
Speaker 2: Volumes were up 9% better, primarily in Asia and America, driven by new plants, recovery in hydrogen, and better immersion volumes.
Speaker 2: For the fourth consecutive quarter, we achieved double-digit increase in merchant pricing.
Speaker 2: which is up 20% compared to last year.
Speaker 2: As cost pressures persist, we continue to work hard on pricing each reading.
Speaker 2: Currency translated from the strengthening US dollar negatively impacted our results this quarter, reducing sales by about 6% and EBITDA by 5%.
Speaker 2: Despite this headwind, even an increase 10% is favorable price, volume, and accurate affiliate income more than offset higher costs.
Speaker 2: The 450 basis point decline in EBITDA margins was primarily attributed to energy cost pass-through, which impacted margins by about 450 basis points.
Speaker 2: Sequentially, volumes improved across all segments.
Speaker 2: and price increase primarily due to actions in our Europe segment.
Speaker 2: EBITDA was up 6% sequentially, absorbing 3% of currency headwinds as favorable price and volume more than offset higher costs.
Speaker 2: Now please turn to slide 15.
Speaker 2: Our fourth quarter GAAP EPS was $2.56 per share and included a negative impact of 32 for two non-GAAP items.
Speaker 2: both of which were non-cash.
Speaker 2: First, we recognize a 27 cent per share loss on the divestiture of our business in Russia.
Speaker 2: which we exited as a result of Russia's invasion of Ukraine.
Speaker 2: as we had previously announced.
Speaker 2: This charge is separately presented as Business and Asset Actions on our P&L.
Speaker 2: We also recognize a loss of five cents per share for the impairment of two small equity affiliates in Asia, which is included in the equity affiliate line item.
Speaker 2: Excluding the non-GAAP items, our fourth quarter adjusted EPS was $2.89 per share, an increase of 38 cents, or 15 percent from prior year.
Speaker 2: We achieved this excellent result despite a negative 15 cent or 6 percent currency impact.
Speaker 2: Price, volume and cost together contribute 46 cents.
Speaker 2: Volume contributed 33 cents and was particularly strong in Asia and America.
Speaker 2: price net of variable cost was favorable 39 cents with Asia, Europe , and the Americas each achieving significant price improvements.
Speaker 2: Price has improved throughout the year due to the outstanding efforts of our regional teams.
Speaker 2: who helped us improve our pricing, net of variable costs, from a modest negative impact in the first quarter to a positive impact in each quarter since then.
Speaker 2: Other costs were $0.26 on saleable. Almost half of the cost increases this quarter or due to higher incentive compensation.
Speaker 2: which is performance-based and reflective of our strong results.
Speaker 2: The remaining increase was primarily due to inflation, supply chain disruptions, higher plan maintenance, and the addition of resources needed to support our growth.
Speaker 2: The currency was negative 15 cents, which was about five cents worse than we had expected when we provided Q4 guidance in July .
Speaker 2: The DeZane Joint Venture drove the improvement of equity affiliate income. However, many of our other equity affiliates compared unfavorably due to the strong performance last year in part due to the lower medical oxygen demand for COVID this year.
Speaker 2: Now please turn to slide 16.
Speaker 2: The stability of our business allows us to generate strong cash flow despite the challenging environment.
Speaker 2: In fiscal year 2022, we generated more than $3 billion of distributed cash flow, or almost $14 per share, which is up 15% compared to last year.
Speaker 2: From our distributable cash flow, we paid over 45%, or roughly $1.4 billion, as dividends to our shareholders.
Speaker 2: This leaves more than $1.7 billion available for high-return projects.
Speaker 2: 20% more than last year.
Speaker 2: This strong cash flow, especially in uncertain times, enables us to continue to create shareholder value through increasing dividends and capital deployment for high return projects.
Speaker 2: Slide 17 provides an update of our capital deployment.
Speaker 2: As you see, our capital deployment potential has increased to about $37 billion through fiscal 2027.
Speaker 2: The $37 billion includes over $8 billion of cash and additional debt capacity available today.
Speaker 2: More than $17 billion to be expected to be available by 2027 and $11 billion already spent.
Speaker 2: We still believe this capacity is conservative given the potential for additional EBITDA growth.
Speaker 2: which would generate additional cash flow and additional borrowing capacity.
Speaker 2: As always, we continue to focus on managing our debt balance to maintain our current, rented, AAQ rate.
Speaker 2: So you can see our backlog has grown to nearly $20 billion, which will provide substantial amount of growth in the future. We have already spent 30% and have already committed 73% of the updated capacity we show here.
Speaker 2: We have made great progress and still have substantial investment capacity remaining to invest in high return projects.
Speaker 2: We believe that investing in these high return projects is the best way to create shareholder value for the long run.
Speaker 2: We continually evaluate our capital deployment options and determine the best way to use available cash entrusted to us by our shareholders.
Speaker 2: Before I turn the call back to safety, I would like to mention that starting first quarter of fiscal 2023, we will exclude the non-service pension impacts from our adjusted results.
Speaker 2: these non-service related components and our defined benefit plans.
Speaker 2: including effects of the changing interest rates and movements of the capital markets, are unrelated to our operations.
Speaker 2: By excluding these items, we believe that we can better provide visibility to our underlying results.
Speaker 2: The recaps of Earnings Per Share by quarter for fiscal year 2021 and 2022 are included in our reconciliation tables available on our website.
Speaker 2: The EPS guidance for the first quarter and the full year of fiscal 2023, which safety we'll discuss in more detail later, reflects this change.
Speaker 2: Now to begin the review of our business segment results, I'll turn the call back over to Stacey. Stacey?
Speaker 1: Thank you, Melissa. Now please turn to slide 18.
Speaker 1: for our Asia fourth quarter results.
Speaker 1: Sales and profit both improve double digits.
Speaker 1: despite the continued currency headwinds.
Speaker 1: Volume and price together were up 19%.
Speaker 1: but they're partially offset by 7% weaker currencies.
Speaker 1: Volume by itself was up 16%.
Speaker 1: benefiting from new small to mid-sized traditional industrial gas plants in our on-site business across this region.
Speaker 1: as well as an increase in spot opportunities for sales.
Speaker 1: ...
Speaker 1: stronger than last year.
Speaker 1: which increased the region's overall sales by 3%.
Speaker 1: Price was up across the key countries and most major product lines.
Speaker 1: Continued COVID restrictions in certain parts of China
Speaker 1: modestly reduced volumes and created supply chain inefficiencies that contributed to higher distribution costs.
Speaker 1: EBITDA was up 13%
Speaker 1: after even after absorbing 7% of negative currencies.
Speaker 1: as favorable volume and price.
Speaker 1: more than upset and with favorable costs and a lower contribution from our equity affiliates.
Speaker 1: Sequentially, the strong volume
Speaker 1: drove both the sales and profit increase versus the previous quarter.
Speaker 1: Now I would like to turn the call to Simon.
Speaker 1: to talk about our European fourth quarter results. Simon?
Speaker 3: Thank you, Sophie. Now please turn to slide 22.
Speaker 3: Power cost recovery via price for our merchant business is a primary focus to manage the ever higher energy costs in Europe .
Speaker 3: Our onsite business has contractual pass-through which enables us to pass the energy costs to our customers. And almost all of our natural gas usage is for onsite hydrogen production.
Speaker 3: As the chart shows, power costs for Europe this quarter soared to more than five times the level of the beginning of 2021.
Speaker 3: Our commercial team has tirelessly implemented price increases to compensate for these costs in our merchant business.
Speaker 3: turning a headwind at the beginning of the year to a tailwind by year end.
Speaker 3: Although we have fully recovered the higher power costs for the year, we are keeping a watchful eye on energy costs heading into the winter season and we remain focused on power cost recovery in this region.
Speaker 3: Now please turn to slide 23 for a review of our Europe results.
Speaker 3: In addition to significant energy cost increases, unfavorable currency movements also pressured our European businesses.
Speaker 3: All major local currencies were weaker versus the US dollar by double digits.
Speaker 3: Compared to prior year, price increased 19% for the region, resulting from a 30% increase in merchant pricing.
Speaker 3: Prices were higher in all key subregions and product lines.
Speaker 3: Our volume is flat this quarter as a favorable contract amendment with an onsite electronics customer offset modestly weaker demand across our businesses.
Speaker 3: Additionally, our results no longer reflect our immaterial Russia business, which was the best in August .
Speaker 3: Negative currency reduced sales by 15% and EBITDA by 12% compared to last year.
Speaker 3: Despite this currency headwind, EBITDA improved 8% as positive price and better mix more than offset higher costs.
Speaker 3: Higher energy costs passed through negatively impacted EBITDA margin by about 750 basis points. Excluding this impact, margin was slightly higher than last year.
Speaker 3: Compared to the prior quarter, price contributed 5% via our ongoing price actions.
Speaker 3: Volume added another 5% driven by better hydrogen activities following a planned customer turnaround last quarter and the previously mentioned contract amendment.
Speaker 3: Despite a 5% currency headwind, EBITDA was up 5% as better price and volume more than covered the higher costs.
Speaker 3: Even the margin was relatively flat, excluding the negative impact of higher energy costs passed through.
Speaker 3: Compared to Q1 of this year, Europe's operating income has improved about $50 million, or about 50%, thanks primarily to our team's successful pricing efforts.
Speaker 3: Now, I would like to turn the call over to Dr. Sirhan for discussion of our other segments.
Speaker 4: Thank you, Simon. Now please turn to slide 24 for a review of our America's results.
Speaker 4: Strong underlying sales accounted for half of the nearly 40% sales increase compared to last year.
Speaker 4: while the other half was due to higher energy costs passing through.
Speaker 4: which had no profit impact but diluted our margins.
Speaker 4: Price improved for the region by 8%. This is equivalent to a 21% increase in our merchant business.
Speaker 4: Prices improved and all key product lines over last year.
Speaker 4: Our team in the Americas did an excellent job raising prices to more than cover the higher energy cost.
Speaker 4: Volume grew 12 percent, primarily due to improvements in immersion and hydrogen.
Speaker 4: We saw an increase in helium volume this quarter, and the demand for hydrogen has been climbing steadily in the past several quarters.
Speaker 4: We expect hydrogen to follow this recovery path as we move into 2023.
Speaker 4: Plant maintenance activities have declined compared to last quarter as expected.
Speaker 4: but they were higher compared to last year.
Speaker 4: Maintenance activities were significantly below average in the fourth quarter last year.
Speaker 4: Ibera grew 8% over last year driven by positive price and volume.
Speaker 4: partially offset by higher cost and lower equity affiliate income.
Speaker 4: Higher energy costs pass through negatively impacted epitaph margin by about 650 basis points.
Speaker 5: Sequentially.
Speaker 4: Volume was up 4% and improved across all product lines.
Speaker 4: Price was also favorable 1%, more than covering the higher variable cost.
Speaker 4: If it increased 7%, mainly due to better price, volume, and lower plant maintenance.
Speaker 4: which more than offset higher above costs.
Speaker 4: Now please turn to slide 25 for review of our Middle East and India segments.
Speaker 6: Thank you.
Speaker 4: Sales and operating income in this segment are modest, since our Middle East and India wholly owned operations are smaller in size.
Speaker 4: The segment evidence however significant since it includes the equity affiliate income.
Speaker 4: related to the design joint venture and our India joint venture in our products.
Speaker 4: For the quarter, shares were higher versus last year due to acquisitions.
Speaker 4: Operating income compared unfavorably to last year due to mainly a favorable contract settlement in last year.
Speaker 4: We also expect land maintenance activity to increase next quarter.
Speaker 4: The over 40 million increase in equity available income included our share of the designed joint venture of NET merc.
Speaker 4: which is delivering as we expected.
Speaker 4: We have been receiving cash distributions from the joint venture.
Speaker 4: Please turn to slide 26 for our corporate segment.
Speaker 4: This segment includes our self-equipment businesses as well as our centrally managed functions and corporate costs. There are a couple of things that we gotta appreciate today before pearl coming out of
Speaker 4: For our sale of equipment activities, our LNG business historically has been an anchor, but our non-LNG-related project activities have grown in recent years to become major contributors for this segment.
Speaker 4: The cadence of project activities and the timing of sales and profit recognition can vary the segment's results.
Speaker 4: Our ongoing effort to support our growth strategy has also increased the centrally managed functions and corporate costs.
Speaker 4: For the fiscal year, the segment's capital improved over 20 million, but the fourth quarter share than profit will lower than last year primarily due to lower sale of equipment project activities.
Speaker 4: We also added resources to support our product strategy.
Speaker 4: As mentioned before, inquiries for potential LNG projects have jumped recently.
Speaker 4: But they will not drive our near-term results as these projects take time to develop. We're working hard to sign new projects to maintain the good momentum in this segment.
Speaker 4: At this point, I would like to return the call back to Saifie to provide his closing comments. Saifie.
Speaker 1: Thank you Dr. Sherhan.
Speaker 1: We believe that investing in high return projects
Speaker 1: is a better choice for our shareholders.
Speaker 1: and share buyback in the long term.
Speaker 1: We are also confident.
Speaker 1: that we can deliver on near-term results.
Speaker 1: while achieving our long-term goals.
Speaker 1: Although the projects that we seek to execute
Speaker 1: are large and take time.
Speaker 7: on behalf
Speaker 1: the competencies and the people to execute these projects.
Speaker 8: and have been
Speaker 1: diligently.
Speaker 1: working on them for many years to get to where we are.
Speaker 1: Now, Air Products has entered a new phase of our company's evolution.
Speaker 1: in which we expect a steady stream of meaningful contribution from these new projects going forward and for years to come.
Speaker 1: by choosing capital deployment over shared buyback.
Speaker 1: We believe that we have traded quick gains in the near term for greater reward in the future.
Speaker 1: Now please turn to slide number 27.
Speaker 1: Economies around the world continue to face considerable obstacles.
Speaker 1: The conflict in Ukraine persists. COVID restrictions in China may continue. We see that inflation, currency and supply chain issues will remain as headings.
Speaker 9: As always...
Speaker 1: We will push for price increases to compensate for additional costs, pursue additional volume opportunities and obviously pay close attention to our costs.
Speaker 1: It is that background for fiscal year 2023.
Speaker 1: We expect our earnings per share.
Speaker 1: to be in the range of $11.20 to $11.50.
Speaker 1: representing an 11% increase at midpoint over last year.
Speaker 1: This includes an expected roughly 50 cents of negative currency impact.
Speaker 1: I would also like to add
Speaker 1: that are
Speaker 1: eworld projections
Speaker 1: for next year.
Speaker 1: based on the fundamental assumption
Speaker 1: that the economies around the world...
Speaker 1: perform as we see them today.
Speaker 1: That means we don't have a crystal ball, so we are not projected.
Speaker 1: any economic growth?
Speaker 1: around the world, neither have we projected a significant recession.
Speaker 1: Our guidance is based on what we see today in the economies in the Americas, Europe and Title T greens every 50 years thanks to Donald Trump.
Speaker 1: For quarter one of fiscal 23
Speaker 1: For first quarter of fiscal year 23, our earning per share guidance is $2.60 to $2.80.
Speaker 1: up 5% to 13% over last year.
Speaker 1: Please also know that our prior results for the first quarter
Speaker 1: benefited from a gain of roughly 20 cents related to the finalization of the Jazan air suppression unit joint venture.
Speaker 1: In terms of capex.
Speaker 1: We see our cap-ex expenditure for next year to be approximately five to five and a half billion dollars
Speaker 1: including the approximately $1 billion for the first two of the JASAN project.
Speaker 1: Now please turn to slide number 28.
Speaker 1: As you made the call from our last earning call.
Speaker 1: I have been hosting in-person discussions with our employees across the regions.
Speaker 1: to share our strategy and answer the questions.
Speaker 1: My goal is to talk with our more than 21,000 employees around the world over the course of the next year in small groups.
Speaker 1: I am happy to say that our employees around the board share our core values.
Speaker 1: and focus on our common goals.
Speaker 1: Their commitment.
Speaker 1: and motivation.
Speaker 1: are truly a long-term competitive advantage.
Speaker 1: As I stated at the beginning of this call,
Speaker 1: I am proud to be working alongside them to make Air Products the leader of the clean energy future for the world.
Speaker 1: Now, we are more than pleased to answer your questions.
Speaker 10: Thank you very much sir. Ladies and gentlemen if you would like to ask a question over the phone at this time please signal by pressing star 1 on your telephone keypad. Please note if using the speakerphone just to make sure your mute function is turned off to allow your signal to reach our equipment. So once again that is star 1 to ask a question. I will now move to our first question which comes from Steve Byrne from Bank of America. Please go ahead your line is open.
Speaker 11: I wanted to ask a little bit about this Greenfield project up in New York. The capital costs at $5 a watt seem a little high. Is this an undeveloped site? Maybe more importantly, what do you see as the primary demand for this product? It's a pretty remote location. What would be the end market that you're going to be selling this liquid hydrogen into?
Speaker 1: Excellent question. Good morning. First of all, in terms of the capital cost, this is a green sand site. Number two, it includes, if you are comparing it for example to what you are doing at NIO, it includes the co-affection.
Speaker 1: because we believe that the future of hydrogen for mobility is in the form of liquid rather than gases hydrogen.
Speaker 1: Therefore, the facility is designed to include the liquid fire.
Speaker 1: And it also includes auxiliary investments in order to develop the site and also in terms of how we get the product to the customers.
Speaker 1: The primary market that we are targeting is obviously hydrogen for mobility.
Speaker 1: that the site might seem remote but once you have liquid hydrogen
Speaker 1: The cost of distribution of liquid hydrogen is not that significant. We right now have liquid, make liquid hydrogen in near Toronto in Canada and sell it in California. So the location...
Speaker 1: We chose it because of the proximity to the power and the site that was there and access to the water. So, I'm not concerned about the distribution cost because that is not going to be that significant in the overall scheme of things. And besides that, 35 tons a day, considering that any heavy truck on the average uses about 60 kilograms per day, you need about 600 trucks and it will consume.
Speaker 11: in merchants up 30%, your two large competitors reported something similar. That's really impressive. Can you comment on how much of that would be a surcharge that's potentially reversible? And would you characterize your primary merchant customers as the hydrogen cost is relatively modest in their cost deck and thus they can...
Speaker 1: absorb a 30% increase but the price increases in Europe are mainly on liquid oxygen, liquid nitrogen and liquid with argon and helium and oboe c-hydrogen are related to the pulse of electricity.
Speaker 1: And in addition to that, there is general inflation, so the cost increases are a reflection of the increase of our overall cost.
Speaker 1: So if electricity prices go down, doesn't mean that all of our costs are necessarily have gone down. And therefore, we are going to try to hang on to the price increases for as long as we can because a lot of it is justified, just based on inflation, rather than just to repower costs.
Speaker 12: Thank you.
Speaker 10: Thank you. We'll now move on to our next question over the phone which comes from Jeff Zajkauskas from J.P. Morgan. Please go ahead your line is open.
Speaker 10: over the phone which comes from Jeff, the Couscous from JP Morgan. Please go ahead, your line is open. Thanks very much.
Speaker 13: I'm sure, Safie, in your spare time you read the Inflation Reduction Act.
Speaker 13: In calculating the tax benefit for your Louisiana facility,
Speaker 13: Is it $85 a ton times 5 million tons or 425 million a year? Or is it a bigger number or a smaller number?
Speaker 1: Good morning, Jeff.
Speaker 14: Ceremonie there.
Speaker 1: The numbers are very clear in the Inflation Reduction Act with respect to CO2 sequestration.
Speaker 1: very clear in the Inflation Reduction Act with respect to CO2 sequestration for every ton.
Speaker 1: you get $85.
Speaker 1: And obviously our project in Louisiana is going to produce 5 million tons a year of CO2 that we plan to sequester. So your math is exactly correct. We will get a benefit of about $425-$430 million a year for 12 years.
Speaker 15: Uh...
Speaker 1: in doing the sequestration after tax.
Speaker 12: That is correct.
Speaker 12: Okay.
Speaker 13: Second question maybe is for Melissa. In your cash flow statement you have other adjustments.
Speaker 13: for the year of negative three hundred and four point nine million call it negative three oh five what is that
Speaker 13: your undistributed equity earnings are negative 215 versus I think 481 of equity income. Is that going to get any better in the future? So you know what's the first number and is the second number going to improve?
Speaker 1: I can answer that question but you wanted Melissa to answer, that's not a problem. Melissa, would you please take that question?
Speaker 2: Yep, so the other investing activities, is that your question?
Speaker 13: The other adjustments.
Speaker 13: It says other adjustments negative 304.9.
Speaker 13: What's that?
Speaker 2: Okay, thank you. So that is largely intercompany CTA, Jeff. There is a portion of that is associated to one of our large projects deferred costs, but the massive vast majority is associated to our intercompany CTA.
Speaker 13: So does that change next year?
Speaker 2: So that will, there will be a decrease next year associated again to that role that the large project deferred cost, but it won't change largely now.
Speaker 13: Okay. And the undistributed earnings of equity method investments? Are we going to get closer to the equity income?
Speaker 2: So Jeff, that's largely associated to our project for JIGPC and so the fluctuations in there is all just a timing of the distributions from that joint venture.
Speaker 13: Okay, great. Thank you very much. Thank you, Jeff. Thank you, Jeff.
Speaker 10: Thank you. Ladies and gentlemen, if you do find your question has been answered, you can remove yourself from the queue at any stage by pressing star 2. We'll now move on to our next question. The phone which comes from Mr. John Roberts from Credit Suisse. Please go ahead.
Speaker 16: Thank you and welcome, Sid.
Speaker 16: Cephi, for the clean hydrogen other than sustainable aviation fuel, do you expect to have primarily a merchant pricing model where you don't have any volume guarantees?
Speaker 14: For the...
Speaker 1: of our hydrogen business? No, I think that it will be a mixture because I think some customers, even for when they are using it for fuel, like large trucking firms and all of that, they would want to, and they have talked about the possibility of long-term contracts to ensure supply. So I think that we will have a combination of both.
Speaker 12: Thank you, John .
Speaker 16: Thank you. I'll pass it on. Sure.
Speaker 12: Thank you.
Speaker 6: Thank you.
Speaker 1: Would you please go to the next question?
Speaker 10: Certainly sir. Thank you. We'll now move on to our next question over the phone which comes from David from Deutsche Bank. Please go ahead.
Speaker 17: Hi, this is David Huang here for Dave. I guess on the SAF project, what's the expanded scope on the SAF project include and is any of the increased investment due to any project cost inflation?
Speaker 1: The main reason is that the total capacity of the plant is not only the capacity of the
Speaker 1: is approximately 340 million gallons a year.
Speaker 1: But the portion...
Speaker 1: that will be SAF has been increased.
Speaker 1: Because with the IRA, as you know very well, there is going to be a dollar 25 incentive for making SAF. So we have changed the design of that plan to make more SAF and that is adding to the cost.
Speaker 12: Okay.
Speaker 17: Can you talk about what's causing the delay?
Speaker 1: It's basically COVID related and the COVID shutdowns.
Speaker 12: Thank you.
Speaker 12: You're welcome.
Speaker 1: Next question, please.
Speaker 10: We'll now move on to our next question over the phone which comes from Mr. Josh Spector from UBS.
Speaker 17: Hi, thanks for taking my question. I was wondering if I could clarify your assumptions for next year, particularly where you say no recession predicted. If you're kind of run rate in current demand, I mean, I think it's arguable that Europe's in a recession, China's obviously underperforming. Are you assuming that that continues or are you assuming any improvements in those markets?
Speaker 1: No, we are not assuming any improvement in the markets. We are assuming improvement in our results, but we are saying that...
Speaker 1: We have made our forecast for next year based on what we see today. That you're right, economic activity is down in Europe , it's down in China, and it's debatable where it is in the US. We are basing our assumptions on currently what we see.
Speaker 1: That's correct. We are not assuming any significant economic growth and we are not
Speaker 1: assuming any significant deterioration for where we are. Where we are is not a good place to be, but we are not expecting that to get much worse.
Speaker 17: Thanks. That's helpful. If I could just clarify within Europe , what are the base volumes down? So I'm not sure how much that contract amendment helped volumes, but just curious on the base level there.
Speaker 1: You mean the contract amendment with respect to what?
Speaker 12: I didn't fall.
Speaker 17: On European volumes, you talked about volume flat with the base business down, helped by the contract amendment for the volume. I was wondering what the base volumes are in Europe today or in your September quarter.
Speaker 1: Are you referring to our onsite business or our mission business?
Speaker 1: I'm not relating to the contract amendment. Simon, can you help me?
Speaker 3: So in Europe we said our volumes were roughly flat, we said we had a positive contract amendment and so our base volumes were down slightly. We didn't quantify that because of the details around the contract amendment, but the base volumes were down modestly Josh.
Speaker 12: Okay, thank you.
Speaker 6: Sure.
Speaker 12: Okay.
Speaker 10: We'll now move on to our next question, sir, which comes from a John McNulty from BMO Capital Markets. Please go ahead. Thank you, sir.
Speaker 3: Yeah, thanks for taking my question, Safie. So I guess the first one would just be, you know, when you think about the opportunities around the IRA bill and the potential for green versus, say, blue hydrogen and carbon sequestration, I guess, when you look at your backlog of opportunities, not the ones that you've already announced, but future ones, I guess, which way would you say air products may be leaning? Is there more opportunity, would you say, in the blue arena and the carbon sequestration arena or would you say green is kind of going to be the next?
Speaker 1: How would you characterize it? Good morning, John . Very good question. I would like to say all of the above. That means that the IRA is very favorable about pursuing green hydrogen opportunities, and we will do as you saw with the announcement about the project in New York, and we will do additional green hydrogen projects in the United States.
Speaker 1: And then the carbon sequestration and the $85 a ton will help us do additional blue hydrogen projects.
Speaker 1: We are, as you know, we are committed to the transition and the IRA provides opportunity for us to do both of those things.
Speaker 3: Okay, fair enough. Is that okay, John ? Yeah, no. That's fine. And then I guess the second question would just be, you know, I saw you had signed, I guess, an agreement with one of the, for a port project in the UK. There was another one earlier in the year. I believe it was in the Netherlands. I guess, can you speak to the confidence that you have around those regions actually taking in green ammonia, green hydrogen, and the demand for it? Where you're getting more comfortable with, you know, with the demand and...
Speaker 1: also blue, but that.
Speaker 1: and level of conversation.
Speaker 1: in terms of significant demand.
Speaker 18: for green and blue hydrogen in...
Speaker 18: Europe is noticeable, yes, you are very right on that.
Speaker 3: Okay, thanks very much for the caller.
Speaker 10: Thank you, sir. Thank you. We'll now move on to our next question over the phone, which comes from Vincent Andrews from Morgan Stanley . Please go ahead. Thank you and good morning, everyone. Sebi, with the New York project announcement, there's a reference to potentially building a fueling station network in the Northeast. Could you talk a little bit more about that and what would sort of get you over the line on that project?
Speaker 9: Well obviously we have...
Speaker 9: Well obviously we have the liquid hydrogen.
Speaker 1: In order to sell it, we would need hydrogen refueling stations at different locations so that the trucks can come and stop by and get fuel. There are a lot of options about how we are doing that and we are exploring all of those options. It is something that we know how to do.
Speaker 1: I think we already have about 112 of these stations or more than that around the world. We have patents, we know how to build these things, we know how to design these and I have to say that I think we are at the forefront of technology for these kind of especially liquid stations. So we will be building those in order to be able to sell the product.
Speaker 10: Okay, and just as a follow up, post the IRA, there's been a lot of announcements, no surprise, for projects in the US. How are you thinking about the risk of CapEx inflation in the United States post the IRA?
Speaker 1: Well, I think in the context of the U.S. economy, the U.S. economy is a very big part of the
Speaker 1: Even you add up that all of those projects are real projects rather than just MOUs.
Speaker 18: But I mean, it's not enough to kind of affect
Speaker 18: the inflation of the cost of a plant that you're going to build in the US, I don't think so.
Speaker 18: We are not focused on that. We don't think that...
Speaker 12: That's relevant.
Speaker 10: Thanks very much.
Speaker 19: Thank you sir.
Speaker 20: Thank you. We'll now move to our next question over the phone which comes from Mike Leithhead from Barclays. Please go ahead.
Speaker 10: Great. Thanks. Good morning, guys. Just one clarifying question, I think for Melissa, but if you want to answer, that would be great too. The pension adjustment you're now making for adjusted EPS, I think in your reconciliation you disclosed it was a $34 million income in fiscal 2022. I understand you plan to exclude it from adjusted EPS going forward, but Melissa, what is your best estimate of what that line item might be for 2023?
Speaker 1: Yeah, minister should answer that. She does a better job than I would do on her.
Speaker 2: Melissa? Thank you, Stacey. Yeah, so for the non-service component, so if I look back at FY22, that was about a 15-cent benefit, but we're forecasting for FY23 an anticipated 35-cent headwind moving forward. So, if I look back at FY22, that was about a 15-cent benefit, but for the non-service component, that was about a 15-cent benefit, but for FY22, that was about a 15-cent benefit,
Speaker 10: And just to clarify, the 35 cent is just in that one year, it's not year over year, 35 cent correct.
Speaker 2: That's correct. It's readjusted every year.
Speaker 2: Great. Thank you so much. Yep, absolutely. We will provide a reconciliation table for that.
Speaker 20: Thank you. We'll now move on to our next question over the phone, which comes from Mike Harrison from Seaport Research Partners. Please go ahead.
Speaker 3: Hi, good morning. Was wondering if you could talk a little bit, Safi, about what you're seeing in Europe with regard to natural gas prices. There's been a recent decline there. Obviously that impacts the pass-through, but do you think that maybe changes your ability to get pricing? And do you have any encouraging feedback from customers that they're going to be running harder now that they're seeing some relief on natural gas costs?
Speaker 1: Good morning, Mike. I think the natural gas prices increases in Europe have moderated, but there's still natural gas prices in Europe are around $30 a million BTU, which is, you know, a little bit more than that.
Speaker 1: six or seven times what they used to be. In terms of the natural gas prices, as you correctly said, is mostly enhanced to cost to us.
Speaker 1: The relevant thing becomes if the higher natural gas costs affect the cost of electricity, which they do.
Speaker 1: And we haven't seen the electricity prices moderating as much as obviously we or other people would like to see it.
Speaker 1: But I do not expect a significant change.
Speaker 1: But energy prices, as we all know, are pretty unpredictable.
Speaker 1: It depends on a lot of things, so I don't want to speculate on that. But the one thing that I hope Mike has demonstrated is that we have the ability, the agility to get us know what that event might be like.
Speaker 1: and the determination to be flexible and react to that and recover the cost increases.
Speaker 12: which we have done. I think that's the good news.
Speaker 10: All right, thank you for that. And then my other question is on the hydrogen business in the US. Kind of two pieces to this question. First of all, are you starting to see some better utilization and better hydrogen spot volumes from your refinery customers as we see diesel stocks being relatively low? And can you comment at all on the maintenance outages that you're expecting in Q1 compared to Q4 levels? Is it going to be a greater cost?
Speaker 1: than you saw in Q4. Thank you. Sure Mike, I would like to have Dr. Serhan answer that question. He mentioned something about that in his prepared remarks, but Dr. Serhan, would you like to kind of expand on your remarks about hydrogen demand?
Speaker 4: I mean, definitely it's been picking up, as we stated before, the last few quarters. So we are at the level now in our pipeline system in Texas and Louisiana, really to the level before COVID, and it's still even recovering farther. The refineries, our customers basically have the high utilization. The demand is very high. And definitely we see more opportunities for additional volume. And we're really doing our best to add even more capacity to our pipeline system. So we can supply our customers.
Speaker 20: Thank you. Thank you very much. We'll now move to our next question over the phone, which comes from Duffy Fisher from Goldman Sachs. Please go ahead. We'll now move to our next question which comes from
Speaker 3: Yes, good morning guys. First question is just around the APAC business. The volumes there were very strong, up 16% relative to only up 2% last quarter. And Safie, I think you called out a number of kind of smaller traditional ASUs starting up. So is it fair to anniversary that number over the next three quarters that APAC should be very strong just because of business that we've built in already?
Speaker 9: Hi Daphne, how are you?
Speaker 18: How are you?
Speaker 1: You know, you're asking a very, very good question and thank you for noticing the fact that we have grown our traditional business. We are not just focused on large projects in that part of the world.
Speaker 1: Theoretically, what you are saying is correct.
Speaker 1: The only unpredictable thing in this is what is going to happen to these...
Speaker 1: shutdowns in China because right now one of the provinces that we operate, the Intelligentworkers Global Action Committee, Expected to accept and receive medical advice and community assistance.
Speaker 1: They had found some COVID cases in some of the coal mines and then now the whole state is shut down and all that. Those things do affect our business in the short term. So, and that they are totally unpredictable. But if you assume that none of those things will happen, obviously the fact that we are bringing these new facilities online, they have helped that fast quarter and they will help in the future, absolutely. Perfect.
Speaker 3: And then maybe one just on your crystal ball, because you've seen a few cycles, when you see the data you have coming in, when you look at the world around you, and you look at your customers, how do you think this cycle plays out kind of through this quarter into the early part of next year? Is there another leg down for your broader customer base, or do you think we've kind of put in the trough here in the calendar Q4, and things get better as we get into next year?
Speaker 1: I'm a little bit hesitant to predict that because obviously with our business, we are
Speaker 15: A.
Speaker 18: We are a leading indicator in terms of since we don't have any inventory. I can tell you exactly what is happening now but and now
Speaker 18: You know the state of affairs.
Speaker 18: But predicting...
Speaker 1: what is going to happen in the next month or two months or three months.
Speaker 18: especially both in China and also in the US and all of that, with so many different things moving, would be very difficult. But this is why, as I said,
Speaker 18: for our guidance we assume that things are the way they are right now.
Speaker 18: rather than predicting any up or down.
Speaker 18: We have to wait and see. Sorry about that. That was the point specific though.
Speaker 21: Fair enough. Thank you guys.
Speaker 12: Thank you.
Speaker 20: Thank you very much. We'll now move on to our next question over the phone, which comes from Christopher Parkinson from Mizuho. Please go ahead, your line is open.
Speaker 3: Great, thank you so much. When you're looking at the world right now, could you just give us a quick update on where your rough estimates are for merchant operating rates in terms of just what you're seeing in the macro? Thank you.
Speaker 18: Sure Chris, good morning. Yes, I can give you that. Right now, if you look at all of Asia, we are at around 77-78%.
Speaker 18: Good morning. Yes, I can give you that. Right now, if you look at all of Asia, we are at around 77-78%. Europe and the European countries are cash in on us as well.
Speaker 18: is
Speaker 1: Depending on which country you are, it goes somewhere from...
Speaker 18: as high as maybe 81-82% in UK to as low as
Speaker 18: 72-73% in certain parts of Europe . But in the US, we are at around 77-78%.
Speaker 3: It's very helpful. And say Pete, entirely understanding that you don't necessarily have a crystal ball. Obviously there's been a lot of fluctuation in regional MACRA activity this year. It's all been caused by various factors in Europe and China and so on and so forth. But if we just circle back to a previous question on China, what's your best view of the outlook for the Chinese economy after the Lunar New Year?
Speaker 3: on next year in terms of what you're hearing from the ground, what you're hearing from your customers. Just any insights would be very helpful. Thank you. Well, Chris, thank you very much. Obviously – That's fantastic, mates.
Speaker 3: to what you're hearing from your customers. Just any insights would be very helpful. Thank you. Well, Chris, thank you very much. Obviously, you know,
Speaker 18: In China, everybody is obviously...
Speaker 18: When they talk to you, nobody wants to be pessimistic, everybody wants to be optimistic. So it's very difficult based on the input that you get talking to different people.
Speaker 1: to make an estimate of what the real economy will do.
Speaker 18: I do not expect a significant change up or down. I think it will be steady, but who knows what's going to happen.
Speaker 18: But right now, my best estimate is exactly what they are putting out for our guidances, that things will stay the way they are currently in terms of utilization and in terms of the GDP growth. For more information, visit www.fema.gov
Speaker 3: Okay. Understood. Thank you very much.
Speaker 3: Understood. Thank you very much. Thank you Chris.
Speaker 20: Thank you very much. We'll now move on to our next question over the phone, which comes from Kevin McCarthy from Vertical Research Partners. Please go ahead.
Speaker 3: Hi, good morning. This is Corey Murphy on for Kevin. Two questions on your project pipeline. First, your press release highlighted 1.3 billion of major projects on electronics. On slide 30, I see 900 million in Taiwan. What other major projects do you have in electronics? Any color you can provide on timing, location, and future activity would be helpful. And then second, it appears as though the net zero hydrogen project in Alberta increased in size by 300 million Canadian.
Speaker 22: to $1.6 billion. Why is that and what impact might that increase have on your project return expectations? Thank you.
Speaker 9: Sure. In terms of the...
Speaker 9: The Canadian operation
Speaker 18: The increase was a little bit of a change in scope and also with respect to once we got finalized with our customer about what they wanted. The return on that project is still very good because we adjusted the prices to compensate for that. So I don't expect any downside on that.
Speaker 18: and actually we'll have some more to say about that project in the next few weeks. With respect to the electronic projects, I can't say more than what we have disclosed because we are under confidentiality agreement with the customers.
Speaker 18: The customers don't want us to talk about the project because they don't want anybody to know what it is and what they are doing. You have the details. It's $900 million in Taiwan for a very big semiconductor manufacturer, so you can almost guess what that is and the other one is for some other people. So I can't give you any more specifics than what they have already been because of the questions by our customers.
Speaker 22: if you don't mind. Understood. Thank you very much.
Speaker 20: Thank you. We'll now move on to our next question over the phone, which comes from Lawrence Alexander from Jeffries. Please go ahead.
Speaker 16: Thank you. This is Dan Rizzo, On4Lawrence. Thank you for taking my question. You mentioned a little bit about COVID disruptions affecting supply chain and some projects in China. I was wondering if they are affecting your operations or your customer's operations as well.
Speaker 18: Well, the reason we mentioned it is that because they did affect our operations because it caused
Speaker 18: at most of these lockdowns.
Speaker 18: effect or distribution cost.
Speaker 18: and sometimes it causes some of the plants to have to shut down. So the reason we mentioned it is because they did have an effect on our operations.
Speaker 16: And just one other question. Just given the current environment with interest rates, is debt pay down a focus at all? I mean, I know you have a solid rating, but I was just wondering if it's something that you're considering given the potentially elevating costs.
Speaker 18: Well, our debt is in form of bonds. Most of our debt, we have approximately $7.5, $8 billion of debt. So we just corporate bonds.
Speaker 18: which the interest rates are fixed and we will pay them down based on the
Speaker 18: schedule that we have in the bond payments and we disclose those so you can see when you are supposed to pay down significant amounts of debt.
Speaker 20: Thank you very much.
Speaker 20: We'll now move on to our next question over the phone which comes from Eric Petry from Citi. a long time ago when it was
Speaker 23: Hi, good morning, Stacey.
Speaker 18: I call you.
Speaker 13: Good. Any update or expected potential milestones from your MOU with cummings and developing dual cells for heavy duty trucks?
Speaker 1: They are working on it and they are
Speaker 1: have the trucks under development and we are looking forward to receiving the trucks. I think they are a little bit delayed in terms of their schedule that they had promised us, but we are continuing working with them.
Speaker 18: And I have to say that we also are working with other people too. It's not just comments.
Speaker 13: Okay. And then on your New York green hydrogen project, I think it translates to roughly 14 million per ton per day. How do you see that for future green hydrogen projects going forward and the reduction in cost between electrolyzer power and liquidification costs?
Speaker 18: Well, the cost is very much location dependent in terms of how much work you have to do in terms of game field site, existing sites, what are the things that you have to do in order to get a real project.
Speaker 18: Well, the cost is very much location dependent in terms of how much work you have to do in terms of game field site, existing sites, what are the things that you have to do in order to get a real project going. Let's watch it powered with sky light Alan.
Speaker 18: I don't expect the cost of building green hydrogen projects to significantly come down. There is no reason for that. We have inflation and this thing about the fact that cost of electrolyzes will go down.
Speaker 18: is a myth, number one. And number two, the electoral rises are not a significant part of the cost of building.
Speaker 18: green hydrogen facility. So that is just something promoted by somebody. I don't know who, but in the real world...
Speaker 18: hydrogen facility. So that is just something promoted by somebody, I don't know who, but in the real world the cost of building a plant.
Speaker 18: two years from now or five years from now or three years from now will be higher because of inflation.
Speaker 12: So the sooner you build these things, the better it is. Thank you. Thank you.
Speaker 20: We'll now move on to our next question over the phone, which comes from Sebastian Gray from Bernberg. Please go ahead.
Speaker 24: Hello, good morning and thank you for taking my questions. I would have two please. The first one follows up on the earlier question on interest costs. If I look at the refinancing schedule for air products and the expansion in capex over the next two or three years, the current interest charge in 2021 was 128 million. Melissa, would it be plausible for this number to double in the space of two or three years? That's my first question.
Speaker 24: My second one is on changes in scope to investments. We've had two or three investments be upscaled. Is there a chance at all that the same thing could happen to Louisiana and the $4.5 billion blue hydrogen project? Thank you. To both of you speaking this afternoon and today from the traveling archives that the
Speaker 18: Okay, I will have Melissa answer the first question that you had and the second question that you had with respect to the project in Louisiana.
Speaker 12: We are looking based on the Investment Reduction Act.
Speaker 18: about the scope of that project. And we might actually change the scope and increase the scope and as a result, increase the capital costs for that project. So that all depends on what we conclude in terms of what is the best options for us to take advantage of the legislation. So yeah, it is possible that we would say a year from now, two years from now that we have increased the scope of that project and maybe this spring.
Speaker 18: I don't know, $5 billion or $6 billion on that project, depending on what we decide to do.
Speaker 18: So now, Melissa, would you like to answer the first question, please?
Speaker 2: Yes, thank you, Stacey. So we've talked a lot about a crystal ball. Obviously, we don't have a crystal ball of where interest rates are going to go, but we don't anticipate them moving up to double levels in the next year. That being said, you know, right now, given our current access to the liquidity market, we actually don't anticipate having to go to the debt market in the near term, but obviously we're always evaluating the market and the rates that we obtain given our AA-2 rating.
Speaker 20: That's helpful. Thank you for taking my questions. Yep, thank you. Thank you. There are no further questions queued over the phone at this time. I would like to turn the conference back over to yourself for any additional closing remarks.
Speaker 1: Thank you very much. I would just like to thank everybody for listening to our presentation. We appreciate your interest and we look forward to discussing our results with you again next quarter.
Speaker 1: As I said earlier, please stay safe and healthy and all the very best. Thank you very much and also thank you very much for the very good questions.
Speaker 18: We appreciate it. Have a great day. Thank you. Thank you.
Speaker 20: Thank you very much for today's speakers. Ladies and gentlemen, this does conclude today's call. Thank you very much for your participation. You may now disconnect.
Speaker 6: You You
Speaker 6: you
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