Q1 2023 Air Products and Chemicals Inc Earnings Call
Yeah.
Good morning, and welcome to Air Products' first quarter earnings release Conference call. Today's call is being recorded at the request of Air products. Please note that this presentation and the comments made on behalf of air products are subject to copyright by air products and all rights are reserved beginning today's call is Mr. Sidney men dress for please go.
Go ahead.
Thank you Kelly.
Morning, everyone welcome to Air Products' first quarter 2020 earnings results teleconference.
Sure.
Of Investor Relations and corporate Treasurer.
Pleased to be joined today by 50%.
Okay.
Rather than.
Amir.
Our chief operating officer.
Shafer.
Vice President and Chief Financial Officer, Shawn nature.
Vice President General Counsel, and Secretary and Simon Moore, Vice President of Investor Relations corporate donation and sustainability.
As previously announced.
At the end of March.
We will be pleased to take.
Take your questions.
Earnings.
And the slides for this call are available.
On our website.
Product Dot com.
Discussion contains forward looking statements.
Please refer to the forward looking statement disclosure that can be found in our earnings release.
And on slide number two.
In addition throughout today's discussion we will.
Refer to various financial measures.
Unless we specifically state otherwise.
Sure.
Income operating margin and EBITDA.
Uh huh.
But its a margin.
<unk> tax rate and <unk>, both on a total company and segment basis.
Our adjusted non-GAAP financial measures.
Adjusted earnings per share.
Adjusted operating income adjusted operating margin.
Adjusted EBITDA.
Adjusted EBITDA margin.
Adjusted effective tax rate and adjusted return on capital employed.
These installations of these measures to our most.
Directly comparable GAAP financial measures.
We found on our website.
Our earnings release section.
No.
I'm pleased to turn the call over to.
David.
Thank you Sir.
Good day to everyone.
Thank you for taking time from your busy.
You can schedule.
On our call today.
I am proud.
And the people at air products.
Great results this quarter.
Significant macroeconomic headwinds.
Thank you.
Of our talent.
Dedicated and motivated employees for their hard work.
Now please turn to slide number three.
Safety performance.
As always our highest priority.
As you can see.
Made significant progress since 2014.
But we always work hard to do better.
Our goal is to achieve zero incidents.
Seasonal accidents.
Now please turn to slide number four.
The first quarter of our fiscal year 'twenty two 'twenty three.
Sure.
Ah 64 cents.
Improvement of 16% per share.
As a percent versus last year.
Hi.
Ride performance versus last year.
Was march better than that.
Yes, I can just add.
You need to consider to make a fair comparison versus last year.
<unk> no.
<unk> <unk>.
Packed from currency.
The pump time of <unk>.
<unk> in the first quarter of last year from the Finalization of the <unk> joint venture.
I would like to point out also.
Our guidance for the first quarter cost to deliver earnings per share of <unk> 62 to <unk>.
Actual Etfs is 264.
Yes.
But at the lower end.
The principal reason is that the Chinese and European economies.
Vijay.
Our expectation in early November and then they gave you the forecast.
Now please turn to slide number five.
They are committed to rewarding our shareholders.
Our long term growth strategy.
I am pleased to say that again raised our quarterly dividend.
8% to $1 70.
Sure the quarter or $7 a share on an annual basis.
Sending a record.
Of more than 14 consecutive years.
Is it an increase.
We expect to pay out more than one and a half.
To our shareholders in 2023, reflecting our commitment.
Yeah.
To return cash to our shareholders.
Now please go to slide number six.
David It's Ron.
This shows our EBITDA margin.
Energy costs remain high.
Margin improved this quarter.
Our team has worked hard on increasing prices to offset that.
<unk> costs in our merchant business and they continue to work on productivity.
I would also like to point out.
Three quarters of the margin decline.
Key initiatives teach margin of around 42% is due.
To higher energy cost pass through.
In our <unk> business, which increased sales.
But it does not.
The impact our products.
Now please turn to slide number seven.
In addition to delivering strong results. We also achieved several significant project margin.
During the quarter.
In December 2012.
<unk> two <unk>.
Yet to.
To announce our $4 billion.
Hydrogen project in the United States.
This project will be located.
Okay.
In Northern Texas.
Our latest make our escape zero carbon which is green hydrogen project.
Awesome.
Evolutionary neon Green hydrogen project in 2020.
It will be by far the largest green hydrogen project in the United States.
The information about this project.
Any quality of our December eight net cash.
Yes.
For this project Alright, David.
That's right.
Now please turn to slide number eight.
We were pleased to announce.
In January January 19.
Felicia.
And face up to 12%.
Gasification.
At power project.
Which is 51% majority owned by air products.
Is 60% project finance.
During the first quarter.
At this stage of this project.
It was completed in October of 2020.
Air products contributed.
Hey, Bob.
Davidson.
Towards the purchase of seven 1 billion.
Billion of assets from Saudi Aramco.
In the second phase, which was just completed.
<unk> contributed an additional $900 million for the purchase of four.
$2 billion of additional assets.
Total cash contribution.
This is <unk>.
Yes.
Yes.
The first phase of the project.
80 to 85 cents per share.
On an annual basis, which significantly contributed to our results in fiscal year 2022.
With the completion of the second phase.
We now expect about the total.
<unk> testified to ship of ethane contribution on an annual basis.
This is fully in line.
The announced investors more than three years ago.
Please turn to slide number nine.
I wanted to provide you with an update.
Update on our great Tom Green hydrogen project.
We achieved a trough period. It gives you an update.
Yes.
Very close to completing a major milestone which is shining the definitive project financing agreements for this project and therefore, we wanted to give you an update before you read about that in the next few weeks.
We have been making excellent progress on this what scale project complaining.
Clean energy Good award.
Engineering is now about 30.
8% complete.
Oh, Thanks for sub contract for the project has been awarded.
<unk> electro large areas in the power plants and all of that.
That generation is is completed and construction has started.
LLC joint venture team is in place.
Executing the projects.
Now I'll finish centers.
Yes.
As you know air products has advanced care ownership position.
The New York production joint ventures.
But importantly, and this is very important.
Yes sure.
100%.
The green hydrogen produced an informal clean ammonia produced at this facility.
In an exclusive.
30 year contract.
Okay.
We continue to see.
Again opportunities to use discrete along two bringing green hydrogen.
Yes.
And as I said beyond the solid uptake.
And distribute these products.
Then I wanted to emphasize that our stage price.
All this green ammonia.
Yes.
Is this.
As Ben the negotiate that Richard.
Okay.
In the summer of 'twenty, 'twenty, and the announced the product.
This is a very key point.
That's correct.
Project financing this project and as a result.
Shortly after financing charges and so on.
That has not changed the update price.
Now please turn to slide.
Yes.
Yes.
<unk> net profit.
<unk>, which is owned by Gis.
Sure.
We intended to use our own cash.
Cash to fund to fund the project with both of our products.
But for the past three years, we have seen significant interest from the global financial institutions, we see tremendous value.
Composition of this product.
Therefore.
Okay.
And be considered and we decided.
Is that the best course of action.
And then on cash contribution.
Maximize the return on the cash issue.
Sure.
Non.
Course project.
I've seen this product.
The partner is going to continue with 25% cash and the remaining 75%.
The non recourse project finance.
And obviously, if you are doing non recourse project financing, you'll want to maximize amount of money that you can volatile. Therefore, you put a lot of your ongoing cost and your brain can fall apart.
As in value.
Borrow against that I'm going to explain this a little bit more when we get to the DJ truck.
Business that air products.
This project financing needs.
Our cash contribution to this project will be $800 million less than 800, which is significantly less.
$7 billion.
That's the original.
Expect that this budget would expect us to add these core products point of project finance.
Now please turn to slide number 12.
I am pleased to say that.
Non recourse financing as well.
And the <unk>.
More than two times over subscribed.
The launch of Bob.
We have received commitments from <unk>.
Global financial institutions.
Strengthening their confidence in this project.
Each month, we expect to complete but because the dry clothes achieved the signing of the definitive financing agreements.
Do you expect the financial close to be completed a few months later.
You'll see this as you know as <unk>.
Any progress on the project finance.
Now please turn to slide number 17, Jonathan I can't provide you with an all in view of the total project capital needs.
First Richard.
$5 that you had mentioned before.
The capital required to uncertainty.
Do you have.
It increased.
It has increased by about half a billion dollars due to inflationary pressure that everybody expects.
Any of that issue.
We have further increased the product.
Investment by $1.2 billion.
Inc.
<unk> said, we've been in service for not at depot.
I'd love to provide those services ourselves in order to make the project total SaaS contain and beams.
The dependent on projects.
These include power transmission lines.
Infrastructure that was needed for the product.
This increases the capital cost but.
<unk> operating costs and decided that bodes embedded tradeoff.
Key point.
Question make sure that the product is not dependent on other people are doing.
At England pest control over the whole thing so the F&B come on it.
Everything that they need for the project is the operator.
No.
Onshore will be a subject matter.
Question from people is the $1 8 billion for project financing costs.
That is indeed.
But is there can you explain why that is.
If you are on project financing you want to put and borrow as much money as you can.
First of all.
Got it.
Of that one 8 billion.
Is interest.
Construction.
So we are spending money, we want to borrow that money.
Just to that borrowing therefore that adds up for the networks and ended up the project of about 1 billion Yuan to finance that and bond obligations.
We are using.
Thank you Sarah.
Leasing the land for 50 years.
These target to pay for that upfront.
That reduces our ongoing cost and you can.
Find asset.
That is a few hundred million dollars.
<unk> for the project <unk>.
If you buy the spin as you move forward you decided to buy all the shares front and finance.
Those are the kinds of cost.
Comprise.
Yes.
It makes a lot of sense and that is.
Project Finance <unk> Chen.
Do you have that flexibility.
Speaking.
A lot of them of course that will say to your operating costs.
So altogether the total funding needed for the project is Ethan asked.
Now please turn to slide 14, I appreciate that overview of the funding.
As I described before.
<unk> is made up six 2 billion of non vehicle.
Non recourse debt, reaching target to maximize and $2 $2 billion of cash.
From the cheap partners.
And therefore, obviously.
Potash cash contributions about Ontario, which is estimated to underpin this is as compared to the $1 7 billion <unk> genuity.
Do you expect.
So all in all we are very pleased if not beyond.
We are very pleased with the fact that Dr project financing.
Minimizing our cash flow and we are very pleased that the.
Having said DRP molinar stay the same as the bus in Turkey.
We are very much thinking about projects and the prospects for our budget for the total supply chain as we go forward.
Now please turn to slide 15.
I'd like to summarize the discussion by sharing some thoughts about our strategy.
As I have mentioned before.
Pillars for growth a strategy at air products.
Sustainability is the foundation for both of them.
Sure.
Sure Paul.
Industrial gas business.
We supply our customers and dominance of indices.
Great cloud products.
Yes.
And services at lower emissions and increase efficiency and productivity.
Sure, Paul and Green hydrogen.
So in the future.
You can commit more than $15 billion by 2027.
<unk> delivered a clean hydrogen as a SKU.
Helping to drive the energy transition and moving humanity for.
These pillars, which support each other for success.
In the heart of clothing in fluids.
Then each for the unfortunate needs for sustainable energy and environmental solutions.
I am proud to say that the people.
As we continue to drive results in the near term.
Excellent progress.
In executing our growth project as we move forward.
Slide number 16 summarizes our management bench to close.
Hi.
Great quarter.
These principles are critical to the air products success and will continue to guide us in the future.
Now on <unk>.
Please to turn the call over to Alicia.
Chief Financial Officer.
Thank you Jamie.
You mentioned earlier, we've delivered another great.
Great.
Even with this correction.
Kevin.
Across the region can any equity credit action.
Hey al.
Thanks, Jonathan.
Operating income.
Despite a significant.
A negative currency impact.
Operating margin was up 300 basis points higher.
Last year.
I also would like to thank Ian and Eric Hi, sorry, the continued.
Catherine.
Now please turn to slide 17 for sure.
First quarter results.
In comparison to last year.
Got it.
Hey, Craig.
Okay.
Thanks, Dan.
Okay.
Total company equaled 20 from Finland, and merchant price compared to last year, the fifth quarter, Andy Brown, a double digit increase.
Volumes are up 2% driven by better unquestioned market.
Partially offset by lower capital equipment.
Okay.
Volume for a strong Americas and Asia.
And year.
Currency translation from the strengthening U S dollar.
Reduced by about 6% and lowered operating income by eight.
Okay.
Despite this headwind.
5%.
And operating margins 300 basis, primarily.
Thank you everybody for your questions.
Okay.
Across the region.
Particularly in America.
Improvement in EBITDA and EBITDA margin.
Yes.
Operating margin due to the prior year, one time items.
Item, primarily related to the Japan joint venture.
Our LTE has.
The last eight quarters, reaching 11, 3%.
120 basis points higher than last year.
We expect.
Further as.
As we bring new projects on stream.
Cash on the balance sheet to Mark.
Adjusting for cash are awesome.
30% this quarter.
Okay great.
With me here, a strong prior quarter, which also benefited from spot.
Okay.
Gotcha.
Great.
Across the region.
3% versus last quarter.
EBITDA was down 5%, primarily due to weaker volume, while EBIT margin was up 200 basis points.
Positive price.
More than offset by lower body.
Now please turn to slide eight for a discussion of our earnings per share results.
Our first quarter adjusted EPS was $2.64 per share this year.
64, 6% compared to last year.
Strong price drove the improved results.
Net of variable comp contributed over 75 this quarter as our price actions more than offset the higher variable cost increases.
Cost was 11% on favorable primarily due to inflation and higher maintenance.
Alright.
Volume and cost together added 63 alright.
Alright, 25% increase compared to last year.
However, the negative 15 from currency.
Roughly 25.
Prior year onetime benefit associated with I heard Nathan Thank you, Dan and tea joint venture moderate the strong underlying results.
The Japan accounted for much of the 14th at decline in equity affiliate income.
Favorite on Tencent and Noncontrolling interests.
Yes, that's a tax rate of 19, 1%.
10 basis points unfavorable due to less tax benefit this year.
We expect an effective tax rate of 19% to 20%.
Hi, Greg.
For the quarter and non service component of our defined benefit plan are favorable for last year and unfavorable seven this year.
I shared with you last quarter, we now exclude the component from our adjusted results.
Now please turn to slide 19.
Our distributable cash flow.
<unk> declined driven by improving EBITDA.
GAAP expenses included <unk>.
Cash tax and maintenance Capex.
Relatively stable.
The last three years.
Over the last 12 months, we generated close to $3 1 billion of distributable cash flow.
Almost $14 per share.
I would say our cash flow, we paid over 45% or over $1 $4 billion as dividends to our shareholders, while still having almost $1 billion and that's for a breath.
Our ability to grow distributable cash flow.
Especially in challenging conditions, Jeremy great strength there.
<unk> of our business.
Enable us to continue to create shareholder value by increasing dividend and declining capital for high return projects.
Slide five provides an update of our capex commitments.
As you can see we have over $36 billion of capital deployment potential through fiscal 2027.
It's $36 billion, including over $8 billion of cash additional debt capacity available today.
About $17, we expect to be available by 2027 and 20.
Finally $12 billion artifact.
We still believe that capacity is conservative given the potential for additional EBITDA growth, which will generate additional cash flow and additional borrowing capacity.
Ali we continue to focus on managing our debt balance to maintain our current targeted AG re.
You can see our backlog of nearly $20 billion, we will provide a substantial growth in the future.
However, please note. This figure still includes the second phase of Japan project that was completed in January as well as the capital required for neon added original higher value as we work through the Finalization of that project.
Tomorrow, we will create as $4 billion, Texas Green hydrogen projects when the project reaches final investment decision.
We have already spent over 30%.
74% of the updated.
Eddie capacity, we show on this slide.
We have made great progress, but we still have substantial investment capacity remain high.
High return projects.
We believe that investing in a high return project is the best way to create shareholder value for the long run we continue to evaluate our capital deployment options and determine the best way to use available cash and trusted by our shareholders.
Now to begin the review of our business segment results I'll turn the call back over to Steve.
Thank you Melissa now please turn to slide number 21 for our Asia first quarter results.
Our business has been able to deliver positive volume and price.
The negative COVID-19 impact in certain parts of China.
Volume improved 7% supported by new assets.
This quarter, we benefited from more than 25, new small to mid size traditional industrial gas plants, which came on stream across the region.
Over the last years.
Price was up 1% in total which is <unk>, 3%, which translates to 3% in our merchant business.
Although underlying sales grew 8% versus last year and energy.
Pass through was a positive 2%.
Ross is this trap.
Offset by a 10% the currency issues, obviously transformation.
Negative currency also reduced operating income and EBITDA each by about 10%.
Operating income and EBITDA, both improved versus prior year as better volume and price more than offset the negative COVID-19 impact.
Price and volume also drove margin improvement.
Although China is government.
Z lash.
Rules related to Covid.
Subsequent high infection rates have impacted business activity.
We expect.
Economic recovery in China to take time.
We anticipate power.
Ross the region to continue to rise and we are taking action.
I mean pricing action.
To mitigate the impact.
Sequentially.
Results compared unfavorably to last quarter, which benefited from some specific cost savings.
At this point I would like to turn the call over to Seth to discuss our European results.
Yes.
Thank you Sammy now please turn to slide 22.
As the chart shows our cost for Europe moderated sequentially.
Water, but are still at historically elevated levels.
Our commercial team has executed significant price actions to compensate for these costs in our merchant business and then hardware capacity.
Although we have fully recovered the higher power costs for the quarter, we are keeping a close eye on the dynamic bond market in this region.
As a reminder.
<unk> costs in our merchant business.
Brian refocus when managing the escalating energy costs in Europe .
Our onsite business have contractual bumps, which enables us to spot energy cost to our customers and almost all of our natural gas usage.
On site hydrogen production.
<unk>.
Now please turn to slide 23 for a review of our Europe results.
Successful price actions, we have worked hard to implement the last few quarters drove the significant improvement in Europe's results.
Compared to prior year price increased 14% for the regions corresponding to a 24% improvement in merchant pricing.
Volume declined 6%, reflecting challenging conditions in the region.
Demand for our hydrogen was weaker as customers continued to optimize their own hydrogen operation.
Our merchant business was lower partly due to the divestment of our business in Russia.
Energy cost pass through was up 9% due to higher natural gas cost, although it had no impact in profit.
Operating income jumped nearly 50%, while EBITDA was up almost 30% primarily due to strong price.
Although unfavorable currencies reduced operating income and EBITDA each by more than 10%.
Right, primarily drove the more than 400 basis point EBITDA margin increase.
This was net of the higher energy cost pass through which lowered the margin by about 200 basis points.
Compared to the prior quarter volume was unfavorable due to a weaker merchant this quarter Andy.
The favorable contract amendment in the prior quarter.
Now I would like to turn the call over the Doctor said, Ron for a discussion of our other segments.
Thank you Sir.
Now please turn to slide 24 for a review of our American golf.
Yes.
Underlying sales increased 16%.
Right.
Effect of severe weather in December .
Right and go forward.
This is equivalent to a 26% increase in the merchant business.
Okay.
Our team in the Americas.
The prices coupled with the high up okay.
Volume grew six.
But our merchant and on site.
Volume also benefited from our new shop agreement.
Each will benefit.
Because the next few quarters.
Yes.
Operating income was up almost 30% over last year.
Operating margin improved 300 basis points.
Okay.
Quite a strong price.
Volume also contributed to profit but.
I have several.
Sure.
EBITDA in Peru.
Garden operating income.
No.
Thanks, Amit.
Favorable one time items and lower medical oxygen volume in Mexico.
Impact upsides.
Sequentially, Okay, Brian continue to gain.
<unk> was up 7%, but volume was down three bucks and follow up on the strong pretty good Scott.
Yes.
EBITDA margin improved by about 400 basis points.
<unk> your cost basket.
Doug Good fourth quarter.
We expect our maintenance activity to increase next quarter and barbell with our customer.
Yes.
Please now turn to slide 12.
The 26, our corporate segment.
Yes.
This segment includes our I'm sorry.
So maybe related to this.
Let's turn to clients.
I'm sorry, if you had that Matt Middle East and then before I go into that so.
Let's go to slide 25 fourth quarter view of our Middle East and India segment.
Nonoperating income in that segment are modest and our middle East and then wholly owned operations, although smaller in size.
The segment EBITDA is significant.
GAAP income.
The design specification on Bawag joint venture.
Our India joint venture.
Our products and other joint venture.
For the quarter.
Acquisition benefited.
Operating income versus last year, but was partially offset by maintenance activities.
Okay.
Although our share of the ongoing design gasification and power joint venture with net profit added to the regions.
What do you really get income declined by $28 million, primarily due to the onetime benefit associated with the <unk> joint venture Finalization in the first quarter of last year.
I'd say as we mentioned before we have successfully completed the second phase of the gasification and power project.
And we have begun to receive additional income and the <unk>.
For the quarter.
Now please turn to slide 26, what our corporate segment.
This segment includes our sales of equipment businesses as well.
Our centrally managed functions and corporate costs.
While our standard equipment activities, our LNG business historically has been Bangkok, but our non LNG related to project activity at work so growing in recent years to become major contributors to this segment.
The cadence of project activity and timing of sales and profit recognition can vary the segment results.
Our ongoing efforts to support our growth strategy has also increased the centrally managed function and corporate costs.
For the quarter.
He has been in profit were lower than last year.
Primarily due to lower sale of equipment project activity.
We also continue to add resources to support our growth strategy.
I've mentioned before enquiries for the potential LNG projects have picked up recently.
However, these projects take time to go to.
What excited however that we have signed one new agreement in the quarter and working hard to sign additional New York projects.
At this point I would like to begin the call back over to safely to provide his closing thoughts.
Thank you.
Thank you Dr.
Now please turn to slide number 20.
The outlook for the global economy remains uncertain.
However, we remain confident in air products.
And the prospects that we have in the future.
And the stability of our business.
Which is supported by our robust capital deployment strategy as UFC.
Therefore for fiscal year 2023.
<unk> left our guidance unchanged.
Five <unk>.
Significant uncertainties that exists in the world.
For the second quarter of fiscal year 'twenty three.
Which is usually our weakest quarter.
Our earning per share guidance is $2 50 to $2 70 up 7% to 15% over last year.
We still see our capex at $5 to $5 5 billion for the year, including the approximately $1 billion.
For the completion of the <unk> project that we just talked about.
Now please turn to slide number 28.
We included this slide in all of our earnings.
Call presentations.
It describes very clearly.
That's an enterprise can only be successful.
Over the long term than the people in the enterprise are motivated and committed to our mission.
At Air products.
Hi, Chris.
As a company is to bring people together.
So that they can collaborate.
Innovate solutions to the board's most significant energy.
Environmental and sustainability challenges.
We continue to build a diverse and inclusive culture that are more than 21000 people.
They belong and matter and our multi vacant.
To achieve our goals.
I believe air products is uniquely positioned.
To help the world transition to a cleaner and better future.
And we are putting our efforts towards that each and every day.
Now.
We are very pleased to answer your questions.
Operator, we are ready for questions.
Thank you if you would like to ask a question you may signal by pressing star one on your telephone keypad. If your speaker for if you're on a speaker phone. Please make sure. Your mute function is turned off to allow your speaker allow your property.
Allow your signal to reach our system.
Once again star one for questions. We also ask that you limit yourself to one question and one follow up question. We will go first to Christopher Parkinson with Mizuho.
Great. Thank you so much.
Just given all the macro uncertainty that's prevailing across the globe can you just give us your current assessments.
Of where you think you stand as well as the.
The operating rates.
Regional merchant businesses. Thank you.
Thank you very much Chris.
Right now obviously.
It's very difficult.
Current circumstances to predict.
While he is going to happen in the next that too.
A few quarters, but we feel very confident about our own operations and about our ability to keep our plants running and service our customers and as I look around the world. We obviously saw the Chinese economy, a little bit <unk> in the first quarter than we expected.
Okay.
<unk>.
My view on the Chinese economy is.
We have to wait and see how it comes out after the Chinese new year's.
We don't expect any kind of disaster or any bad news, but it's just a question of that the rate of improvement how would that be a very good position that we have taken action to increase prices and most important as I said, we are benefiting from the fact that we add 2025.
Smaller projects that we usually don't announce.
But.
Standard industrial gas projects that are coming on stream and they are contributing so we feel that we will be able to deliver on Asia in general.
In Europe , the economy again was weaker than we expected in the first quarter, but right now energy prices seem to have stabilized.
Prices have stabilized natural gas prices have not yet, but overall, we think that you should be okay in Europe and in the U S. You saw actions.
Last quarter because.
Overall, 7%.
There are for the whole company, we got 7%, but in the U S. We got almost 14% price increase this translates to almost 19, 20% cost increase on the merchant side.
Latin America is always very beach, so John talked about it too much. So all in all we feel pretty confident that we should be able to deliver.
The forecast that you have given you for these.
Okay.
That's helpful and just as a quick follow up just given now that investors and your team has it had an opportunity to digest.
The IRI is there Eddie.
Key opportunity, that's let's say specific to air products that you believe investors are missing is there something on the Haikou facility retrofits.
Anything else in terms of that Mutualization over the next several years that we all should be paying attention to thank you.
Yes, Chris that's a very very good question.
I don't want to comment too much about the Iot benefits because the law is that everybody can read that but the opportunities for air products that video definitely Florida a true.
Number one we did put catlin captured on our existing facilities.
That has two benefits on that number one to reduce our.
Emissions and number two it gives us an opportunity to have it.
Lower carbon hydrogen that we can sell at higher prices, we would definitely do that then.
Benefiting.
From the Iia unapproved, yet announced before.
Which was the project in Louisiana.
That project with economic space.
No benefit on $85 for synergy capture we were counting on about $60. So that additional $35 enhances the returns on that project.
And then we will do.
Significant amount of great projects in the United States, We did announce the project in.
Northern Texas.
And we.
Definitely are working on other mega projects.
To produce green hydrogen in the United States, the Iowa credits for $3.
For Green hydrogen production plus the fact that if you make it integrated facility you will also get credit for that.
Renewal power that you generate makes it very attractive to make these investments in the U S. We are extremely well positioned with our pipeline and the Gulf Coast and did our Knowhow and beyond.
<unk> capabilities to do things that other people cannot do.
Because antibody cannot be take advantage of that.
Credits, if you can do something with the hydrogen.
People say.
Okay, I'm going to build the plant.
To produce green electricity and produce hydrogen, but then what you do with the hydrogen.
Air products is one of the very few companies, who knows what to do with the hydrogen hydrogen conflict. Therefore, we are in a very unique position to take full advantage of the IRS is inflation. We are very pleased with that that was a very significant step forward in the United States.
Dan.
It's a very good news for US is that that has prompted.
Other countries to transaction and our team yesterday the day before that you saw an announcement from the European Union.
That.
They are going to add.
Our program of about 280 billion euros to promote the same kind of things.
We would obviously be very good for us because we are a global content.
Okay Chris.
Very helpful. JP. Thank you so much.
Thank you.
Okay.
We will take our next question from David Begleiter with Deutsche Bank.
Thank you. Good morning. This is Anthony <unk> on for on for David.
Steve you mentioned in your slides.
Your new capital structure, and the changes on the capital costs and contributions to Neil.
What is the return on this project versus what you were expecting when you first announced the project in July of 2020.
Well the thing is that I have three partners.
I don't want to speak for them and disclosed that return on the project.
But the team that you have to take a look at is that we don't look at the return on the project because they are going to take the offtake and sales that and make money on that and that is called <unk>.
Look at the return on the total investment.
So on that front the return on that is going to be in accordance with what they have given you a guidance, which is for every dollar that you invest you should expect about 10 cents of operating income.
So you have to look at the total supply chain from air products point of view and.
In terms of the specific retailer on the property that is up to my partners to decide whether they want to disclose that or not I don't want to disclose that because for us that doesn't mean anything is the total supply chain.
<unk> seen that you need to focus on is the fact that the.
Our Offtake, Inc.
Tony.
At the same price as it was negotiated in 2020.
Okay.
Yes, understood and as a follow up on the Green ammonia.
If you did not lock in this price to purchase.
Much higher do you think it would be today versus when the project comes on stream.
Well it depends on budget would have negotiated with.
<unk>.
Partners.
Yeah.
Sure.
I don't expect it to have been significantly different but.
Because I mean, you talked about additional capital cost, but as I said a lot of the operating cost is being capitalized so that necessarily doesn't affect the return on the project, but again I just don't.
I have two parts to other partners and I respect them and I don't want to disclose their financials.
Sure.
As I said pleased from an air product point of view you need to get the total supply chain.
Okay.
Yes, thank you very much.
Thank you Sir.
We'll take our next question from John Mcnulty with BMO capital markets.
Yes. Good morning, Thanks for taking my questions safety so.
You seem excited about the price of the off take for Neon basically remaining flat. So I guess why is that are you seeing interest from buyers right now that are higher than what you thought they would be at the time that you originally signed into this contract I guess, how should we be thinking about that.
Well I think that's one way of putting it.
I think that we see a significant interest in the product.
And obviously as a business man.
I would like to update anything that we buy.
Most favorable price that they can get but I'm, particularly interested in the region I keep mentioning that because.
I just wanted to make sure that depot advanced thing that.
These guys said $5 billion <unk> billion therefore.
Sure.
Yes.
Price of ammonia must have gone up it did not.
And it's okay.
No.
One other thing John .
And I do.
Beyond project financing this thing with some of the biggest banks in the world, giving us money.
We have looked at this project they have looked at the end of the project and they are getting to financing.
So I guess they all think this is a good project and have good prospects and theyre going to get their money back.
So.
Yes no.
Sure I guess, maybe maybe looking at it from a slightly different angle. So when you think about like.
When I think about project financing the benefit of it is the 10 to juice the returns a little bit more.
But it does take out some of the EPS.
The equity that.
Thats being put to work because theres less equity involved I guess when you think about the total capital of the project overall, the distribution side as well as the actual production side.
And the economics around that I guess, how has that changed.
Relative to what you thought originally.
With the project financing now in place.
Hi, John It is obviously improve because im putting less cash on the production side.
So and as long as the price of ammonia is the same so.
We have made an improvement.
If you have another $1 billion that we were going to invest to do other things.
Got it fair enough. Thanks very much thank you.
Yes.
We'll go next to John Roberts with Credit Suisse.
Thank you Exxonmobil recently announced a blue.
Hydrogen project in the Gulf Coast that includes ammonia as well and it looks like it has merchant.
Ambitions here.
Since refiners are a large customer for air products help us understand would you bid for that project as well or how do we think about how your customers might play in the hydrogen and potentially ammonia market.
Well okay.
I can't comment on their strategy of eggs.
Exxon and what they want to do.
<unk>.
This is a competitive board.
If <unk> decides that they want to get into the merchant ammonia business and make glu ammonia to sell than we did have an extra an additional competitive.
Hydrogen that they are going to produce.
A significant amount of that from what I understand is going to be used to replace the natural gas that they are using because the whole purpose of the project is to reduce their carbon emissions.
So if they do that now are they going to make so much.
Yeah.
Hi, Jason.
Thanks, John .
To do merchant.
Have any visibility on that and all of that that's up.
To them to do what they want to do.
We would ask.
You know what we are doing that.
Got it.
Sure.
Im sure other people get attracted to these projects.
Yes.
It's Ron.
Looking about these things is actually doing the details.
<unk> announced theyre doing the feed.
They do the feed and the asset costs and then they find out about the total cost is and all of that.
But.
It's entirely up to them.
Okay.
They decided to do it themselves which is fine.
Okay, and then since the Alberta Blue hydrogen plant will be the first really big project up online do you think youll get a premium.
All of the hydrogen out of that plant or do you think some of the hydrogen is going to be sold the existing great hydrogen market.
Well.
Interesting thing is that you mentioned Exxon or project in Canada.
The customer for that project is Exxon.
We are right now almost sold out of that project.
And they are getting a significant premium yes because.
Exxon through their subsidiary, which we have announced this publicly so I'm not putting anything new.
Due to their size.
<unk>, which is a chemical limited they are going to use a new hydrogen begin them to produce renewable diesel that they are going to set in California at premium prices and as a result, they are giving us a significant premium for the blue hydrogen that they are buying from us and Canada.
Great. Thank you.
Thanks Peter.
We will take our next question from Steve Byrne with Bank of America.
Okay.
Yes.
Some pretty hefty merchant price increases in Europe , and Americas. My question for you is.
How much of that had a surcharge in a given gas costs have dropped in both regions could could you see some sequential decline in <unk>.
Racing in those regions.
Well.
<unk> that youre going to see this very relevant obviously have increased the prices in order to recover the power costs.
Obviously at some point in time, if the power costs go down.
Some of the customers would expect us to decrease those prices.
In addition to that and we did make a decision based on supply demand situation as we always do.
So.
It is possible, but if the price declines in the future that would be as a result of power price declining <unk>, there shouldn't be an impact on our bottom line.
Okay, and just a follow up on neo has been good.
Following up the chains.
It's still a.
A couple of Gigawatts electrolyze their capacity or has this changed could you produce more than the one 2 million tons of ammonia. It seems like you could with battery backup is that also enabling us to lead.
<unk> ammonia price from this project.
Steve you are asking.
Question.
So the general discussion quite a bit.
We are.
This is the first significant projects that we are doing for green.
Obviously installing.
Significant amount of.
Wind and solar capacity and.
And Dr. Installing a significant amount of extra adviser capacity.
These electrolyzed centers as the wind and solar we do actually.
And thus, giving us the capability of making a lot more than the $1 2 billion, but I don't want to get ahead of ourselves I don't want to promise that but you are on the right track that there might be an upside in that side.
And I personally think there could be an upside, but you have to vacancy.
Thank you.
Thank you.
We will take our next question from Mike <unk> with Barclays.
Great. Thanks, Good morning, Doug.
First question on Neal on the new $8 5 billion or kind of all in Capex number can you just give us some comfort of framework around how locked in that number is obviously theres still about 70% or so of the engineering work left just any comfort around kind of what youre doing to make sure that number is not going to move again say in the next three years.
<unk>.
At this point I can say that.
We had enough contingency there.
And we have done enough work that I think thats a pretty good number.
But.
No.
Nothing descended percent, but I feel pretty good about that number.
At this stage.
Got it makes sense.
I have to ask yourself on the line who is in charge of ours.
Automotive engineering and all of that but.
I think Furthermore, I feel pretty comfortable that that is a good number.
I spend a lot of time, making sure that we are doing project financing as you don't have to go back.
For additional financing, but we feel pretty good about the numbers at this stage.
Hi, Dan.
Engineered.
Besides the engineering.
Advocates.
They may get orders on the projects. So basically thats also mark standpoint.
Equity section.
Perfect.
That's all in place.
Great. Thank you.
Okay.
Yes.
Yes, and just as a quick follow on with the new capital structure.
That obviously can sometimes come with some level of covenants or restrictions around distributions. So just how should we think about the cash dividends from the projects should they generally match income or are there. Some constraints. There are restrictions around the cash you can get back to air products.
Well the cash income from the project itself. Obviously the project, we would have a cash flow that we would go to servicing that debt and if there is any extra.
Debt to try hope there is that we'll come back to the.
Shareholders.
Estimates as a structure.
Got it.
Thank you.
We will take our next question from Kevin Mccarthy with vertical research partners.
Yes, good morning, with regard to Asia, you had healthy volume growth of 7%, but in the prepared remarks, I think you made a comment that you started 25, new assets in the region over the past year, which.
Sounds like a fairly large number so I was hoping you might be able to put that into context for us.
Looking ahead would you expect the contributions from those start ups to remain.
Elevated or regress by some amount how would you describe the shape.
Of that profile in Asia.
Kevin got honestly Thats, a very good question for Stuart Good morning.
Yeah.
Yes.
This is a good opportunity for me to make a comment.
And at other times people think that air products only can be doing to make our project.
We have our base business and we are making good progress in our base business. We are getting our share of all of these are small.
We don't announce it every time beyond the $50 million of nitrogen generator, but these things do add up.
25 of them on stream in Asia, what they are doing is that they are helping us to deliver the volume increases. Despite the fact that you.
You know that economic activity in China was almost.
It has gone from <unk>.
67% to back to about two 3%.
So we are getting the benefit of that and these things will help us in the future to make up for any weakness and therefore continue to help us to deliver a good result for that region. Despite the fact that China might be flat or slowing down. So these are the good things they are going to <unk>.
And we are very excited about.
Okay. Thank you for that and then secondly, if I may in North America.
You made a comment that volume benefited from a new short term agreement can you elaborate on that what impact did that have in how long might it persist.
Well.
I don't want to disclose that.
Name of the customer and so on but we did get an opportunity because we could serve.
Estimated that other people couldnt, Sir so we did get.
We did get that benefit, but I would like to turn it over to Melissa to expand on that position.
Thank you.
From a volume perspective in the Americas.
Agreement work is that 3%.
The increase in the volume and we will see that over the next four quarters.
So that's what we estimated 2023.
That's helpful. Thank you very much.
Thank you.
We'll take our next question from Jeffrey Zekauskas with J P. Morgan.
Thanks, very much in the in the knee.
Ammonia production project did the net present value of your one third ownership stake in your mind change that is you had a net present value assessed.
Assessment is it different now or is it the same or lower or higher.
Well good morning, Jeff Good morning.
At that.
We had a net present value reached.
Which was the discounting of all of the cash flows that we expect in the few years.
And now with the project financing is that iron ore lower.
I think it should be about the same or even better because we are doing project financing jet.
Great.
You use it you are using more capital or the whole theres more capital that's going in.
Second question is have you determined how much ammonia you are going to make in your Louisiana project.
And does that project.
Is it necessary for there to be a substantial amount of ammonia for that project to go forward.
Jeff that's a very good question.
Disclose publicly at that project will produce about 1850 tons a day approximately.
Hydrogen yep okay.
That project is.
The next to our pipeline.
So we.
We are assessing.
How much of that.
Free cash flow through the pipeline in itself.
Because 1850 ton of that.
Hydrogen.
It is not that huge compared to the total sales of hydrogen that we have on our pipeline.
Because our pipeline over there can do significantly more than that.
Significantly more than that.
Therefore.
One scenario.
Is that all of the questioners on the pipeline.
Due to environmental regulations or debate legislation develops and saw decide hey, Yvonne blue hydrogen.
Then we can just have.
The hydrogen into the pipeline.
Then it is possible that not all of them.
Some of them would say no honestly, okay, great hydrogen than they did have excess hydrogen too.
And make it into ammonia.
Therefore, what we are doing is that in terms of the actual building of the plant.
We are building the plant.
To have ammonia facility that means even better ammonia plants.
Then we will have ultimate capacity.
Two.
And that flexibility.
To use as much of the hydrogen the pipeline, but as you can use an ATM to ammonia.
Yes, ammonia plants themselves yet in the context of the overall don't cost that much.
Ammonia plant once you add the infrastructure, putting your $1 2 million ton ammonia plant by itself is already $250 million.
No.
We are not going to lose anything significant and by having basically it's like a spare capacity.
And then the other thing is obviously how is the demand for our not blue ammonia develop as we go forward in the next few years. So we are building a plant.
To give us the flexibility and this is the beauty of this situation that air products has that nobody else has is that we can make through hydrogen.
And we have total flexibility that we can sell it as hydrogen or they can sell it as a.
As ammonia.
Because of the unique situation because we have the pipeline and as a result of that our teams we can maximize the profitability of that better than anybody else for them, possibly can.
So you haven't determined how much ammonia you are going to make yet.
I said.
We haven't determined how much ammonia or are you going to sell.
Yes.
How much ammonia plants, you're going to build.
Great. Thanks, so much.
Thank you. Thank you very much Jeff.
Yes.
We will take our next question from P J <unk> with Citi.
Yes, good morning.
Good morning T J how are you.
Good.
Kathy.
On the New project you had inflation and then you also had that $1 $2 billion of increased.
Financing costs et cetera.
What is it that is not the financing costs I'm sorry, that's the additional cost.
Additional scope I should say and youre going to build transmission lines yourself et cetera.
What does that mean does that additional scope mean that the project could get delayed or do you think it's still on time for 2027.
We will be on time for 2020.
Additional scope is something that.
We had been thinking up and planning on it and.
Ben.
The progress on this project you said at the beginning you go over there and you say, okay I'm going to build the plant out of the infrastructure is already there or it's going to be there and therefore, we can draw on that as the project goes forward, you'll start getting a little bit concerned about the ability of other people.
To build teams that you need therefore.
With the project Finance, we decided that we're going to do all of that that increases the capital by this saves us operating cost as I mentioned before.
Okay. Thank you and there was a there was a clear disk.
Discussion about hydrogen price.
They give us $3 per kilogram benefit to green hydrogen but.
But how much of that you think you and the industry will have to pass it onto customers.
They get lower hydrogen price and I think that's the ultimate goal of the government is to lower the hydrogen price. So do you have any thoughts on how the industry.
The hydrogen pricing evolves over time.
Thank you.
Thank you P J obviously.
That would be the case, because if you are building the plant.
And we are going to get $3 for the green hydrogen and as Ive said that <unk> is actually more because if you build an integrated facility.
We are doing that means that the.
Then and the solar is part of the project you also get a benefit.
For the wind and solar so that total being translated to kilogram of hydrogen is more than $2. So obviously when the new projects. We expect the return if you are getting the subsidy that improves the return so with this pass through some of that to the customer and we will achieve the goal of the government which is the golar.
Is to fundamentally reduce the price of hydrogen so that people can convert that is exactly the goal and that is exactly what will happen P. J.
Thank you very much.
Thank you Sir.
We will take our next question from Mike Sison with Wells Fargo.
Hey, good morning.
So on slide 30, you talk about downstream hydrogen supply chains about $2 billion between 25 to 28.
Is that $2 billion number.
It could go up as as.
As new projects are you look for new opportunities in the supply chain at any thoughts in terms of the timing between 25% to 28.
Well that was an estimate before about the $2 billion, but that number.
That.
Could be that could be more and let me just explain.
It depends on.
The customers.
It is possible.
That you can because when you look at the customers.
There are some customers.
That are like the mobility.
That you need a lot of the infrastructure savings.
You have to bring the hydrogen to a port.
I have an ammonia tank crack it.
Nick horrified.
The trucks to go and delivered to the gas stations and sell it to that that is one way offsetting the hydrogen.
And now they are there is that somebody develops ships.
That can use.
Ammonia.
And they are on green ammonia.
And in that case, there is no infrastructure because of the shift can darken Neal.
The ammonia unit and then two as it has fewer than there is no interruption costs.
Another question that could be somebody that you bring the ammonia to report.
Youre crack it and then you put it in our pipeline and that goes into a chemical plant or some other kind of a plan.
And they use all of that then you don't have to requalify, you don't have to build the infrastructure for trusted zone.
So the cost of that infrastructure is very much dependent on.
The exact kind of customers right now our best estimate is that with the $2 billion, we will be able to build enough infrastructure to use the capacity of Neil.
But that could be significantly less.
It could be more depending on exact infrastructure budgets. It is more than that means that the infrastructure needed.
For the trucking is obviously more extensive which means that the price of hydrogen at the pump is a lot higher than the price of selling it if you didn't have to do qualify.
So if you adjust for itself.
Okay got it thank you.
We'll take we'll take our next question from Vincent Andrews with Morgan Stanley .
Hi, This is Steve Haynes on for Vincent Thanks for taking my question just wanted to ask a quick one on the other cost line in your EPS Bridge. It was about 11.
A headwind in the quarter.
How should we kind of be thinking about that going forward. Thank you.
Well the other costs I would like to comment.
Comment on that.
Absolutely absolutely.
Hotline, we had a number of components.
Quarter play into there and we had a sizable maintenance both in the Americas as well as American beer.
Joint venture <unk>.
<unk> segment.
So that added additional cost this quarter, we should see that go down next quarter. This cost inflation. However is a driver and that 11 10 and that will be consistent throughout this fiscal year.
Thank you.
Thank you, we'll take we'll take our next question from Josh Spector with UBS.
Yes, hi, Thanks for taking my question just on the near term when I look at your next quarter guidance.
Yes, Dan close based on your math, maybe at 10 or 12, or so sequentially I would think theres, maybe some merchant benefit as energy prices come down maybe there's volumes down a little bit but December quarter was super strong from a demand perspective, So I guess why wouldn't earnings be up sequentially, given some of the tailwind what am I missing.
I don't think Youre missing anything your logic is very.
Correct.
Only thing is that when we make guidance, we have to kind of be cautious to make sure that we delivered the part that we are very concerned about and we don't have any visibility.
Is what is going to happen in the Chinese and European economy, I don't know how the Chinese economy is going to come out of the out of the.
The new year.
Holiday.
And we don't have much visibility.
Seeing how energy prices are going to develop in Europe that is volume a little bit cautious and that you are very correct to kind of say, maybe you are being conservative maybe VR, but we just wanted to make sure that.
We don't get ahead of ourselves.
No fair enough appreciate it.
Sure actually thank you.
Sorry, if you had more go ahead bill I could ask a second quickly to Canada.
Project financing.
Was that expected that anticipated in your economics does that change your thinking at all.
Yeah.
I'm, sorry, I didn't answer.
Thank you for asking that so just to be clear.
<unk> project, we have no project financing.
Exactly.
On the project financing.
This project by project.
<unk> B.
It's a very complicated project and so difficult to finance Neon Australia easy because is it updated pricing on it but you can calculate it now with our projects in that changes the $4 billion project at the announced they would most probably look at project finance on depth.
Make the decision.
That is step by step the options that air products has which is.
Is that we have the option of using our own cash because we have the cash.
Have the option of raising money.
According to the market and products and raising bonds.
Then we have the option of project finance.
If we take everything into consideration and come up with the best possible solution.
So the new visa partners and so on they decided project finance was the best fit obviously for project financing Youre going to pay a higher interest debt. If you have gone and increased bonds, but that was a joint decision with the other partners now for the project and takes US we will probably do project finance for the.
Project in Louisiana, we probably would it depends and this is something that keeps our finance department, our Treasury Department busy.
Trying to assess all of these things and we do ask all of those questions and we make the most of your own decision.
Okay. Thank you okay.
Any more questions operator.
And we will take our next question from Laurent <unk> with BNP.
Okay, Yes.
Two questions Okay.
Hello, Good morning.
All right.
My question is on inflation for the rest of the infection risks for the rest of the backlog. So if we take out.
From the $19 4 billion, there's about 15 billion I was wondering if you could talk about the recent data. We also see there'd be Dan will be in a handful of the extra cost and with a young flexibility on selling prices to adjust for that you mentioned returns. Thank you.
Well. Thank you for the rest of our product mix, obviously some of them are.
Sure.
There are other projects that we have in ours.
Actually in a much more advanced stage than Neil So if you have a pretty good feel for their cost and all of that but I don't want to deny the fact that there is inflation, but we just don't think that the inflation team is something that we cannot manage or it was significant.
<unk>.
Cause a struggle because the some of the projects I mean lets take the.
Project in Louisiana.
The project in Louisiana, if there is inflation in our capital cost goes up then we will probably still ammonia on the hydrogen out of that facility accordingly.
So.
It is not the kind of project and we have committed to a sales price for the product and not have to eat.
Project.
That process.
Most of those things are just about done.
So that's why.
You can't manage.
Okay. Thank you Jay.
Thank you.
Yes.
Yes, Tom.
Your question please.
Thank you, we'll take our final question from Laurence Alexander with Jefferies.
Hi, This is Kevin Estok on for Laurence. Thank you for taking my question.
Just giving forecast that will be like we're entering a recession I just wanted to get a sense of how merchant volumes in pricing fared during the last recession.
You didn't give me an overview that I would appreciate it thank you.
Hello.
<unk> continues then I can answer that definitely because the you have seen our results during the last recession the last recession.
Obviously it was in 2008 2009.
Secondly during COVID-19.
Uhm.
We said that industrial gases business, we had another resiliency because half of our business is on track.
It hasn't really affected by the recession.
Contract.
Merchant volumes hugely positive.
But they did not go down significantly we take action to control our costs and therefore, you can take a look at our actual results during 2009 and 2010.
And 2008.
Our results in 2000, 22021, and Youll see that held up.
Thank you okay.
Well. Thank you very much I'm, just saying I'd like to thank everyone.
Joining the call today.
Appreciate your interest and we look forward to these such involve results with you again.
Next quarter.
As I said earlier please.
Yes.
<unk> and <unk>.
Best of all of you. Thank you.
Okay.
Thank you that will conclude today's call. We appreciate your participation.
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