Q3 2023 Air Products and Chemicals Inc Earnings Call
Good morning, and welcome to Air products third 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. Sid Madden was sure. Please go ahead.
Thank you Todd and good morning, everyone welcome to air products as third quarter 2023 earnings results teleconference.
I said man, Jay Shah Vice President of Investor Relations.
Corporate treasurer.
He used to be joined today by our chairman President and CEO Dr. Amir.
Our chief operating Officer Melissa.
Melissa Schaefer.
Senior Vice President and Chief Financial Officer, and Sean Major our executive Vice President General Counsel and Secretary.
After our comments, we will be pleased to take your questions.
Our earnings release and the slides for this call are available on our website at air products Dot com.
There is discussion contains forward looking statements, including those about earnings and capital expenditure guidance business outlook and investment opportunities.
Please refer to the cautionary note regarding forward looking statements that is provided in our earnings release and on slide number two.
Additionally throughout today's discussion, we will refer to various financial measures.
During our earnings per share operating income operating margin EBITDA EBITDA margin, the effective tax rate and our oce.
On a total company and segment basis.
Unless we specifically state otherwise statements regarding as these measures are referring to our adjusted non-GAAP financial measures.
Reconciliations of these measures to our most directly comparable GAAP financial measures can be found on our website in the relevant earnings release section now.
Thank you Sid and good day to everyone.
Thank you for taking time from your busy schedule to be on our call today.
Our committed and dedicated people at air products delivered another set of outstanding results this quarter.
Driven by strong organic sales growth.
Administrated in the strength and stability of our business.
At Air products, we have an excellent and resilient industrial gas business.
This is the foundation of.
He will be are and what they do.
We supply customers in dozens of industries.
Customers, who depend on our people's expertise.
Who make their products and processes more efficient and sustainable.
We have been doing this for the last 83 years.
And we will continue to do all we can to be the safest and most profitable industrial gas company in the board provide.
Providing outstanding service to our customers.
But at the same time.
We are using all of our experience.
Nashville has strengths and core competencies.
This is the board's leading supplier of hydrogen.
Implement a low and zero carbon hydrogen megawatt projects around the world.
When it comes to generating a cleaner future now.
We want to lead the way Decarbonising heavy duty transportation and heavy industry around the world, It's clean hydrogen at very large scale.
This combination is our growth strategy.
And it is the path forward.
Our continuous success and.
Profitable growth in the quarters and years to come.
I want to tank, the hardworking and talented team at air products, we make all of this.
Possible.
Please turn to slide number three.
Our safety performance, which is always our highest priority.
We have worked hard to realize significant progress since 2014.
But we always do drive and strive to do even better.
Our goal is to achieve zero incidents and zero accidents.
Now please turn to slide number four.
Which summarizes our management philosophy.
We have shown you this slide.
Every time that do you have an earning call.
But I cannot emphasize enough.
Our commitment to the basic principles.
Linear in these slides.
These principles will guide our actions in the future.
Now please turn to slide number five.
Our third quarter adjusted earnings.
Oh $2.98 per share.
Improved 40 cents or 16% versus last year.
And exceeded the top end of our guidance for the quarter.
Both price and volume, but again positive.
We continue to demonstrate significant pricing a strained bar our volume improve for the ninth consecutive quarter.
Driven by a strong onsite performance.
Including improved hydrogen demand in the Americas and over 30, new assets that'd be hub brought on stream.
Additionally.
We anticipate the read recently announced $1 billion.
Acquisition of the natural gas the syngas facility and it was based on.
And the new LNG sale of equipment projects.
It will add significantly to our future earnings.
As you can see on this slide.
We have delivered an average of 11% cumulative average growth rate of earnings per share in the last nine years.
Now please turn to slide number six.
We are committed to rewarding our investors by providing a healthy dividend.
Return cash through that.
We are proud of our record of more than 40 consecutive years of dividend increases.
We expect to return more than one and a half a billion dollars of dividend to our shareholders in 2023.
And also this slide demonstrates that we have increased our dividend by an average of 10% in the last nine years.
Now please turn to slide number seven.
This shows our EBITDA margin.
This continues to be my favorite chart.
This graph is self explanatory and clearly demonstrates the significant improvement of our margins as compared to nine years ago.
I had the honor and privilege of becoming the chairman President and CEO of air products.
Now please turn to slide number eight.
I would like.
So again highlight the two fundamental pillars of our growth strategy.
A resilient core industrial gas business.
And the low and zero carbon hydrogen projects.
The megawatt projects.
Each under pinned by sustainability.
By running our existing business efficiently every quarter.
Have you been able to deliver double digit earnings per share growth in eight of the last quarters.
And we continue to advance our blue and green hydrogen projects.
Health Decarbonize, the transportation and the heavy industry sector of our economy.
We expect these waterscape green hydrogen projects to significantly add to our already strong profit stream in the future.
Now it is my pleasure to turn the call over to Melissa Schaefer.
Chief Financial Officer Melissa.
Melissa.
Thank you Stacey.
Stacy has said the consistency and resilience of our business was on full display this quarter, alright, and violent gained 4% and 3% respectively. At all profit metrics were up again double digits over last year.
Difficult environment.
Thanks to the people of air products for your continued commitment to serving our customers around the world.
We are proud that our neon green hydrogen joint venture the world's largest green hydrogen production facility.
Chief financial closing that.
The joint ventures excessively secure over $6 billion of NAV.
Non recourse financing.
20 Global project Finance leaders.
The project was two times oversubscribed, a clear demonstration of confidence in this project now.
Now please turn to slide nine for a review of our third quarter results.
In comparison to last year.
<unk> increased 3% driven primarily by our onsite business.
Merchant price was 10% higher compared to last year.
Seventh consecutive quarter of double digit increases.
This equates to a 4% price gain for the total company with positive pricing across all regions.
Declining natural gas costs in Europe , and the Americas reduce energy cost pass through to our onsite customers.
This 11% decline in sales had no impact on profit, but had a positive impact on margin.
The overall impact of currency was modest however, Asian currencies, where a particular week alert weaker a contributed to slightly unfavorable currency impact against the U S. Dollar.
EBITDA improved 12% as strong price and equity affiliate income.
The contribution from the second phase of the dam project that closed in January .
That offset higher costs.
EBITDA margin jumped almost 600 basis points.
With lower energy cost pass through accounting for acute there other margin improvement.
R O C E progressed steadily to reach 12%, which is 130 basis points higher than last year.
We expect our LTE to further improve as we bring new projects on stream and continue to put the cash on our balance sheet to work.
Adjusting for cash R. R O C. What had been $13, 6% this quarter.
Sequentially favorable volume and price net of variable costs.
Improvement to the EBITDA and EBITDA margin.
Lower energy cost pass through also bet is that EBITDA margin by about 200 basis points.
Now please turn to slide 10 for a discussion of our earnings per share.
Our third quarter GAAP earnings of $2.67 per share.
<unk> non-GAAP items that together negatively impacted EPS by <unk>.
30 cents per share.
First.
We recorded a 23 cents charged for business and acid action.
Second.
Non service components of our defined benefit plan.
And a seven cent cost this year versus a <unk> <unk> gain last year.
Excluding these non-GAAP items, our third quarter adjusted earnings was $2.98 per share topped 40 that.
Our 16% compare.
To last year.
By strong pricing and higher equity affiliate income.
Price and volume and Cos added 34 set to our third quarter adjusted earnings.
Right.
Net of variable costs contributed 52 cents this quarter and volume improved improvements contributed an additional nine set.
Costs were unfavorable 27 driven by.
As well as our ongoing efforts to support our growth strategy, including bringing bringing new assets on stream.
Equity affiliate income was 18 cents higher due to the contribution of the second phase of just and project a good results from our other.
Holiday to joint ventures in the Americas and Europe .
The remaining items, including Noncontrolling interest.
<unk> expense and not operating income and expense together had a modest negative six cent impact.
We expect our fiscal year 2023 effective tax rate to be approximately 19% to 20%.
Now please turn to slide 11.
Our ability to steadily grow this railroad cash flow, especially in challenging condition is a hallmark of the strength and stability of our businesses and underpins our desired dividend and capital deployment program.
Over the last 12 months, we have generated about $3 2 billion of distributable cash flow.
Or over $14 per share.
We prioritize over 45%.
Or about $1 $5 billion as dividends to our shareholders.
Still having roughly one $8 billion to invest for growth.
Now please turn to slide 12.
We have made significant progress in developing our deploying our capital than 2018.
And committing most of our estimate it in basketball capacity available in 2018 to 22007 timeframe.
That's our strategy related to the energy transition.
<unk> well beyond 2027, we have revised this slide to show a rolling 10 year time horizon.
We have not changed any other assumptions for our calculations.
We remain committed to maintaining our current targeted a a two rating.
With our strong cash flow and additional debt leverage we estimate that we can put more of that $30 billion to work over the next 10 years.
Today, we have an $18 billion backlog.
With $11 billion of projects focused on the energy transition.
We believe that investing in these high return projects is the best way to create long term shareholder value.
Now to begin the review of our business segment results I'll turn the call over to Dr start him.
Thank you Melissa.
During our fiscal third quarter, we again saw broad based improvements across our businesses.
Extending the positive trend from previous quarters.
Results improved in each of our regional segments versus last year, driven by strong price.
Volume.
The activity actions, despite the challenging operating conditions around the world.
Before I discuss the results of each region I would like to provide a brief update on our major projects.
First turning to slide 13.
You will see that we have enhanced how we present our major projects.
Finding the project investment amongst.
This defying the long term nature of the related off take agreements.
I'm, highlighting and they'll get transition projects.
We believe this new format.
Was it clear overview of key projects in our backlog.
To provide near term and long term visibility.
Now please turn to slide 14.
I'm pleased to say that the Georgetown gasification project is in operation.
Our team executed the project in the midst of Covid lockdown on supply chain disruptions.
Including several months of severe lockdowns during the startup period.
We were able to complete this complex project with outstanding safety performance and come in under budget.
The team of over 3300 workers during construction completed in Italy, 13 million hours without a lost time incident.
I would like the team would like to thank the team for a job well done.
Our team in the Americas has also overcome many challenges to execute the Gulf Coast ammonia project.
Which had nearly 1300 workers during construction.
And completed over 3 million hours without lost time incidents.
The facility is currently in its start up and we expect to begin delivering hydrogen our pipeline system. This month.
Finally.
Following many years of hard work, we announced the $1 billion acquisition of the natural gas the syngas plant and use the Pakistan.
As part of one of the most advanced energy plants in the world.
This acquisition included the two largest or to sell them a reformer in the world.
In short ATR.
This is the same ACR technology, we're deploying in our net zero energy complex in Edmonton, Canada.
This will further enhance our industry, leading hydrogen production capabilities.
Driven by our own partial oxidation technology in short box P O X.
This is the technology, we have acquired from GE several years ago.
The Sparks technology, which we are deploying in our clean energy complex in Louisiana.
It's been approved in many states for efficient syngas generation for many decades.
We will operate multiple box units and the Louisiana facility.
Box and a T. R are the two leading processes or the production of a blue hydrogen.
Having the capability and the flexibility to.
We use both leading technology to produce at blue hydrogen at world of this scale.
We will further extend our leadership in low carbon hydrogen production.
Now please turn to slide 15.
For a review of our Americas segments results.
Compared to last year Americas, EBITDA was up 18%.
Driven by higher price and volume.
Merchant price improved, 11%, which corresponded to a 4% improvement for the region overall.
Volume grew 6%.
And by on site.
Including strong demand for hydrogen.
EBITA margin jumped more than 1100 basis points driven by strong price.
Lower energy pass through which drove about three quarters of the margin improvement.
Sequentially.
EBITDA increased 10% mainly.
Mainly I wouldn't bet on hydrogen volume and lower variable costs.
Lower energy pass through also drove roughly around two thirds of the margin improvement.
Now please turn to slide 16 for a review of our Asia segment results.
Our results in Asia improved despite the currency headwinds.
The recovery in China, and higher energy costs across the region.
Compared to last year, EBITDA was up 10%, despite a 5% negative currency impact.
Positive price and volume more than offset tie up costs.
Seven when second quarter double digit merchant price gains for the region.
Volume was up modestly on better onsite this is particularly driven by improvement in hydrogen.
This more than offset weaker demand for merchant products.
EBITDA margin was about 800 basis points higher.
And included the impact of lower energy cost pass through.
Which benefited margin by around 300 basis points.
Sequentially.
The region's EBITDA held steady at several energy costs offset the lower price.
Lower energy cost pass through also benefited EBITDA margin by hour by about 150 basis points.
Now please turn to slide 18 for a review of our Middle East and India segment results.
Compared to last year.
But our merchant volume and price, which sells higher but the increased costs negatively impacted operating income.
The second phase of the design and project, which closed in mid January of this year.
Added to our equity affiliate income.
And it drove the region's overall results.
The <unk> project has contributed as we expected consistent with our commitment.
Please now turn to slide 19 for our corporate and other segment results.
This segment includes our sale of equipment businesses.
As well as our centrally managed function and corporate costs.
The sales and profit for this segment were lower this quarter due to lower sale of equipment activities and.
And higher costs, resulting from ongoing support for our growth strategy.
We do however continue to have robust discussions with customers interested in our LNG technology and equipment.
We're pleased to announce two significant sale of equipment project wins with Qatar gas and next decade.
This is in addition to the two project wins announced in May.
We plan to expand our production facility in Florida, again, and expect increasing LNG project activities to improve the segment results.
Echoing what safeguard Melissa have mentioned earlier.
Outstanding results. This quarter again showed the resilience of our people and our businesses.
I also would like to acknowledge the hard work and commitment of our teams around the world.
I would like now to turn the call back to safety to provide his closing remarks.
Thank you Dr. Kerr Chevron.
Now please turn to slide number 20.
Our third quarter results.
Exceeded our previous guidance.
However, the outlook for economic conditions around the world.
Remain uncertain.
We have again raised our fiscal year 'twenty <unk> guidance by.
By 5% at the midpoint of $11 40 to $11 50.
Earnings per share.
For the year versus the 11 30 to 11 50, we had provided last quarter.
For the fourth quarter of fiscal year 2023, our earnings per share guidance is $3 <unk> to $3 14.
Up 7% to 10% over last year.
We still see our capex for the year to be about five to $5 5 million.
Now please turn to slide number 21.
The people of air products.
Our passionate.
About helping to solve the world's significant energy and environmental challenges.
The commitment and motivation.
Continues to drive our performance.
In our core industrial gases business.
Demonstrating continued strength and resiliency.
Even against soft economic backdrop.
And we continue to bring plants online and enter a new phase, where we will bring additional larger scale projects on stream.
As a result of that.
We see.
A great future.
For air products.
And that is what makes all of us very excited about working here and being part of the global energy transition.
Movement.
And at this time.
We will be delighted to answer your questions.
Thank you operator, I would like to ask a question. Please signal by pressing star one on your telephone keypad.
You are using a speaker phone. Please make sure that your mute function is turned off to allow your signal to retailer equipment.
Please limit yourself to one question and one follow up question.
Again, you May press star one to ask a question.
We will take our first question from Christopher Parkinson with Mizuho. Please go ahead.
Great. Thank you so much.
<unk>.
One of my emerging favorite slides as slide 12 for what it's worth specifically the estimated future capacity.
In terms of what you can allocate the projects in the coming years.
Can you I understand this is a very fluid situation, but can you just kind of help us with a thought process around how much you believe could or will be allocated to projects are oriented to the U S. I array or something along those lines just to help us really think about that.
Next few years on that capital allocation process. Thank you so much.
Thank you very much Chris.
You are asking a very good question. We provided this slide to give you a 10 year view because they are at the long term strategy and they won't get there.
Investors to kit as create a view of the future as we can provide right now.
You. Obviously appreciate that there is a very dynamic situation about different projects in different parts of the world.
I'd like to say that the comment that I make is based on what we know today.
They based on that I think a significant part.
That investment is.
He is going to be in the United States as a result of.
Of the IATA and the opportunities that that creates for us.
But obviously.
The board is developing different people are coming up with different projects and all of that and the participating dose, but right now I would say that the significant part of that $30 billion.
Would it be investments in the United States that we have already committed to and we will commit as the as we go forward.
Okay Chris.
That's fantastic. Thank you so much and just a very quick follow up as a very quick follow up can you just give us just a very very brief overview. There are three questions I'll take the buy side inclusive of obviously a longer term holders.
The update on the Japan to ramp obviously I think I believe that started in January between that Gulf coast ammonia and retire those all trending basically in line with your expectations and just trying to compartmentalize those names as we're thinking about fiscal year 'twenty four thank you so much.
I'm just trying to make sure I understood your question because the silos and.
Non performing as expected.
I would like to have the.
Our doctor centered on as the chairman of the company that.
We have for them to run <unk>, so I'd like to turn it over to him to answer the question yes.
Yes, Chris everything is going as.
The blend really since we took over the group to assets would've been commissioning then putting them on a stream.
And really supplying the product to.
Our to the grid and supplying also products like hydrogen to the refinery any steam so things are really going well would that project I mean, we're really fortunate to have a very strong 800 people doing this running that facility.
Thank you. Thank you that's for sale.
Thank you.
Well move to our next question from David Wang with Deutsche Bank. Please go ahead.
Hi.
I guess do you have very strong March.
Margins this quarter in Europe .
Sustainable are those margin levels, then how should we think about that going forward.
Well. Thank you for the question obviously from my point of view I Hope it is sustainable for a very long time, but.
But obviously time will tell.
As you know very well as a matter of policy.
Not comment on forward pricing.
And the comment on the pricing that we have achieved but we don't comment on cohort pricing. So our goal is to maintain our margins as high as possible.
Create as much value for our shareholders, but it is that you know I don't want to make any predictions.
Do you have any additional comments on that.
<unk>.
But no doubt about it the industrial output in Europe is not growing at all I mean and that is definitely a challenge that we're monitoring.
I mean, some of the segments, we support is better than last year.
We see a gradual improvement in electronics with some of the customers there.
Again.
Measure of caution.
Okay. Thank you and thank you.
Your corporate costs for this quarter, how much was the increased loss from lower equipment sales and then how much was from increased investment spending.
I'd like to turn that over to Melissa to asset.
So thank you very much Stacy.
Just to make sure I understand your question, you're asking what was the additional contribution from our sale of equipment.
Hi, Yes, Europe corporates corporate cost help her or it's higher than the prior year I guess, how much was from lower equipment sales and then how much whats crown increasing investment spending next quarter.
Yes. Thank you very much. So I think you asked a great question and I will focus on costs not just within our corporate segment, but perhaps across our organization. So a portion of our costs are really associated with that good results right. We increased our variable pay program across our organization as.
Our results come in positively. Additionally.
Additionally, like most organizations, we continue to feel the burden of the wage inflation across the organization.
Finally, another notable contribution is the fact that we have several plans that are pre onstream for commissioning phases.
Obviously add to our headcount in preparation to the Onstream as those plan.
Which will add to our cost stack for a period.
Without support from the program from the invoicing of those plants.
Three combined is really where you see the cost increase across the organization.
Okay. Thanks, Okay. Thank you.
We'll move to our next question from Steve Byrne with Bank of America. Please go ahead.
Yes. Thank you Youre increased demand that youre seeing in hydrogen just curious, which which of your pipelines are you seeing that from and are these your legacy refining customers or is this from renewable fuel.
And would any of those.
Customers.
Justify your installing some carbon capture in the near term to generate some blue hydrogen for those customers.
That's my San Antonio in terms of that yes, yes, Steve good.
Good question, we really see the demand for hydrogen.
It's really significant I mean, the main driver for us for our businesses because you know that we have the biggest network in the world in the U S Gulf Coast.
Thats really fully utilized I mean, we have they are more demand than we can really supply.
And definitely there is also demand for lower carbon hydrogen for the renewable diesel refinery. So it has been really very robust we see some activity orders are picking up the hydrogen also in our Rotterdam pipeline system. They are the same thing we see it in Canada, California. So overall really been robust that means the demand for hydrogen with also.
There are some pockets for low carbon hydrogen.
Okay, and then just curious yes, thank you with respect to neon.
Have you.
Reassess, whether or not you need to invest downstream and distribution.
It's been three years since you announced that project and you're at that time, you were thinking you would need to build some some downstream pipeline capacity for the for the.
The Green Green ammonia do you do you have.
View now of where you might be able to sell the green hydrogen from Neil.
Yes, we do and we have announced some of it and I can elaborate on that right now.
We see a significant demand for that product in Europe .
Because it is being very.
Clear with the policies that.
In Europe , basically most of Europe , especially Germany decided to go green.
As a result of that the plan to build at least.
Three terminals in Europe one.
One in Hamburg, one in Rotterdam, and <unk> have any England to bring the product.
Ammonia into those ports.
<unk> and then sell it or mobility and for industrial applications, we might add additional terminals. In addition to that.
There is a demand.
Potential demand for that green hydrogen and other green hydrogen that we might make in the United States.
And we are making in the United States and their state of California because of the.
The regulations that have been put in place in terms of conversion to very low emission.
Very.
Nichols therefore.
Possibly see in other terminal.
Also in California.
That is our current plans, but this is a dynamic situation the regulations around the world continuous changing and as that develops we will obviously update you. There is significant demand being generated and being discussed in Korea. It is obviously the demand for blue hydrogen in.
Japan, and all of that but we will update you.
As we go forward, but that is how we see it today.
Okay.
Yes. Thank you.
I'll move to our next question from John Roberts with Credit Suisse. Please go ahead.
Thank you Hi, Seth just to ask one question here when do you think we'll get the first conversion of an existing U S hydrogen use hydrogen plant from great to blue.
John that is an excellent question.
I can definitely confirm that we are working on that.
I do not want to predict an exact time a schedule because we are talking to customers and it is sensitive and they don't really want us to talk about these things too much but.
As you know better than anybody else.
The significant number of <unk> in the United States that generate <unk> and we are very interested in capturing the cotwo.
As many of them as possible and with the help of the IRS and the demand and the higher prices that few are willing to pay for blue hydrogen we have a significant opportunity on that.
And we will do we will do that.
So how long do you want to make any additional comments on that.
Okay.
Yes, good morning safety.
I wanted to John how are you doing great.
Great Great hopefully you are as well.
I wanted to ask on the Uzbek project that Youre, bringing on I guess I guess a couple of questions on that can you help us understand because it looks like it comes on at some point relatively early in 'twenty four but so can you help us to understand the timing of it and and also the EPS contribution that you expect it to give.
As you look to 2024, and then I guess also tied to that project, yes, how do you think about the returns for it I know you look for a 10% plus return, but I also know you risk adjust those as well so I guess, how should we be thinking about that for for the use back project.
Well I will.
I'll make some general comments and then I'll turn it over to Dr. <unk> to kind of elaborate even more in detail but that.
We expect that project, which is a very good projects is Doctor said Han mentioned.
That project has the largest it's yours in the world and we are very happy to own it now.
We expect contribution from that project in our bottom line.
For sure in 2020 in our fiscal year 2024.
In terms of the exact number obviously I can't give you the exact number but order of magnitude order of magnitude. We expect the contribution of about 35 cents per share.
At least so Dr. <unk> would you like to.
Congress starts really with what is really included in this acquisition. So this is really the two largest web scale at yards in the world.
Also our hydrogen unit, who were large air separation units around 12000 ton per day.
The plant is already developed its in the process of being commission right now and Thats why we see it is going to be assertive. Our earnings next year of 2024 and it will be fully.
And the numbers for 2025.
We're very proud of the project and really operating those ATR.
With the composite technology is really going to give us lots of know how about how to really optimize our positioning in the blue hydrogen in the future.
Okay, John got it perfect. Thanks for thanks for the color and then maybe just as the follow up.
You've got the Alberta project or Ed mentioned project coming on next year.
Does seem like the demand for clean hydrogen is picking up in the region is that project sold out at this point based on based on the contracts that you've locked up.
John on that one.
We have announced.
What the the.
Shining of a long term contract.
In theory, our oil which is part of Exxon.
We have given you the details of that.
The rest of it they have very clear visibility to where we are going to sell it.
So I think it's a matter of semantics. When you say sold out that means contracts that have been signed and finalized.
The fact that we feel that it is going to be sold out. So we feel very strongly that we will sell all of that product and we might actually need more than that.
I'd like to have Dr. Han and make some comments about where we are on this thing and any additional color.
Please note the products out of this project will go into our existing pipeline system that which we have a system in Edmonton Canada.
And this will be feeding <unk> our.
Our customers and also hydrogen for mobility, because we are building a fueling station or should they ought to use low carbon hydrogen for mobility.
It's going very well I mean, working very closely with <unk> per customer.
Okay got it thanks very much for the color.
Thank you.
Our next question comes from Mike Sison with Wells Fargo. Please go ahead.
Hey, good morning, guys.
Yes, just one question when you think about 2020 for next year.
How much earnings growth you get from projects that are coming on stream in and does Capex go up next year, because you have such a big backlog of growth projects.
In terms of 2024 and what comes from there.
I would appreciate it if you have some patience and we will disclose that to you in at the end of October obviously, I don't want to.
Get ahead of ourselves.
But in terms of our Capex our expectation today is that our Capex next year will be approximately five to five and a half the same as this year.
That is based on what we know today.
Okay understood Yep.
Thank you. Thank you.
Thank you.
Our next question comes from Josh Spector with UBS. Please go ahead.
Yes, hi, thanks for taking my question.
First on the Canada Blue hydrogen project, just the slide that you updated on the backlog maybe has a little bit less of the discrete timing elements out there do you still expect that in 2024, and I guess fiscal 'twenty four for you guys or has anything changed there and same thing with the SaaS project is that move for 2025.
The sector is the timing relatively unchanged.
Well that yes.
I'd just like to with respect to the project in Canada.
As Dr. <unk> said Han said, but that project when it comes on stream.
B.
Yeah.
<unk> two process and supply hydrogen to I O L. Toby can only do that when their plant comes on stream.
In addition to that we do.
You have our pipeline they do have existing customers, who do use hydrogen and theyre increasing their demand for hydrogen. So if we have the option of putting that into our pipeline. So we have a lot of different options in terms of hobby.
You're going to deal with that okay. So how do you want to make any additional comments about it before or the year Euro.
Yes.
So that's where we are with that.
Okay.
Yes, I guess, how about the SaaS plant and just my follow up I guess on Canada would just be so you're looking about the returns there as being the pre or post.
Grant number sort of one two or 1.6, what do you base your returns.
Yeah.
Project costs that we have disclosed includes the.
And.
The net is that number that we have given you minus the 475 million Canadian dollars, that's easy to get from the Canadian government. We have given you the gross number.
<unk> 6 billion minus the 400 exactly and then with respect to the SaaS plant SaaS plans, we are working on that.
It is in California.
And we are at the mercy of exactly when the permits will get issued.
Do you have the air permit and all of that but now we are working on getting the actual construction pyramid. So that then they can start working on that project. The base that'd be haven't given you is the best estimate that we have at this time, but that is subject to the issuance of the permit by the state of California.
Or when we can actually start construction again their concern on any additional comments on the visibility we have and we expect that by the end of the year that we would get the construction permits but again it really will depend on the officials from the state of California.
Okay.
Yes, thanks, but just what I was asking on the Canada project was more of a basis of what the returns around 10% pre tax return is that based on the net number the gross number.
It's Oh, let's show you wanted to answer that absolutely. So yes. Thank you for the question. So there's two components of the grant.
The first component is a capital a grant that we are getting from the government in the second component is around a production.
Credit.
For your specific question around where you should expect to take our normal run rate of return its associated the net number of one one Canadian that we have listed on the project side.
Okay. Okay.
Thank you guys. Thanks.
Sure. Our next question comes from Mike <unk> with Barclays. Please go ahead.
Great. Thanks, Good morning, guys.
Safety just boring question on your Blue ammonia facility.
Large fertilizer company last night paused their clean ammonia project, basically saying that costs are coming in higher than theyre, not seeing downstream applications develop as fast as they thought I was hoping if you could speak to those two factors cost and off take agreements as it related to your projects.
But Mike obviously I cannot comment on what other people are saying the blue ammonia project that we are building in our Louisiana.
There are many different options that we are considering in terms of the exact final scope of that project.
As things develop with the markets and all of that you know very well that that project. They are going to make 750 million standard cubic feet a day of hydrogen.
One of the issues for us is finalizing how much of that hydrogen.
We're going to put in our pipeline and how much of that hydrogen we are going to put in and convert to ammonia.
That obviously makes a difference in terms of our total capital costs and all of that I do not want to distribute the general statement that obviously the cost of these projects.
Right.
We're going to be probably higher than people had expected because of inflation because of labor shortages in all of that but we have not finalized anything yet that is at this stage that we would want to.
Talk about that but because our scope is still under definition. The sequestration. How did we do this sequestration it will make a difference whether we do the sequestration ourselves or subcontracted to somebody. So there is a lot of moving parts, but I'd like to turn it over to Dr. <unk> to make some additional comments.
Yeah.
I mean definitely in the context of the soft global economy Global Covid pandemic shortages in labor and material supply chain disruption.
And projects that you are not really hear too many about 160 of them were closed and booked on stream during the Covid period.
We do see something like the inflation updates upsizing slowing down, but it's not going anywhere, but we're really having the execution basically what we're managing these challenges and deliver on our commitment which is the 10% EBITA.
But there are a lot of people sometimes a start on this journey of blue ammonia and green ammonia based on back of the envelope teams without really understanding what they're talking about because they have never done it before as a result, they come up with numbers that looks pretty attractive then when they start actually do.
The project.
Finding their scope and finding out the complexities than they get surprise, so I wouldn't be surprised if in the future. Many of the people who are who have embarked on this.
Energy transition would come up with the realization.
That some of these projects are there a lot more complex than they think it takes a lot more and that not everybody who has never made a pound of hydrogen in their life can become a supplier of blue or green hydrogen and participate in the energy transition we have been in this business for 60 years.
Do you know, what you're talking about but anyway, I just couldn't help but make that general comment.
Okay.
Fair enough. Thank you so much.
Thank you.
Our next question comes from Duffy Fischer with Goldman Sachs. Please go ahead.
Yes, good morning.
Stacy maybe if you could you've seen quite a few business cycles. So I'd be interested if you'd pontificate, a little bit how you see Europe and China in particular, playing out kind of the rest of this year into next year from a macro standpoint.
Thank you for the question and I really appreciate the fact that you use the adjective pontificate because that is what it should be doing.
Very difficult to see the future, but right.
Right now the way that we are seeing right now teams developing in China and in Europe .
China.
We have seen some slow down it is not affecting our business in a significant in a material way, but it is affecting our business.
Got.
The future is very much dependent on what the Chinese government decides to do in terms of any kind of stimulus or not.
That is very hard to predict and obviously you guys react to that the good thing is that a significant part of our business in China.
Something like 65% of it is onsite business. So there is a lot of stability there.
In terms of Europe , I hate to put it this way, but it really depends on the weather and the energy cost.
If the better it becomes significantly core than energy costs go up it will have a significant effect if they become lucky like David.
Last year, then the effects would be less than the energy costs with it stay low but overall.
It is a little bit of an unpredictable situation that is why we as a company. The way we deal with this is we are very focused on productivity and as you saw and as you heard Melissa I explained we have taken actions in terms of productivity and we are.
Rosie as some people are predicting.
That's a 700 and Melissa any additional color on this.
Starting with.
Europe is the one business or one region, we have where we have significant amount of motion I mean versus the other regions. So definitely.
So some recovery, but it is slowing down.
We're keeping an eye on this and what type of incentives that are going to have to redo.
Incentivize that economy.
Yes, so I'll just add one comment specific to Europe . So we are in a situation, where we have now lapped the strong pricing momentum.
Great. Thank you mineral statement of Europe .
In kind of switch back to the hydrogen question. Obviously, you are talking to a lot of folks there.
Have both blue and green hydrogen to offer how do you see Europe , playing out how much do you think will be mandated kind of at the green level and how much will just care is it <unk>.
Reduced so you can use blue hydrogen how do you see that playing out over the next three or four or five years.
Our best information based on discussions with customers is that.
Europe is very much committed to green.
The argument is that.
Blue hydrogen is a transition rating.
<unk> go through the go.
Go to Blue and then go to Green, we know we're going to go into Green, Therefore, let's make the leap and therefore I'm sure you have seen.
Some of the announcements with respect to for example, the $2 2 billion euros that the European Commission approved for tissue group that is clearly.
No.
It was approved for use of green hydrogen.
So that is the direction, we see in Europe .
In Korea in Japan, I think it will be more oriented at the beginning toward blue because that is going to be used for decarbonising, the power plants and in the United States.
We have to see but there.
The good news for us.
Is that we are seeing significant discussion on boat.
It is not as people predict that in the U S. It would all be blue Blue hydrogen right now they are talking to companies who are very interested in green hydrogen in the United States to make their products in the United States, where there is a seat or chemical.
Great. Thank you guys.
Duffy.
Our next question comes from Jeff Zekauskas with J P. Morgan. Please go ahead.
Thanks very much.
One question with two parts.
The first is when I look at your results here volumes are up three your prices were up four.
When I look at your competitor in Danbury I think its volumes are maybe down one prices are up 7%.
And in the different regions. It seems like your volumes are growing at a higher rate than theirs and their prices are growing at a higher rate than yours can you reflect on that in general phenomenon.
And then secondly.
Air products claims to just associated hydrogen.
10% loss rate, rather than 20%, which is sort of the.
General view that people have because of the.
Energy you need to crack the ammonia.
Can you can you just quickly explain to us in layman's terms.
Oh, you were able to have a more efficient process.
And good morning to you Jeff Good morning too.
Two.
That comparison.
You're comparing us to our company, which has a different strategy and a different.
So I don't want to comment on their results.
Sure you are.
Comparing year to year.
Because.
Last year, our pricing was significantly better than the other people so year to year, we are not going to show as much or is that an increase because if they had a very low performance last year. This year year to year. It looks better I think that is the main reason for the pricing.
And so.
That is my general comment on that but overall.
Our.
Very much.
Focused on the.
Yeah.
We are an industrial gas company and at the same time. So we are pursuing a totally different strategy as you and I have talked before.
So the fact that our volumes are up.
And I think this will continue to be the trend that we will beat other people on volume growth is because we are investing in the future and we are bidding.
Our share or even better than our share of the smaller projects that people have been talking about so as a result volume growth is obviously the key things you're focused on pricing we are holding our own.
There is no significant.
And the difference in the pricing because it's it was the market shares will change and the market shares are staying stable.
That is the question that I have a first one on the second question that you have in terms of.
The efficiency of the crackers that we think we have versus the conventional wisdom that you use 20% to 30% of that we have talked about this thing. It has the technology, we have been developing for the person who is doing that on a day to day basis as Dr. Han and I like him to make some.
Comments about that I mean, it really annoys safely to what you mentioned before that new how we developed over the last 60 years and producing hydrogen I mean this is really what we had this challenge a few years ago, we looked at the market, we saw ammonia crackers, but the efficiencies really not acceptable.
Wasting lots of the valuable product.
And again, our team of expert on this and basically we developed a product what we feel is very very.
Efficient I mean to a single digit loss.
And that's really what we have without giving too many details I mean.
Well Dr. Han just gave.
Gave you more information, but you were saying 10%.
<unk> single digits, which is good news, but Uh huh.
Jeff If I may just summarize that I'm very proud of our team. We do have very good people and they have developed this technology and this is.
I'm going to be a competitive advantage that we will end up having as we go forward on this conversion of ammonia to hydrogen.
Okay, Jeff very much yes.
Yes. Thank you. Thank you.
Alright.
Have time for one more question and.
Go ahead.
Our last question comes from Vincent Andrews with Morgan Stanley . Please go ahead.
Hey, Thanks for squeezing me in this is Steve Haynes on for Vincent maybe just a quick one on the fourth quarter Guide I think.
<unk>, usually steps up a bit more seasonally than what you have baked in.
I know, you're just kind of talk to us a macro uncertainty in China.
And in Europe , but is there anything else in there, that's causing a little bit of the more muted <unk> ramp. Thanks.
Well. Thank you for your question you know the.
When we gave you guidance we put out.
I'll touch together about what it is that we can see in terms of our best judgment of what the team can deliver.
And when you look at our fourth quarter.
I do agree with you that compared to seasonally adjusted results in the previous years. It seems that there is not as much of a jump as you would expect.
So on that one maybe you can tell us that we are being a little bit cautious, but we are being cautious because of that.
We are totally uncertain about some of the economies, but that is our best judgment at this time and obviously I certainly hope that we can do better than that.
Okay. Thank you.
Yeah.
Thank you very much.
That concludes our session and I would like to again, thank everyone for joining joining our call today, we really appreciate your interest and your good questions and we look forward to discussing our results with you again next quarter as they say I have a great summer and talk to you soon take care.
Thank you.
This concludes today's call. Thank you again for your participation you may now disconnect and have a great day.
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Yes.
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