Air Products and Chemicals, Inc. (APD) Earnings Call Transcript & Summary

Good afternoon, and welcome to Air Products and Chemicals Investor 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. Simon Moore, Vice President of Investor Relations.

Thank you, James. Good afternoon, everyone. This is Simon Moore, Vice President of Investor Relations. I am pleased to be joined today by Seifi Ghasemi, our Chairman, President and CEO; Scott Crocco, our Executive Vice President and Chief Financial Officer; and Sean Major, our Executive Vice President, General Counsel and Secretary. As I'm sure you all saw, Air Products issued a press release this morning entitled Air Products to make largest-ever U.S. investment of $500 million to build, own and operate its largest-ever hydrogen steam methane reformer, a nitrogen ASU and utilities facilities, and wins a long-term contract to supply Gulf Coast Ammonia's new world-scale Texas production plant. That press release and the slides for this call are available on our website at airproducts.com. Today's discussion contains forward-looking statements. Please refer to the forward-looking statement disclosure that can be found in our earnings release -- in our release and on Slide #2. Thank you for joining us to discuss this very exciting opportunity. After our comments, we will be pleased to take your questions. We will be limiting our comments and only taking questions pertaining to the GCA project. We look forward to discussing our quarterly results with you on January 24. Now I'm pleased to turn the call over to Seifi.

Thank you, Simon, and I would like to thank all of you for joining the call. You're all very busy and this is kind of a short notice. But before I get to the details, I'd like to explain about why we are having the call. This is a $500 million project. It's not a $10 billion project. So why the call? The reason we wanted to have the call is that, number one, this project is very strategic for us. It gives us the ability to extend our pipeline system all the way down to Texas City where there is a lot of opportunities now and in the future, and it gives us the ability to build one of the largest SMRs, steam methane reformers in the world. The second reason is that it is the largest investment that we have ever made in the United States, largest single investment and that from the best information that we have, it is the largest single investment that any industrial gas company has made in the United States. And the third reason is that in the last few years, there has always been this talk that, well, Air Products is investing in China and Middle East because they cannot compete in the U.S. and especially in the U.S. Gulf Coast. This project is a great demonstration that we definitely can compete. And secondly, if there are projects, we are willing and able to invest, and that -- and our preference is obviously to invest in the United States. The reason we haven't been doing that was because there was no projects. Now that there are projects, we participate and are able to succeed. So with that background, I'd like you to go to Page 3 of our presentation. The project fundamentally is to build a 1.3 million ton a year ammonia plant, which would be 1 of the largest ammonia facilities in the world, located in Texas City, taking advantage of the cheap natural gas in the United States and export to ammonia to the worldwide market. And the total investment is approximately $1.1 billion. Now if you'd be kind enough to go to Page 4, this one delineates our participation. We will be obviously using natural gas to build a significant steam methane reformer, as I said, the largest we have ever built and one of the largest in the world, at the site and then also connect that hydrogen plant for reliability via a pipeline to our extensive pipeline system. In addition, we'll obviously build an air separation unit to produce the nitrogen and then the hydrogen and nitrogen will be the raw materials for Gulf Coast Ammonia to go to the ammonium loop and produce the ammonia. Gulf Coast Ammonia is a partnership between Starwood and Mabanaft. They are the principal investors, and they've been investing in total -- obviously, it's project finance -- invest total $600 million to build that. And they have acquired very reputable international people to offtake the ammonia produced under very favorable terms. Our -- we have nothing to do with the price of ammonia or the risk for that. We have a 20-year contract to supply the hydrogen and nitrogen and there are standard procedure, which is that we will get a fixed fee for doing this. The Page 5 gives you a little bit more detail about who the partners are. The project is financially closed. We have closed on the project. We have a signed contract and we are executing. The facility is expected to come on a stream in mid-2023. And then on Page 6, we have the details of the Air Products participation. As I said, the important thing is that it will give us the ability to connect the SMR to our existing pipeline, but that means that we will get the benefit of our extensive pipeline all the way to Texas City. In terms of timing, I mentioned that. And I mentioned the structure of the agreement that we have with Gulf Coast Ammonia. On Page 7, just to remind everybody, I just wanted to show you the extent of our hydrogen pipeline system, which is the biggest -- by far, the biggest in the world. And now we will have the benefit of that pipeline and all of the 14, 15 steam methane reformers connected and connected to Texas City, which, as I said, there are significant current and future opportunities. We are very proud of the hydrogen pipeline system that we have. And obviously, it has created a competitive advantage for us in the past and it will in the future. If you go to Page 8, you'll see that we are trying to delineate that this project is a perfect fit for our long-term strategy. It, number one, creates significant shareholder value. The returns on this project are actually better than the general guidance that we have given you. It is an investment in the United States, which we like. It strengthens and expands our Gulf Coast hydrogen pipeline network. And it also reinforces our ability to execute very large projects and it also strengthens our ability to participate in project -- ammonia projects around the world, which we believe there will be many of them because of some of the developments in hydrogen mobility. So those were my -- the prepared comments that we had, but obviously we have the call in order to answer your questions. So with that, we are ready for any questions that you might have, please.

[Operator Instructions] And we'll take our first question today from David Begleiter with Deutsche Bank.

Congratulations on the project.

Thank you, David.

Intrigued by your comments that returns here will be -- or better than what you've stated in the past as your target. What's enabling these better-than-normalized returns given you're entering into a region that you have not been before, and it was likely, I suspect, a competitively bid project? So what drove the high returns and what drove the ultimate win versus other industrial gas suppliers?

I think we have the competitive advantage of having the significant pipeline system, which will provide total security of supply to the project. That is one thing. The second thing is that I think we are very competitive in terms of the capital cost of building the steam methane reformer because we have done many of that before and we have made advances on that. And those 2 put together is creating the environment that we will be -- we are able to compete with our other competitors and still end up with pretty good returns.

Next, we'll hear from Christopher Parkinson with Crédit Suisse.

Seifi, you were alluding to this a little bit, but just on the projects, there are obviously a few moving parts and consequential benefits. So when we're thinking about the earnings contribution deriving from the SMR and, I guess, another large portion of the balance coming from better scale and leverage on the pipeline system, just in terms of the overall return for the project, knowing that we can't do anything definitively quantitative, just how should we be thinking about this project versus your traditional ROIC targets? And how should we think about the potential optionality for this -- the pipeline extension going forward with any potential incremental projects?

Well, thanks very much. If I understood your question properly, number one, the overall profitability of this specific project is better than our pipeline -- existing pipeline system put together. So that's the good news. The other thing is that by now building the pipeline and having such a large SMR in Texas City, any future projects we will be very competitive in terms of the ability to supply hydrogen to the other refineries, Marathon and all of that. So we are pretty excited about that in terms of creating an opportunity for future growth at very competitive prices. Did I answer your question, Chris?

Perfectly well.

We'll now hear from Kevin McCarthy with Vertical Research Partners.

Seifi, do you see any opportunity to de-captivate existing industrial gas assets that happen to serve the ammonia industry? Or is this a more isolated example of investment in that space?

Well, we are hoping that by doing this thing, we will encourage people to give us a consideration. I think that by demonstrating that we can do these things and the fact that it is competitive, I hope that would create that kind of a situation. But the more -- that is one thing, but strategically, I think by doing this, it gives us a good reference for the future ammonia projects around the world. I believe there will be many new ammonia projects built around the world in order to supply what will be a significant demand from Japan for ammonia to be dissociated to produce hydrogen for hydrogen mobility in Japan. So that is why we are participating in this.

And secondly, if I may, today's natural gas environment is obviously quite conducive to the sort of project on the Gulf Coast. As you well know, that hasn't always been the case historically if you look back to the 2000 to 2005 period, for example. So can you talk about the principles here, Starwood and Mabanaft and how you got comfortable with those firms as partners as per your 20-year take-or-pay agreement and what recourse you have there?

Well, the thing is that the recourse we have is the standard recourse that we have with any company, but we obviously want them to be successful. The fact is that if the natural gas prices, it's a question of competitiveness. When the natural gas prices in the United States was $11 a million cubic feet, also the rest of the world was very expensive, too. So if for some reason, the natural gas prices in the United States go up because of some events, I expect that the rest of the world prices will be up. So the ammonia produced at this facility would still be competitive on the world scale. And therefore, people will be able to sell it and still make a profit so that they have the cash to pay us.

Steve Byrne with Bank of America has our next question.

The $0.5 billion investment here, does that give you oversized ASU and SMR that would give you excess capacity for the oxygen, nitrogen, hydrogen and even the CO that's going to come out of the SMR to sell to other customers along your network beyond this particular account?

Well, that is something that I'd rather not comment on for competitive reasons. But you would imagine that we would have talked about something like that.

Okay. And then the CO that's going to be coming out of this SMR, is this -- your partners here have any interest in pursuing urea down the road, which would require CO with the ammonia.

The way we are designing this particular SMR, there is not going to be a lot of CO because we will shift that and it will be mainly hydrogen. If there is a plant that is going to require urea, you would kind of change the shift conditions on the SMR to produce the CO, but this -- and the CO2, but this one wouldn't require that. So we are not going to get any CO items. Yes, thank you. Do we have any other questions?

Yes. We do have a question from Laurence Alexander with Jefferies.

This is Adam Bubes on for Laurence today. I was wondering to what extent is the SMR size to support expansion of the ammonia project over time?

So I think maybe one of the things to keep in mind here is, obviously, we talked about the size of the hydrogen plant is 175 million feet a day. We talked about the total hydrogen supply to GCA being 275 million feet a day. So in general, as Seifi talked about, the pipeline connection that we're making at Texas City will supply approximately 100 million feet a day to the hydrogen plant. So their total hydrogen demand is greater than the capacity of the new SMR we're building.

That was, again, another -- one of our competitive advantages in winning the project. That means that we had excess capacity in our pipeline system that we could utilize in here.

Okay. Great. That's very helpful. And then my last question, I was wondering if you could just give us any sense of the utilization rate of the hydrogen pipeline?

Our hydrogen pipeline system, I don't think it would be wise for me to give you the exact utilization, but it is pretty high. It's not 70% or 80%. It's definitely higher than 90%, but I don't want to quote you the exact number. But we are seeing very good volumes and very good demand in the Gulf Coast for the hydrogen.

Our final question will come from John Roberts with UBS.

Congratulations on the project. On Slide 5 on the ammonia offtake, so Borealis will be a major offtake player, but where will the rest of the ammonia go?

Borealis is not a player in here, John.

Okay. This is not the original -- I think Borealis had a project there once upon a time. Could you talk about where the offtake is going to go?

Yes. John, the -- you are right about Borealis because Borealis was the original developer of this specific project, but then in the -- about 1.5 years ago, they dropped out and then M&B came in. So you have it right that this was the same project, but then the ownership changed. In terms of the offtake agreements, they have advised us that they do not want to disclose the offtake agreements and who they are. And the people who are taking the offtake, do not want to tell the world that they are doing this.

Okay. But it's multiple then. It's not one offtake partner.

Yes, yes. There are several. There are actually, yes, 2 or 4, right.

That will conclude today's question-and-answer session. I'll now turn the conference over to Seifi Ghasemi for any additional or closing remarks.

Thank you very much. I'd just like to thank everybody for taking the time to be on our call. And we certainly look forward to talking to you in about 3 weeks about our results for the quarter. Thank you for being on the call, and have a wonderful day.

That does conclude today's conference. Thank you for your participation. You may now disconnect.