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

Okay. We'll go ahead and get started. Again, thanks, everybody for coming out. Very happy to welcome up here on the stage, the team from Air Products today. Seifi Ghasemi, the CEO; and Scott Crocco, the CFO. Seifi has now been in Air Products a little over 5 years, has done, I think everybody would agree, a magnificent job in restructuring the company, turning the company around and kind of exciting because now we're going from cost-cutting margin expansion to a very outsized growth program at Air Products. So we'll get in and talk a lot about that and let Seifi kind of give you the vision for Air Products over the next 5 to 10 years. But first, as we always do on these ARS questions. If we could go ahead and load those up, we'll run through the 6 of those relatively quickly. So first question is just, do you currently own Air Product's stock? [Voting]

Oh, that's some opportunity. All right. Question number 2, what is your general bias towards the stock right now? [Voting]

Okay. Generally positive. In your opinion, through this cycle, EPS growth for Air Products will be above, below or in line with peers? [Voting]

All right. It's getting excited here. We're way above. We're way above. All right. Question number 4, in your opinion, what should Air Products do with its excess cash? And you better not vote for share repurchase or Seifi will get mad. [Voting]

Okay. Mostly internal investment.

Internal investment. That's good.

All right. Question number 5. In your opinion, on what multiple of 2000 earnings should Air Products trade? [Voting]

40.

Okay. Towards the higher end of the range. And then the last one, what do you see as the most significant share price headwind facing Air Products? [Voting]

Okay. Core growth. Perfect. Well, with that, we will jump in, and again, always glad to have Seifi and team with us today.

I think like we do most of the time, just because you have such good concurrent view of what's happening with the world, if you would kind of walk around the world geographically and by end market, what are you seeing? What are you expecting in 2020?

First of all, thank you for inviting us. It's great to be with you, Duffy. And good morning to everyone, and thanks for attending here. Looking forward to your questions. In terms of what we see, if I go by geographic area. In North America, everybody knows the data. GDP is growing, but it's not 5% or 6%, it's not 0%. We are doing our fair share of growth here in our base business. So -- and as you have seen, there is some opportunity for pricing that we are taking advantage of. Latin America has -- in the last 2 years, I've been saying that it's a basket case, and it continues to be a basket case. Really, we have a lot of issues there. Then when we go to Europe. Europe, surprisingly, is stable because we thought that with Brexit and all of that there will be a lot more turmoil, but that has not happened. But I'd like to say that there is not significant growth, but it is not going down. And again, in Europe, we do have pricing power, so that has improved our results in Europe. Then we don't have -- other than the very big projects, we don't have a lot of merchant exposure in the Middle East and so on. So I skip that. India is growing significantly for us. It has been doing that for a few years. Our business there is growing 15% a year. Unfortunately, it's not that big, but it is doing very well. Then in China, until the Chinese New Year, our growth was continuing, everything very strong as before. With the Chinese New Year, as expected, we went down. And we track this thing, nothing abnormal. Then obviously, with the virus situation, we haven't come back the same way that we usually come back. But I do like to say that interestingly enough, it went down -- it stayed down for about 2 or 3 weeks. But right now, we haven't come back, but we're not going down. Actually -- it's actually improving a little bit. So we are optimistic that in time, that situation will correct itself. And I don't want to underestimate that. But in the long term, this is a onetime event, whatever happens, happens. But then -- and then things will get back to normal, and I don't see this affecting the overall prospects for China in the future. We have about 4,000 people in China. Fortunately, none of them have been ill with the virus, and we are taking the normal precautions to make sure they are safe and all of that. But as far as we see right now, the impact on our business, we don't think it's going to be material. 63% of our business in China is on-site. So that's kind of a little bit more protected from this. But when we announce our results at the end of April, obviously, if there has been an impact, we'll quantify it. And then the rest of the Asia is doing fine. So that is the -- our kind of base business. Then on the growth potentials that we have, which is gasification, carbon capture and hydrogen for mobility, I am more bullish about those things than I have ever been. We are seeing significant opportunities for gasification. The owning of the technology -- the 2 technologies is giving us a very good basis to talk to customers about and get their attention. So we are excited about that. On carbon capture, we are making a lot of progress. And I think that is going to be a big deal in the future, and everybody is talking about it. And with hydrogen mobility, we are very committed to that. But our focus is not on passenger cars, it's on buses and trucks. Because that is where I think hydrogen has an advantage today. And then obviously, in the future, once there is a lot of electric cars going around, people will realize that how are we generating the electricity for those. And then, I think, in 20 years from now, everything will be hydrogen anyway. So that's kind of overall.

Fair enough. Okay. Maybe just to go back quickly to China and the COVID virus, let's say, at some point, pick it a 20 days from now, China kind of says, okay, we think we've got it under control. The area of Wuhan starts to open up. Just from a physical standpoint, how long do you think it'll take China to kind of get back to normal, to get the workers back to where they need to be, to kind of unlock some of the bottlenecks, whether it's trucking, raw materials for the industry, when you think about industrial production. Because we've got one baseline for coming out of Chinese New Year, but you do that every year. That's pretty set. This feels like it's going to be more severe. Is that a 2-week ramp-up, a 1-month ramp-up? How long do you think it'll take to get back to some kind of normal level once the all clear signal is given?

It would be difficult for me to give you an estimate because we don't have any experience for anything like this. The Chinese New Year, we go through it every year, and I can give you an estimate. But for this thing, I don't know. But this thing, at the end of the day, might end up being an opportunity because all of this inactivity. If everything goes back to normal, you might actually end up having a lot of activity for people to make up for that. But as I said, right now, for our business, I mean, our business is different from everybody else's business. But for our business, we don't see any material impact.

Fair enough. Okay. If we go back to this conference a year ago, you were pretty adamant at that conference that you thought your products were worth more than what you were selling them for. And I think you made some comments that, listen, if we have to walk away from some business to realize that value, we're willing to do that. That obviously worked one of the good news stories for you and the industry over the last year was that pricing did improve somewhat meaningfully. When you sit here today, do you still feel that your products are not capturing the value that they deserve? And so that's still kind of your mindset to push to capture more of the value?

Yes.

Okay. Okay.

But you are very right, it was at the conference here that we kind of made that statement based on prompting from you.

Okay. So that feels like that, that continues. Okay. Maybe we'll jump around to a couple of specific. Jazan, a very large project for Air Products, different than what you'd entertain before. The building's going on, we don't have a finalized deal. Can you help people kind of put parameters around kind of when that deal may come to fruition? And what the financial ramifications of that deal could look like for an Air Product shareholder?

Look, the thing is that if you put the exact timing aside, once the project happens, the returns on that will be what the guidance we have given. We are going to be having about $2.5 billion of equity in there. So you should expect a minimum of 10% of that, $250 million a year of operating income. So that is going to have. The issue is exactly what is going to be the timing. To do that -- to get to the exact timing, we need to finalize the -- all of the agreements, which, believe me, will be more than 2,000 pages of the agreement with Saudi Aramco and then have that reviewed by their so-called legal adviser and technical adviser and then go to the market to raise the $7 billion and then close. And then once we close, then we get our [ VFC ]. So that is the process we are going through. To put a very exact date on that, I mean, quite honestly, in the long term, it's not. I know that people are concerned about what effect is that going to have, the timing, based on the guidance that you're showing. We are not in the habit of making any changes in our guidance in the middle of the quarter. But obviously, we will update you at the -- in April in terms of where we are with that.

Fair. Okay. And then if you think about Jazan is kind of a big foot in the door, what does that portend for kind of the Middle East and Saudi Arabia over the next decade in Air Products? I mean, that's an area that -- if you look historically, both American companies, when they were American, didn't or weren't large over there. They were kind of the European companies. Is that changing in your mind now that you would like to be kind of the preeminent industrial gas company in Saudi Arabia going forward? And kind of how many opportunities do you see over, again, pick a period, 5 years, 7 years, 10 years?

Obviously, with the Jazan project, I mean, we are going to be $2.5 billion of investment. Nobody is even close to that, not only our competitors, but any company. So obviously, that is received very well by the -- not only Saudi Aramco, but by the Saudi government. So as a result, it is getting us a lot of goodwill. And the first example of that was the permission that we got from the Royal Commission to build the pipeline in the Jubail area, which is going to be a significant project for us. So I do expect that this will not be the end, it will be the beginning of a lot of opportunities. In addition to Saudi Arabia, is that if you are another oil company in the Middle East, and there are several big ones there, and you see that Saudi Aramco is doing this, they are outsourcing. Well, why don't I do the same thing. So that is giving us 2 things: number one, an opening on the concept that if Saudi Aramco is doing this, why didn't you do that; and the second thing is that it's giving us a reference that then I'll go and meet with their CEO, say you can call Saudi Aramco and see what kind of a job we are doing with them. So I see this as a significant opportunity for us in the Middle East. Yes.

And it's a little bit of a one-off, but the investment that Aramco made in SABIC, do you think that changes anything in the playing field in Saudi Arabia or the Middle East for Air Products going forward?

Well, in time, there will be one company. And if you have a good relationship with Aramco, that Aramco will own SABIC. So that would create significantly more opportunities.

Okay. Fair enough.

That's a very positive thing for us.

Okay. Bigger picture question. Your favorite slide that you show every earnings call, the EBITDA margin chart, it's been a phenomenal 5-year run. So I think the most pushback I get from investors who don't own you or kind of naysayers, listen, great 5-year run, full credit, but you can't do that over the next 5 years. So what would you offer to those people that say, okay, here's what we did the last 5 years, yes, it was great, but here's what we can do as good or maybe even better over the next 5 years. How do you get the Air Products stock to double again?

Very easy because our margins is 40%. Look at the amount of money we are spending. If you are spending money at 40% return, it's really easy to double the Air Product stock. So because there is 2 ways you can improve the bottom line. One is improving the margin, which is fine. But the other thing is that if you are growing with the same margin, then you create a hell of -- lot of value. And we -- this is why we stress about the fact that, look, we have an $18 billion minimum that we are going to invest. We have given a guidance about $4 billion this year. So if you take that and assume the margin wouldn't go up at all and apply that in terms of convert that -- we say $18 billion. If you take $18 billion, at 10%, that's $1.8 billion of operating income. I mean that's $9 a share. So that is the way that I -- that people should look at the growth because we are not going to be static.

Fair enough. And then one of the big growth areas is your coal gasification technology. You bought 2 separate technologies. So maybe a couple of questions on that. One, what does putting those 2 technologies together do? Are there synergies between the 2? Can you use some engineering parts from one to the other? Are they really just completely separate technologies that don't have synergies? And then two, what optionality or what opportunity does that give Air Products going forward? Why did you need to own those? And how does that make you better?