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

It's my pleasure to host Air Products for the next session. We have Simon Moore and Mun Shieh from the Investor Relations team up here. And we're just going to fireside chat here for the next 40 minutes.

So I should point out your 30-year career at Air Products, Simon. You started out in Merchant, right?

Right.

At Merchant, hydrogen, electronic materials. So been through most of the business units. But you now have, as I see on this slide here, sustainability as part of your responsibilities. I'd like to kick us off with maybe a little bit of a discussion on that. What all are you including in that? What are your objectives? And where do you think you can go?

Great. Well, first of all, Steve and the rest of BofA team, thank you very much for the opportunity to be here today. Thanks for joining us, the folks in the room and also the folks on webcast. And I can't believe I've been with Air Products for 30 years. What I'd say is I've been with Air Products 5 or 6x or 5 or 6 different opportunities. So it's been exciting journey along the way, and it's incredibly exciting today. And one of the reasons, quite frankly, why it's exciting is sustainability. A great question to start with. I think for everybody in the room and listening in, this is one of the key areas of focus. I think you asked what sustainability means. I think it means a lot of different things to a lot of different people. So let me talk about it from an Air Product standpoint now. And what I'd like to do is let me hit a few things at a high level, and then maybe we can come back and dive into them a little bit more. So one of the things to appreciate about Air Products today is a significant amount of our business is driven by the world's need for clean energy. What I mean by that is we produce a lot of hydrogen. We're the world's largest hydrogen producer. Almost all that hydrogen today goes to the refineries and allows the refineries to create cleaner transportation fuels. So from a standpoint of today is, a lot of Air Products business is because the world has decided that they need energy and they need it in a more environmentally-friendly way. So today, we sit here as a very positive impact on the environment. As we look to the future, we see and we believe that the world is going to continue to stay focused on sustainability in ESG. And obviously, that means a lot of different things. We have a governance aspect of that, that has always been important to investors, I think continues to be. We have the social aspect of that, which continues to be very important to everybody in the world. And I think, really, it's the environmental focus that's increasing. And for us, that focus really boils down to around CO2. So what I'm most excited about for sustainability is that Air Products does not need a new sustainability strategy. Our business strategy is very beneficial to the environment and fits perfectly in from a sustainability standpoint. So whether that be hydrogen for the refineries to clean up transportation fuels, gasification to allow people to use coal in an environmentally-friendly way, opportunities for carbon capture, opportunities for hydrogen for mobility. Those are our business strategies. And what comes along with that is a great sustainability situation. So we don't need a new sustainability strategy. The beauty of this is, we'll be very well positioned from a sustainability standpoint when we execute on our fundamental business strategy. So again, happy to jump into any of those in more detail, if you like.

So what projects do you think you can get engaged in that would reduce CO2 emissions? And you and I talked about electrolysis of water. Is that an area that is a meaningful opportunity for you?

I think it is. And I think that one might be a little bit further out. So let me kind of bring it back to what we kind of see happening now is, obviously, both hydrogen plants and gasification plants -- as they say, chemistry is chemistry. So you're going to produce CO2 in a steam methane reformer or a gasification plant. You produce the CO2, that's the chemistry. Today, most of that CO2 gets emitted. The exception is a plant that Air Products has in Port Arthur, Texas, where on the back of our large hydrogen plant there, we have a carbon capture project. Today, we've had this running now for about 6 years. It captures about 1 million tonnes a year of CO2. It captures that CO2, cleans it up, puts it in a pipeline and sells it to Denbury, where it's used for enhanced oil recovery. So the great thing about that, Steve, is we've got development, execution and operating experience with the carbon capture project that's running today. Now to be fair, the Department of Energy had to pay for a significant amount of that project. But as we look to the future and as we look around the world and whether it's countries or states or provinces, many places are looking at the opportunity to create value for captured CO2. And everybody realizes this, whether that's places like Canada, whether that's places like Rotterdam, places like California. So what we see in the near-term opportunity is to go to our existing plants that emit CO2 and install a carbon capture system. So you might ask, "Well, what's the business model around that?" One of the most important things to -- that we have to do a better job of communicating is that our customers have the risk of the cost of CO2. So in our contracts, to supply hydrogen to the refiners, to supply syngas to the chemical plants, if a CO2 tax or need to buy a credit comes in, we will pass that on to our customers. So we actually don't see the possibility of a carbon tax as a risk to Air Products. We see it as an opportunity. So with that backdrop, we would go to the customers and say, "Hey, look, we think that it'll be a great idea if we install a carbon capture project, capture the CO2 coming off of the hydrogen plant or the gasifier, and then either use that for somebody to do enhanced oil recovery, sequestration, or potentially in the future, use it for beneficial usage." So in the near term, we see that as a greater opportunity. Seifi uses the terminology that we see gasification is a great opportunity today, and that will continue for decades. Carbon capture is a great opportunity, perhaps tomorrow. We're actively working on projects. And then obviously, hydrogen for mobility and/or for energy, I think, is a really exciting opportunity. That's a little further out. And just wanted to kind of come back to carbon capture there because I think that's a little bit more near term.

And what other beneficial uses for carbon capture are there?

Sure. Well, I mean, obviously, you'd like to do something productive with the CO2. That would clearly be better than putting it in the ground one way or the other. But this is one of those cases where people ask, "Well, is the technology exists today to do something productive with the CO2?" And to be blunt, the question in most of chemistry and chemical engineering is not, does the technology exist, is it ready to be deployed at world scale, reliable and operational capability? And I think the answer to that is no. I think there are technologies that are under development. We're doing some work on them. Others are doing some work on them. But potentially, the idea will be to take that CO2 and create some syngas out of it, and then use that syngas to make chemicals or additional materials. So that's, I think, in the long run, the most exciting opportunity, but not really ready to be deployed at world scale today.

And there are some regions in the world that are pursuing the mobility with hydrogen. Are you monitoring those? Are those places where you could get involved in the hydrogen plant?

Yes. So great. Let's talk about the hydrogen. I think there's kind of 2 parts to this. One is what will people decide they want to do with the hydrogen. We'll come back to you in a second and talk about how you produce it. So today, in California, you can go and buy a hydrogen-powered fuel cell from Toyota, and you can fill it up at the hydrogen filling stations that are out in California as an individual consumer. So in certain places of the world, this technology is available today that you can go and take advantage of that. We are not monitoring. We are actively involved in places around the world where we see people interested in hydrogen as a transportation fuel. And yes, that's in California, and yes, it's in Japan, and yes, it's in Korea and Europe and China. And we are involved in a lot of different projects, whether that be from a fueling standpoint. And again, I think there's good opportunities for passenger vehicles. But I actually think of the long run, buses and trucks, where the benefits of hydrogen become more apparent, might actually be even a bigger opportunity. So -- but we can't make that happen by ourselves, obviously. A consumer has to have an auto company that makes the hydrogen fuel cell vehicle to be able to go buy one. You got to have the hydrogen infrastructure. So there's a lot of different people who are working together to try to make this happen, including some clear government support in certain parts of the world. So then we turn to, I think the question you were asking, and I apologize for not answering it a few minutes ago, but -- so where is this hygiene going to come from? So today, as we talk, most of the hydrogen comes from hydrocarbons. We talked about the fact that, that creates CO2. Today, it's emitted. So in the future, perhaps, we'll capture the CO2 off those plants. That's certainly a less environmentally impactful way of making the hydrogen. And then in the long run, there's some opportunities to make hydrogen that doesn't kind of come from hydrocarbons. One option people talk about is you could have a solar cell, you could take that power in electrolysis unit, separate water and make hydrogen. Well, that -- you could do that tomorrow. All those technologies exist today, but the reason it's not practiced very widely is, in most parts of the world, it's not particularly economical. But this is what's exciting when the world looks at a fundamental shift in its energy, a lot of smart people looking at those options and seeing how and where we can drive down the cost of that, and at the same time, perhaps the cost of CO2 raises at the other side. So we absolutely see an opportunity for Air Products to play a key part in this transformation, to be an opportunity to develop and execute these large projects and be supportive of this. We've actually created a focused team that is focused on this area within Air Products. So we're excited about it. But I always have to remind people, there's a lot of excitement. We're doing some work on it. We're focused on it. But I do, again, believe that this is a few years from now until this is meaningful from a financial standpoint.

That isn't the crux really, access to low-cost renewable energy?

It is, and it's having that access in a place where you need the hydrogen. You could certainly do this in a place where the sun shines a lot. But if that's not where you need the hydrogen, then you got to figure out how to transport it as well. So yes.

Okay. All right. Maybe we move over to capital deployment. You've got a strong balance sheet. You got a lot of projects you've already committed to, but it looks like you still have. Your powder is very dry. When you look at that, what are your -- what are the primary buckets that you think you'll be going after on that? I mean you've moved heavily into gasification. You got acquisitions or a possibility, and you got growth projects. What are the big buckets that you would see further deployment of capital into?

Great. Well, Steve, thanks, and I appreciate you described as we have a strong balance sheet. I'd kind of say, I think, Scott Crocco, our CFO, would agree that we have kind of a ridiculous balance sheet for our business right now. So we're looking forward to deploying the capital. So maybe just to frame it for folks who might not be as close to it is, we laid out a 5-year window, FY '18 to FY '22, where we said we have an opportunity for significant capital deployment, and we update the math each quarter, but based on a strong commitment to want to maintain our A rating. We think that's very, very important. We think we have about $18 billion of capital to commit over this 5-year window. As we showed last quarter, we've already spent or committed about $10 billion of that. So what's left is the $8 billion. Now I think everybody realizes the $18 billion is fairly conservative because it's built off of trailing 12 months EBITDA. That number will grow over time. And I also remind people, it's not like at the end of FY '22, we'll be all done. There will be opportunities beyond that. But to get back to your question about, so this $8 billion or a bit more than that, that you have to deploy, I think the exciting opportunities that we see are absolutely gasification projects. We continue to see gasification-potential projects in China. But we're also seeing countries around the world who are in perhaps a similar situation to China, where they have coal resources and they want to use the coal resources they have in an environmentally-friendly way. So places like India, Indonesia, there's definitely some potential for those places. So I think gasification continues to be a big opportunity for us. I think if you look at the last 2 projects that we just announced, they're actually not gasification, right? On Monday, we announced a very exciting project to build a hydrogen plant, an air separation plant, an off-gas recovery plan and pipelines in Jubail in Saudi Arabia, a place where we had received approval to do this from the Royal Commission back in November. And we were very excited only a few months later to be able to announce a project. So that's not gasification, but a significant investment. The project we announced before that in January is in U.S. Gulf Coast in Texas, where we're going to build, again, a very large hydrogen plant and ASU would extend our pipeline network. So those are examples that go along with the traditional opportunities to supply nitrogen to semiconductors option to the steel mills. So we will continue to support those businesses. I also want to make it clear that we're going to continue to support our merchant business. We obviously talk a lot about the on-site business. We talk about the large projects because that's where there's a lot of excitement. But we will still continue to support growth in our merchant business. We will invest in liquid production capacity where it makes sense and where it's needed. We just don't think that there's a significant amount of that growth potential there. But I want to make sure that we remember we're going to continue to support that. Third area of opportunity is, we still see an opportunity for asset buybacks. So you could call those acquisitions if you want to, but really acquisitions of customer assets, whether they be ASUs, hydrogen plants, gasifiers. Obviously, Lu'An, gasifier onstream for more than a year, and the Jazan project are both projects like that where we acquire the assets. And then the more traditional aspect of M&A. I think perhaps there's some small and medium-sized opportunities in M&A. So that's kind of how we see the opportunities for this next $8 billion and beyond.

Do you get much investor pushback from an ESG perspective about being supportive of coal gasification?

So I think that -- to me, what's fascinating is how fast this is moving in the investor dialogue. I think if we were sitting here a year from now, a year ago, I'm not sure your first question would have been about sustainability. I think it came up in every conversations today and last week, and it will come up next week. So I think the world is evolving in their thoughts very, very quickly there. I think that we need to do a better job of helping people understand that Air Products being involved in these projects is a positive. And what I mean by that, the reason that China has chosen or India might choose to gasify coal is because they believe it's a more environmentally-friendly way to use that coal. Air Products getting involved in this, the whole point of our on-site business model is we can run these assets more efficiently, higher reliability, which improves the environmental impact, and obviously, then gives us the opportunity to do the carbon capture projects that we talked about as well. So I think people are excited about this opportunity. Again, the idea that we have a fundamental business-driven strategy that provides environmental benefits, I think is very, very positive.

I asked you that because I think there is likely a perception out there that coal gasification is environmentally bad, and I think that will be very misguided. And as we heard at our noon time panel discussion, I don't know if you were able to join us, but it was on plastic recycling. And my hunch is feeding waste plastic into a coal gasifier is probably the easiest route to circularity and molecular recycling as opposed to converting into a liquid and then feeding it into a cracker and, therefore, it could be really a win-win. Is that an area that you guys have looked into in any of those gasifiers, the potential of blending in some waste plastic into the coal feedstock?

So Steve, I think your question really points out the incredible flexibility of gasification, right? So -- I mean we have a technology here that we can feed coal, petcoke, liquid product, that's the Jazan project, the bottom of the barrel, natural gas into it. You can essentially put almost any hydrocarbon into a gasifier. And so the idea of putting, whether it's plastic or other types of waste products, into the gasifier is absolutely something that we have interest in. We continue to look at. It has to make sense in the geographies that the projects run there. But yes, I do see that as a good opportunity going forward.

And certainly, the coal gasifier that I saw, that one didn't have an Air Products' air separation unit on, and the other one did, was quite different, okay? The other one was blowing coal right out the stack.

Got it.

Maybe switching over to this culture change that has occurred at the company in the recent years and months. You have a long history with Seifi. And I guess I'd like to ask, is there more of this culture change to go to drive productivity?

So my opinion is yes. We are a different company than we were 5 years ago. But I don't think we're where we need to be yet. And I think Seifi would agree. The Air Products was a good company before. I think we're a great company now, and we have even more potential. And what I mean by that is -- so we talked about some of the business opportunities in front of us. We have some of the changes that Seifi brought to us to help drive the culture changes, reorganizing the company, so we have very clear accountability for business leadership. We used to have a more complicated global matrix-type system. And now we have very clear accountability. And so if I just take an example, we have a head of our business in Korea, who has full responsibility for our business in Korea, accountability for delivering the profitability of the Korea business. And that person and the team in Korea will be rewarded based on how the Korea business does. So it is about creating clear line of sight about who is responsible for what, who is accountable for it, giving clear targets and directions, and then, quite frankly, providing support and expecting the team to deliver. And if they don't deliver, they're not going to get rewarded. And in the long run, if you don't deliver, you'll have other problems from an employment standpoint. But while I am very, very excited about this, I think in all of these areas, there's still opportunities. Seifi challenges people every day not just to work harder, but make sure you're working on the right things. Is there a work that we do today that is probably unnecessary? Yes, there's still some work in our large global corporation that we could be driven out to move quickly, to move with speed. I mean look at some of the project development we've done. If I could just -- when we announced this Jubail Royal Commission approval in November, there was a bit of a sense from investors, "Jeez, these guys can take it 2 or 3 years until you can announce the project." But we're -- here we are in February and we just announced one. So we didn't do all that work in the last 3 months, but we had the confidence to work hard on that project development for quite some time and the ability to deliver on it. So we absolutely need to and will continue to get better. That improve -- that includes moving quickly, having the self-confidence to take bold steps when that's necessary. For example, being focused on carbon capture, being focused on hydrogen for mobility. So we've come a long way, but I think there's more there.

Is there potentially a low in new projects driving up margin in this next year? You got some that are like 2022, 2023. Is there a little low here? Or is this Jubail something that could move more quickly than that?