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

Hello. Good morning and good afternoon, and welcome to Day 4 of the Exane BNP Paribas 22nd Annual European CEO Conference and today's fireside chat with Air Products. [Operator Instructions] I'm now delighted to hand over to Laurent Favre, Head of the Chemicals team at Exane BNP Paribas, who'll be presenting today's session. Over to you, Laurent.

Thank you, Paul. Good morning, Seifi, first. I hope you're well.

Yes. Thank you. Good morning. Good morning to you and everybody who is on the line. Thank you.

Thank you, Seifi and it's a pleasure to have you on today. We will be jumping straight to Q&A.

So I guess my first question to you, Seifi. How has Air Products behaved in this COVID environment in terms of both how you're running the business, how you've adapted but also what are you seeing in the market? And maybe we can split between the different geographies, if that's all right with you?

Sure. As I said before, first of all, it's a pleasure to be with you and the rest of the team who is on the line. Our behavior, I mean, follows the history of basically the virus because everything was normal until January. Then in January, usually, they have the Chinese New Year, which creates a dip in our business in China. That did happen, but obviously, then the coronavirus was an issue in China during the months of February, March and April. So as a result of that, we did see an impact on our volumes, but mainly the impact was on our merchant volumes. That is our LOX, LIN, LAR, hydrogen -- I mean, helium business. But we do have a significant presence in the -- onsite business in Asia, about 63% of our business is onsite. So our financial performance was relatively good there, and it showed in our second quarter -- fiscal second quarter results that you have seen as of the end of March. Then when you get to Europe, obviously, we started feeling the impact of the COVID in the month of March, April, May, and it is obviously continuing. And again, our onsite business held up okay but our merchant business, in terms of the liquid part of it, went down about 25% and the packaged gases business, about 45%. And that is approximately where we are right now. We haven't seen a lot of improvement since those numbers. And then in the Americas, as you know, the impact really started in the middle of March. And it has affected us the same way. But in Americas, we do not have a large -- actually, we don't have any packaged gas business in the U.S. and a small one in Latin America. So the overall impact on our merchant business in the Americas has been about 15% to 20% down. But again, our onsite business has held up very well. So that is where we are right now today. Our -- going back to Asia, our volumes are approximately back to where they were pre the COVID event, and our people are going to work on all of that, you see that. So it's kind of the situation getting to normal there. But in Europe and in the U.S., we are where I just mentioned. We hope to see an improvement, but we haven't seen anything yet.

In China, on the merchant side, when you say back to normal, is it in terms of year-on-year actually seeing growth because normally in China is growth?

When I say that, I am mainly talking about our merchant business, by the way. And because our onsite business obviously grows because of the projects that we have done. But the merchant business is back to pre-COVID levels, but it is not significantly higher than last year yet. It's about the same.

Thank you. Maybe again, staying on merchant. On the pricing side, I think you had a very big push that started about 3 years ago now, and you've shown some pretty impressive. And the whole industry has been quite impressive on pricing. Could you maybe talk to us about what you can see from here in terms of those price announcements that you've made on the American side? Are they sticking or not? And then elsewhere where you don't typically make price announcements, are you trying to get more price increases?

Laurent, as a matter of policy, I'm sure you have heard us talk about this thing before. We do not make any comment forward about pricing because that remains to be seen but we obviously comment about what has already happened. We did have a big push, as you said, about 3 years ago in terms of needing price increases to compensate for our cost increases because prices of our merchant products have not gone up for about 3 years -- for about 10 years, actually. So we did what we needed to do, and you have seen the results. And it continued even last quarter. But in terms of how would things develop going forward, I cannot and should not make any comments on that.

Of course, I did have to try. On the one area where we typically don't focus all that much on your products, health care, which I think is about 5% of your sales, could you perhaps talk to us about what you've seen and whether to some extent, you've seen some benefits, unfortunately, I guess, from the current COVID situation? And are those benefits now slowing down as we are getting out of lockdowns?

Our exposure to medical is not that material. The only thing that we do in the medical side is basically supply oxygen to hospitals and obviously, helium for the MRI machines. We did a little bit better because of, unfortunately, as you said, because of the COVID thing. But overall, for Air Products, that is not a material number in terms of up or down.

I see. I may have one last question around this, I guess, short-term COVID impact. And I guess that's related to what you may have learned from this crisis about how Air Products behaved? And perhaps on the cost side, some of the temporary measures and some of the temporary benefits you've seen, for instance, on travel, entertainment, et cetera. Do you think that some of those savings could be structural? Do you think you may change the way you work on Air Products going forward? Or is it too early to say?

No. Sure, I don't see much of a change because we do save some money because people are not traveling as much, but the travel cost as compared to our $3.5 billion, $4 billion of EBITDA is not that significant. We -- our people are working from home very efficiently, but we do not see a permanent shift to having people working from home. I think there is a lot of value in people going -- working together in order to innovate. In terms of cutting costs and so on, considering the nature of the events that we were facing, which is obviously a phenomenally a stressful situation for our employees about getting sick or their family members and all of that. We made a decision that we are not going to lay anybody off or cut anybody's salaries during these times because that will significantly add to the stress on our people and we believe that our people are what make the company. So as a result, we have not taken any restructuring measures or significant salary cuts and all of that. And we do not expect to do any of that. That's one thing. And the second thing that I think this crisis has proved is the defensive nature and the resilience of Air Products portfolio that since we have a lot of our business, which is onsite, overall, more than 52%, even during the time that the world is shut down, we still don't fall off the cliff. And we have an acceptable performance, okay?

More than acceptable. Seifi, on the -- I guess, if we also look at what else you've been up to in this time, obviously, we've seen some big announcements. Maybe I can start with the PBF deal. Not necessarily asking about this deal per se, but more about the opportunity for decap. I've seen some numbers of $30 billion, $40 billion of captive sales for industrial gases. How much of those billions do you think could ultimately end up being decap?

Well, I think as time goes by, and situations like the current situation happens, companies start focusing on, look, what is my core business, and what is this that it is not core business? And I think as you have seen during the history of the Industrial Gases business, why do we exist? We exist because people decided to outsource their industrial gas, right, supply at some point in time and a steel plant decided that I'd rather have somebody else build an oxygen plant rather than me building it myself or a refinery decided that I rather have somebody build the hydrogen facility for me. So I think this is a historical trend that has been the foundation of the creation of our business. And as a result, I think this will continue. Therefore, I do see more companies coming to the conclusion that well, I have some industrial gas assets, maybe I shouldn't be operating. And actually, some of these companies like PBF, they've had half and half. Half of their supply was their own steam methane reformers and half of their supply was what we were doing for them. So somebody comes to the conclusion that why don't I just outsource everything. I mean, not a lot of companies these days are making their own power, right? Buy the power because somebody else is better at producing it. So I think that trend will continue as we go forward.

Do you think that over the next, let's say, 12 or 18 months, we could see a meaningful number of meaningful deals signed by the industry, not necessarily just Air Products? But I just noticed that the PBF deal is probably one of the largest decap deals we've seen in the past 10 or 15 years. Is it a one-off? Or do you think we can actually expect to see more?

Well, I mean I don't want to predict the future. I think there will be. But please just putting thing in its perspective, the project that we are doing in Jazan, the Saudi Aramco is the biggest buyback of all, right?

Yes. We are seeing buyback.

We are -- Saudi Aramco, yes, $11.5 billion to buy back the gasifier. So I think that -- I just don't want to get ahead of myself on predict things, but you would imagine it's logical to think that more people would think about this thing and will decide that this is the right thing to do.

So I guess, it's a great segue into a quick discussion around some of those large projects. On the Jazan side, as you said, $12 billion decap, the last deal that you've announced all the way out into October. I guess, can you tell us if there's any delay that is related to execution on the assets per se? Or is it more related to the structure of the deal, the financing, et cetera, of the assets coming into fruition as planned?

It has nothing to do with the asset. The plant is being built on schedule and all that. The delay is all related to coming to a final agreement and getting all of the lawyers from 6 different organizations together and financing is $7 billion of financing and all of that. So that is the delay. And obviously, COVID then I think didn't help by dispersing people to their homes. They cannot get together to do these things efficiently and all of that. So it has nothing to do with the asset itself. It's just the procedure of trying to go through the motions.

And on the traditional side of, I guess, new projects. So what I mean by traditional is your plain vanilla, gas compression unit or chemicals for steel, et cetera. We're hearing quite a bit about companies trying to be as modest as possible on new projects and CapEx and supply. Are you, I guess, seeing any change in the discussions with your customers on new projects on portfolio of opportunities?

Well, on that one, when you come to our so-called traditional business of onsite, which is a small nitrogen generators or 500-ton or 1,000-ton oxygen generator for a steel plant and so on, I am very pessimistic about great growth potential for those kind of projects. I mean, how many clients have you seen, any of the industrial gas companies make those kind of announcements recently. There aren't that many of those projects because those projects and those small ones are light emission business, they are totally dependent on industrial production and industrial production is down. It will be down for quite a while. That is why we have always been saying as Air Products that, look, if we stick with the traditional industrial gas model, we are not going to have a lot of growth because the world is not going to see a lot of growth. And unfortunately, the COVID-19 is going to create more of a problem there. So we have not seen a lot of opportunities there, and I don't expect to see that many in the so-called conventional small nitrogen generator, oxygen generators.

Okay. Got it. And I guess, leading us to the less conventional side. Maybe if we take a step back around gasification first, where you are a leader in, I guess, technology, but also capital commitment. I think last year, at some point in time, you talked about dozens of potential projects. How do you -- first of all, is it still the kind of number you're looking at? And then second of all, how do you choose where to focus? And what is the competitive environment like for those new projects?

Well, first of all, I would like to confirm that there is still a lot of opportunity. If anything, I think there will be more opportunity than we talked about before. In terms of how do we choose these projects to participate in, we obviously look at the -- while the project is being done, the fundamental economics of the project. Is the project going to produce a product that eventually will be sold and the whole project being profitable. So it is the nature of the project itself. Then the second thing, we look at the counterparties that we are dealing with in terms of who they are and their viability. And then we look obviously at the geographical location, and we take all of those into consideration. And then obviously, the financials are another consideration, and that is how we make the decision. In terms of competition for those kind of projects, the competition is usually the people who want to do these things themselves, that the government of Indonesia wanting to build gasifiers. Well, they have the attitude that they built refineries, we can build gasifiers. They buy from you or somebody else rather than outsourcing it. That is usually our challenge to try to convince them that it is whether if they do it with us. In terms of competing with other entities, I am obviously not treading into that because when we do the project that we did in Indonesia, our customer over there doesn't exactly tell us who else they have talked to and all of that, and it really is none of our business, but maybe they have talked to a lot of other people. But right now, it looks like we have a leadership position in that, and we are going to take advantage of that in advancing as many of these projects that make sense for us.

I see. I think historically, you used to say that you would not invest less than 10% IRR for those very big projects. Are you trying to bake in a bit of a premium for the fact that there might be more risk given that they are bigger projects? Or on the other side, given that they are bigger projects, the IRR is going to be a bit smaller?

We do the deals not based on the fact that we have a target. We do the deal based on what is the market and our fee. Somebody wants to do something, and we are the only people in town who have the expertise to do that, and we can charge them 20% IRR, we will do that. The 10% that we have said was a level of comfort for people that we are not going to do stuff below that. That is not the offer limit, and we don't end up doing the project that, okay, this is the one 10% in terms of this is what we are going to charge the customer. We charge the customer based on what we think the market is, who is the competition? What is the alternative, can they do it themselves, can they not and all of that. But we wanted to have a number that we give a guidance to people that, look, if you are spending $2 billion to build a facility, because the numbers are big, that will produce approximately a 10% IRR, about $200 million of operating profit, and that approximately is 15% return on equity. So we just wanted to give them a feel because when you're spending a lot of money, we just want to make sure that people don't think you are just interested in growth because that is not what we are interested. We are interested in growing our bottom line and improving our margins. And as a result of that our shares will actually go up. We are not interested just to rack up sales numbers. That doesn't mean anything. A lot of trading companies in Japan have a lot of sales. That isn't the measure of anything.

So you've mentioned -- I think you've mentioned a couple of times Indonesia already. So a few weeks ago, you announced a $2 billion coal-to-methanol project. I guess it's taking you into a slightly even further away from the traditional gases business. Can you maybe start by telling us why do you think that project makes sense? And what are the returns like as well for that project, depending on various scenarios for coal pricing? In other words, as it is a coal-to-methanol project, is this a project where your returns could be impacted by a change in coal pricing?

Well, that is the point that I don't think we have done a good job in explaining to a lot of the investors. We are not getting into the methanol business. We are not getting into the coal business. The structure of this project is that people give us coal at any price they want to assume. We take that coal. We have the technology for the ASU, for the gasifier, for the methanol and we convert that coal to methanol, and we get paid a fixed fee for doing that. Whatever happens to the price of coal and whatever happens to the methanol price is none of our business. We are not in the business of selling methanol, and we are not in the business of buying coal. We just process the stuff. This is the beauty of the nature of the projects that we have structured. And investors -- the other parties, they like this because we become a one-stop shop. Take a project in Indonesia. If you are going to do it a standard way, what would you have to do? The owners who are buying the methanol from us, they would have had to go to a -- come up with a concept, then they would have had to go and hire an engineering team. I don't know, KBR, Technip or something, to do a FEED study. That costs money, takes time. Then they would have had to go to individual people to buy the technology, ASU technology. They have had to go buy the gasifier technology, they would have had to go buy the methanol technology. They would have to spend time to evaluate these things and pay somebody to evaluate these things. Then once that is done, then they had to go and find an engineering EPC contractor to give them a fixed price for building this thing, which by itself is a challenge. A lot of people are reluctant to do that, and it would take additional amount of time, and now you're paying somebody else. Then by the time you are finished with that, you had to go to the market and convince a bunch of bankers and investors who usually charge you an arm and a leg to finance this project. Well, this project is in Indonesia, and I need this fee or I need that fee and all of that. By the time you put all of that together, they would have had to spend 10 years developing this thing and deal with several different entities and have to create a big organization to manage that. What are we doing? We go to them and say I'm a one-stop shop, sign 1 contract. I do the FEED, the technology. I have all of the technologies. I build the plant for you. I operate the plant for you. You don't have to -- and I'll finance it. You don't have to worry about anything, one-stop shop, 1 contract, 2 months to negotiate the contract. And 4 years from now, you have 2 million tons of methanol to sell and do your business. That is the value proposition that we are bringing to the people. And that is why they are willing to give us the kind of returns that we want because in the real world, when you put all of these things together, we make the methanol cheaper than they can do it going the conventional way. So that's the essence of the cost process.

I got it. On that basis, I won't be asking you how returns look like versus that 10% IRR. I think you made your point very clearly. And can I perhaps ask on the Haldor Topsoe alliance? So is this -- I guess, should we be seeing this now as a new platform, and therefore, we should be assuming that there will be more of those projects into ammonia or methanol?

Well, the thing is that, yes, because the reason we did the alliance with other top stories to be able to go to the customer and say, I have the technology across the board. I have the technology for ASU. I have the technology for gasifiers and I have the technology for making methanol, ammonia, DME, urea, whatever you want. And by doing it, it makes it easier because before some of the projects we have done, we said, okay, we have the technology for the ASU and we have the technology for the gasifier. So we are going to sell you a syngas. But then that made it complicated, negotiating the syngas contract to another contract that somebody has to sign, there would be many contractors on the side that would increase the cost. Therefore, we tried this, we can go all the way, we can make it simple for our customers. And the customers liked this concept. And yes, I'm hoping that we will do more of these things. Yes, that is our plan. Now we have to see how the world develops, but that is what we would like to do.

Okay. And I guess on the use of coal, 2 questions. I think in the past, you talked about India as a place where there was a lot of interest. There was a lot of interest in China, but that seems to be stalling a little bit. And I'm just wondering, what are you seeing when you talk to those governments because I think it's at the top level that you had those discussions? What are you hearing in terms of their commitment to the usage of coal? And in particular, at what point in time does CO2 or CO2 emission become an issue in the discussion? And I guess, that will lead me to talk a bit more about sustainability.

Well, the thing is that those discussions are going on. Nobody has slowed down. And I think Indonesia and India will get into gasification of coal. With respect to CO2, what are they going to do with the coal? They either burn it or they convert it into chemicals. By converting it into chemicals, everybody seems to be focused on, okay, you are burning coal and you are putting CO2 in the air. Fine. But by burning the coal, I'm putting the CO2 into the air, what are we producing? We are producing clean diesel. That clean diesel goes into the cars and saves the world a lot of CO2. So when you think the whole thing holistically, it's actually not bad -- not damaging the environment. I mean, when you look at Air Products, we publish our sustainability report. We have all of these SMRs around the world. And people say, "Oh, you are putting a lot of CO2 into the air." But if you take that and then say the products that we make is going into cleaning of the diesel, the hydrogen we're making, the Gulf Coast is cleaning up the fuel that people are using and do the balance, we are actually saving the world 55 million tons a year of CO2. So it depends on how you look at these things. So that is one thing. The second thing is that the benefit of gasification is that the CO2 is capture ready. And that is why when we talk about our way forward, we say gasification, CO2 capture and hydrogen for mobility because we think that capturing the CO2 and sequestering it or dry reforming it or using it for enhanced oil recovery, will be a business that we want to be in because that enhances the value proposition of what we are doing.

And on the CCS side, Seifi. So I guess you guys have been running one of the largest CCS projects in the world since 2013, I think, on the Gulf Coast. At what point in time, do you see yourselves spending meaningful amounts of money on CCS? Do you need your customers, do you feel they have to? Or would you see yourselves actually making a decent return given what you just talked about on CO2 and on the use of coal?

Well, you are sitting in Europe, what is happening, you are seeing that the governments, in a massive scale, are following the lead in California by putting a lot of value on this low-carbon fuel cell standards, which gives you a lot of incentive for capturing carbon, right?

Yes.

So they are making it attractive for people like us to go capture the CO2. And obviously, we will do that. That is why we are excited about the CO2 capture. That is why we talked about it, and that is why it is 1 of the 3 pillars of our growth as before.

Yes. And on a 10-year view, I mean you may not answer, but on a 10-year view, do you see yourselves spending closer to $1 billion or $10 billion, let's say, on this type of technology?

I see ourselves in the next 10 years to spend several billion dollars, not $1 billion, but several billion dollars, that is $10 billion or $8 billion or something on carbon capture, yes. And also a lot more than that in hydrogen for mobility and also on gasification.

I mean I guess on hydrogen, you sound as bullish as anybody else, really. Do you think that returns can be as high as on other projects? And I'm asking because, for instance, Air Liquide yesterday said to the same question answered by saying that the money is there. The question is how do you balance returns versus capital spend?

Well, I think the money in hydrogen is in either blue hydrogen or green hydrogen. If you are making hydrogen by burning natural gas in an SMR, trying to make money on that for hydrogen for mobility is a challenge. But if you find a way of making blue hydrogen, that means make hydrogen by capturing the CO2, that is helping the environment significantly and people will pay you premium and obviously, the ultimate thing would be that if you can make green hydrogen on a massive scale, that is the ultimate prize, and there, I think you can make money. I think the hydrogen growth is going to be phenomenal. The world is going to go into a hydrogen economy. 20 years from now, just about everything we do will be fueled by hydrogen. And therefore, we think we are positioned very well, and we are going to do our best to position ourselves to take full advantage of that.

And I guess sitting in Europe, now we've got this Green Deal. Do you think that Europe -- what Europe is trying to do is going to be isolated? Or would you actually see, for instance, the U.S. doing something at a federal level to try and I guess, replicate those assets?

Well, in the U.S., first of all, right now, California is ahead of everybody else in terms of what they are doing. And California is a nation of 40 million people, right? It's not a small place. I think that other states in the U.S. will follow California. I don't know what is going to happen at the federal level, obviously, that depends on what kind of administration we get. But I think the states, already Oregon is talking about it. New York is talking about it. So I think the states will take the initiative. But quite frankly, you are very familiar with the bill which was talked about in Europe. That is enough to create enough business to make us grow significantly, even if it was just for Europe. I mean, what they are talking about is asset, right?

Do you -- are you at Air Products agnostic as to which part of the hydrogen economy takes off first as in mobility for cars versus trucks and trains or grid infrastructure? Do you have any, I guess, preference as Air Products?

Well, obviously, it's the whole supply chain, but we think that the fastest growth area will be use of hydrogen to power buses and trucks. And the reason I say that is that because electric cars will be competitive and people who look at them as green, then it is for small cars and the battery is manageable. But in time, people will come to the conclusion that how are you generating the electricity. And therefore, electric cars will eventually go away. But for the shorter period of time, electric cars will be there. Therefore, we think it is better to focus on buses and trucks where you cannot find a battery to run those things and it becomes a lot more efficient if they are on that. And also, obviously, the generation of the green hydrogen, that's all opportunities.

Sure. And keeping up -- I'm just checking on time. I've got a couple of minutes left. Seifi, maybe one on -- well, your own, I guess, plan for Air Products. So your contract was just renewed for 5 years. I think if I look at the past 5 years, you've sharpened the portfolio, improved profitability, set Air Products on its growth path. What is it that you are keen to do for the next 5 years that you have not achieved already?

Well, I am very keen to, as they say, make our dream a reality in terms of the 3 areas that I talked to you about in terms of gasification, carbon capture and hydrogen for mobility. And if we do those things, we will see Air Products twice the size that it is by 2030. So I'm very excited about that. And I very much like to continue doing that. And I think our Board decided that, that was the right thing to do, and I was more than willing to continue to do what I'm doing as long as I can do that. So I am very excited about the future of the company. And my hobby is to come to work and work with the great people at Air Products in order to innovate and create value for not only our shareholders, but for everybody, I mean, create value for our people, by having a bigger company, employing more people, be a responsible citizen in the communities we live in and have a higher purpose to create an environment that people come to work, enjoy working and feel that they are doing something positive for the world by solving environmental issues that their children are going to be breathing the air, and I think that's a very good feeling for everybody.

; Well Seifi, I think that's a great way to finish out this discussion. So on behalf of all the investors on the line, I would like to thank you for your time this morning and I wish you a very good day.

Thank you very much, and I appreciate all of the good questions that you asked. Thank you, and have a wonderful conference.

Thank you, Seifi.

Thank you.