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

Good morning, 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 Simon Moore, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Auder. Good morning, 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; Sean Major, our Executive Vice President, General Counsel and Secretary; and Dr. Samir Serhan, our Chief Operating Officer. As I'm sure you saw, Air Products issued a press release earlier this morning entitled, "Air Products, ACWA Power and NEOM Sign Agreement for $5 billion World-scale Green Ammonia Production Facility Powered by Renewable Electricity for Export to Global Hydrogen Markets." The press release and the slides for this call are available on our website at airproducts.com. This discussion contains forward-looking statements. Please refer to the forward-looking statement disclosure that can be found in our release and on Slide #2. Thank you for joining us to discuss this exciting opportunity. We look forward to discussing not only the NEOM production project but also the massive opportunity to provide clean carbon-free hydrogen to power buses and trucks around the world. After our comments, we'll be pleased to take your questions. We will be limiting our comments and only taking questions pertaining to this project. We look forward to discussing our quarterly results with you on July 23. Now I'm pleased to turn the call over to Seifi.

All right. Good morning, everyone, and thank you, Simon. I also like to thank everyone for taking time from your busy schedule to join our call today. I am obviously very excited to be on this call, as we will explain the details of this unique, innovative and world-scale project to produce carbon-free energy for the entire world. We at Air Products, as the largest producer of hydrogen in the world, are very honored to be partners with NEOM and ACWA Power to bring carbon-free hydrogen to the world on a massive scale. NEOM is the visionary and carbon-free city of the future. ACWA Power is the world leader in production of renewable power. Therefore, the 3 of us make a perfect team for this project. Air Products, NEOM and ACWA Power are the natural partners, complement each other's capabilities and make this project a reality. Now please turn to Slide #3. We have been working on this project for the last 4 years. And today, I'm very happy to announce that NEOM, ACWA Power and Air Products, with the full support and approval of their Board of Directors, have decided to move forward with $7 billion of total investment to implement a unique, innovative project to produce carbon-free hydrogen and deliver it to the end users around the world. Please turn to Slide #4. At Air Products, whenever we embark on a new project, we ask ourselves why. Why do we want to do this? The answer is on Page 5. We are proud to be part of this undertaking because it is the first and largest and the most innovative project to make mankind's dream of carbon-free energy a reality. But in addition, the execution of this project is fully in line with our higher purpose as a company. As you can see on Slide #6, our higher purpose at Air Products is to be a company that people from all walks of life join together, work together and feel that they belong and that their contribution matters. Our higher purpose is to come up with innovative solutions for the challenges that face our customers and the world, especially when it comes to clean energy. Therefore, this carbon-free hydrogen project will benefit the world by providing clean energy on a larger scale and eliminate CO2 and all other emissions from equivalent of 700,000 cars. That is in line with our higher purpose. Now please turn to Slide #7 for a more detailed explanation of the project. We intend to use the power of the sun and the wind to produce about 4 gigawatts of power, which will be used to produce about 650 tons of carbon-free hydrogen from electrolysis of water. Now the issue has always been that, okay, you can find a place where there is sun and wind and you can produce hydrogen from electrolysis. But how do we take that hydrogen molecule, which is in gas state or even then if you liquefy, how do you get that molecule into a truck or a bus in Frankfurt or in Tokyo? Therefore, the uniqueness of this project, the innovation that we have come up here is to take that hydrogen gas and make ammonia with it, and ammonia, this green ammonia now is a product that can easily and commercially be shipped around the world with available technology and available ships, put on trucks and then delivered to bus stations, truck depots around the world. Therefore, we have found a very effective way, an innovative way, of actually delivering the hydrogen -- green hydrogen molecule to the end user no matter where they are. That is the key to this project. The amount of ammonia produced is about 1.2 million ton a year. Now please turn to Page 8 for a discussion of the role of the 3 partners. As you can see on Page 8, the production facility -- that doesn't mean production. The wind and solar facility is the expertise of ACWA Power. They have done this before, and on a mega scale, they have built that. And as I said, the capacity of that is about 4 megawatts. We take that electricity, and through the hydrolysis of water, Air Products will do that and execute that, but we will use the technology from thyssenkrupp. We put out an announcement yesterday saying that we have an exclusive agreement with thyssenkrupp for doing this. They are by far the largest and the most innovative technology leader in this field. So we are very happy to be cooperating with them. Then obviously, Air Products will build an air separation unit, and then we bring the hydrogen and nitrogen together into making a green ammonia. Air Products will do that with the technology that we have with Haldor Topsoe, and we have made an announcement before about that. So now we have 1.3 million tons of ammonia, green ammonia, to be shipped. At this point, I want to stress that ammonia, we use the word ammonia, but ammonia right now is only a means of transporting the hydrogen. We are not selling ammonia. We are transporting hydrogen to sell hydrogen to the world. The location of this project is in the visionary city, carbon-fee city in the Kingdom of Saudi Arabia. Not only NEOM has the right vision for what they want to do, but the fantastic thing is that the location that they are is ideal for the project because the particular location that they are, especially the piece next to the Gulf of Aqaba has wind, significant amount of wind in the night. Therefore, we use the sun during the day and the wind during the night so that we end up with more than 70% continuous power during the day, and for the other 30 days, we build the storage, so it makes it technically feasible to have this operation come together on an economical basis. So as I said, we are obviously honored and delighted to work with NEOM because of their vision. But in addition, the location is absolutely the right location that lends itself to the concept of what we are doing. So now page -- turn to Page 10. So what did we do once we have turned the hydrogen into ammonia? We transport it with commercially available ships. These LPG ships already exist. We bring it to wherever they locate, whichever part of the world we want, and then we will take it by truck and deliver it to what we call processing stations, which will be built at bus and truck depots. There, we will dissociate the hydrogen, compress it and delivered to the buses and trucks. Please note that we are not building gas stations here. These are specialized units, processing units that will be connected, built in bus depots and truck depos where there are hundreds and thousands of buses and trucks come together to make the whole project practical. As I said, we are not building gas stations around the corner. Now one question that sometimes people ask is that, okay, you are going all the way to another part of the world in order to make hydrogen from water. Well, why can't I make it in the U.S.? I just connect it to the grid, make it a station and deliver it to the buses and trucks. But the difference is that, as you see on Page 11, that if you make electrolysis of water in China, where most of the electricity is from coal, you generate 50 kilograms of CO2 for every kilogram of hydrogen. That means you defeat the whole purpose of green. You cannot call that green hydrogen. You cannot even call it renewable. I mean it's not green. It's not renewable. It's just -- even worse than any kind of a gray hydrogen that we can make from a steam methane before. And even if you are in a place where the grid is 100% powered by natural gas, you are still going to end up producing 23 kilograms of CO2 per kilogram of hydrogen. That is why this project, if you want really green carbon-free energy, you have to have wind and solar power, and there are only certain locations in the world that lends itself to a massive production of those stuff. And therefore, you need to find an innovative way of transporting that, and that is what we have come up with the conversion to ammonia. So now turn to Page 12. There, I have the details of the commercial arrangement in terms of investment on the production site, which will be in NEOM. The capital estimate is about $5 billion, which will be 1/3, 1/3, 1/3 between the 3 partners. We are equal partners, and we are very proud of that. And ammonia will be given to Air Products, and the financial returns for that project are such that we say that they are better than the guidelines we are giving. And then Air Products will receive the ammonia. We, as Air Products then, will invest an additional $2 billion to develop the whole downstream, logistics and infrastructure to move this stuff, move it by truck, build the processing station and deliver this 650 tons of hydrogen to end customers. And I did explain to you a little bit more about how we intend to sell the product. So in total, Air Products investment in this project will be about $3.7 billion. Now please go to Page 13. I'd like to tell you a little bit more about these processing stations that you're talking about. We bring the ammonia, we will use the ammonia itself as source of energy to dissociate the ammonia to hydrogen, and then we will use some of that hydrogen to drive the compressors to compress the hydrogen to 10,000 psi, about 700 bars, and then we will put it in buses and trucks. The important thing I noticed that you notice here is that the processing units themselves are totally self-sufficient. We are not going to use any power from the grid. Therefore, the molecule which is delivered to the truck and to the bus are 100% carbon-free. And therefore, they qualify for, for example, in some of the places where they have low carbon fuel standards, they fully apply as zero footprint. That is the key thing that's totally self-sufficient here. So on Page 14, I'd like to stress that we are talking about providing hydrogen to buses and trucks, not passenger cars. Passenger cars are going to be electric most probably for a long time and they don't use a lot of hydrogen running it on. So we are focused on buses and trucks around the world. And then in terms of Page 15, our concept of selling it, we want to do it a little bit like our sale of gas model. That means that we will go to a bus depot, a truck depot around the world and say, look, you have 2,000 buses that you are fueling every day. You know what your demand is. We are going to build this processing plant, process the ammonia, produce hydrogen and sell in to on a long-term, 10-year, 15-year, 20-year basis because it's very easy to predict what the demand of the customer will be. They have a historical record of how many buses they -- how many miles they drive and all of that. That is the intention of how we would sell them, which is in line with our long-term sale of gas model. Please turn to Page 16. God willing, we will have carbon-free hydrogen to power buses and trucks at the latest by 2025, which gives us plenty of time to build the infrastructure and be ready for when this thing comes on stream. So if you go to Page 17, this project is a perfect fit, absolutely perfect fit for our long-term strategy that we have talked to you many times before. It is, number one, aligned with our higher purpose as a company. It creates significant shareholder value because we are producing a unique product. It positions us long term to be a leader in the demand for carbon-free hydrogen. The demand for carbon-free hydrogen is huge. Even with this massive project, if you do the math, we will only have enough hydrogen to power 15,000, 20,000 buses and you know how many buses and trucks there are in the world. So there will be many more of these projects, and we are going to position ourselves to be the leader, to have the technology to make these things happen, many of these happen in the future. And then obviously, this makes a firm statement about our total commitment to sustainability. And how can anything be better for sustainability than carbon-free hydrogen? Zero carbon, zero footprint. That is our presentation, and now we will be delighted to answer your questions as usual.

[Operator Instructions] We'll go first to Duffy Fischer at Barclays.

Congratulations.

Thank you.

Maybe two questions for me. One, just on the science of it. If you're using your own molecule, your own energy for all the different processes through, what's the energy efficiency of this from front to back? So when you end up with solar, wind power and you go through all the different steps, what percent is left by the time the end bus or truck ends up using it?

Well, obviously, that is a proprietary information that we don't necessarily want to disclose, but we don't lose a lot.

Okay. Fair enough.

Because -- yes, thank you.

And then just the second one is, in general, what's the plan for how this will be accounted? Will this -- I'm assuming that you're not going to be able to bring this on the balance sheet as you're only a 1/3 owner of the JV?

Duffy, I'd like to have Simon comment on the production side. You see, this is 2 parts. One is the production facility. On that, we are a 1/3 owner. So we will not be able to consolidate that most probably and take credit for all of the EBITDA that that would generate on all that. But when we sell the end product, the hydrogen, then that is 100% Air Products, and we will account for the profitability. So you need to look at this thing as 2 investments. One is $1.6 billion of investment for a production facility and the other one is $2 billion of investment, which will generate a certain amount of revenue, [ like as a cost ], and it has a revenue and the returns for that, okay?

We'll go next to Kevin McCarthy at Vertical Research Partners.

Seifi, can you speak to the scalability of both green hydrogen? And what is the investment opportunity or market opportunity here over the medium to long term in your view?

Well, we think that -- and we have looked at a lot of numbers and a lot of studies and some of them are public, we think the total size of hydrogen for mobility, hydrogen for mobility, the total size by 2030 will be $60 billion, $70 billion, if not more. So the opportunity is huge. Now some of that hydrogen will be served as gray hydrogen, I'm sure, but green hydrogen will be in demand, and we think that about 2030, you might see 10 of these projects.

Okay. And then secondly, if I may, can you speak to the financing paradigm here, both for the $5 billion project as well as the $2 billion distribution piece?

The $2 (sic) [ $2 billion ] distribution piece is 100% Air Products. We don't plan to project finance that because if you need money, we have the money. If we need money, we will just issue bonds. So there is no project finance for the $2 billion part. On the -- currently on the $5 billion, there is no plan for financing, and it will be cash from the partners. But in the future, depending on what the markets are, we might change our mind, but that's the way we are looking at it right now. That is why I'm saying Air Products' contribution will be 1/3 of the $5 billion plus the $2 billion.

We'll move next to Steve Byrne at Bank of America.

I was curious, of the 650 tons of hydrogen that this project will produce, do you have at present any long-term contracts locked in with specific countries or companies that would build the truck fleets and so forth?

I don't think I should comment on that because that's just giving too much information to our competitors. The others talk about that.

Well, is the -- yes. I'm just wondering who has -- who carries the risk on the selling price of this ammonia? Is it the JV? Or is it Air Products?

Air Products.

Okay. Do you -- does the JV provide a production price of that ammonia that you can then work with to calculate your own ROI on that subsequent? And is that...

Yes. Yes, we are the offtaker of ammonia. So we will offtake the ammonia and pay the JV certain dollars per ton for that so that then the JV has a return, and then we take that. That is our cost, and then we go and sell it, and then when we make the money, it's all 100% Air Products.

And does that JV have a commitment from ACWA Power on the cost of the electricity that will be delivered into the JV? Is that something in a cents per kilowatt hour you can comment on?

No, no, no. They wouldn't have any cents -- they are an investor in the total project. So the cost of electricity will be the variable cost of production. They are not building this and providing power to the thing. They are an investor in the whole JV. The profitability of the JV is going to be shared with everybody, the same way that we are not selling green hydrogen to the JV to make ammonia. We are all partners. We form one company and that company builds the plant at a certain cost. It has a certain variable cost, and it has a certain revenue, which is what Air Products will give them for every ton of ammonia produced, and then they have their own profitability, and all of us share in that profitability.

We'll move next to Jim Sheehan at SunTrust.

Okay. Was the project competitively bid? What can you tell us about the process for how this project came about?

I cannot disclose that. I shouldn't. And quite honestly, if there was competition with us, we had formed -- we have been developing this project for a long time. So I don't know. That's the best way to answer that if there was competition or not. But most probably, as usual, some of our competitors would say, like everything else we announced, that they looked at it. They didn't want to participate. So probably, they will make the same comment on this one. But anyway, I don't have any comments. I don't know whether there was competition or not.

Okay. And when you transport the ammonia from Saudi Arabia to the end markets in Europe or Japan or wherever, if we think about the fuel costs and the transportation cost of that, are those costs going to be passed through to the truck depots by formula? Or do you take risk on the fuel and transportation costs?

Those costs are marginal. They are not huge. The cost of transporting ammonia from Saudi Arabia to Europe is probably $60 a ton. It's not huge in the scale of the project.

And did you say that these...

Obviously, those costs, we will consider those costs when we are pricing the product with end-user so that we can get our margins.

Okay. And on the sale of gas model, you -- I think you referenced it was similar to your typical model. So are you going to have take-or-pay contracts for everything? And would it be a 15-year duration? Or is that yet to be determined?

It is yet to be determined. It depends on how we negotiate these things and it will be different in different parts of the world. Depending on the size, I mean, if somebody has a bus depot with 3,000 cars, 3,000 buses, they will get a different deal than somebody who has 100 buses, right? So we will negotiate those things and the terms and duration and all of that. Those are all individual teams that we negotiate like everything else that we do.

We'll move next to David Begleiter at Deutsche Bank.

Seifi, on the hydrogen refueling stations, the $2 billion you're spending, how many stations do you intend to build with that $2 billion?

Well, it depends on the size of the stations and so on, but it certainly is not going to be more than 100, probably a lot better than 100, depending -- I mean, if you find somebody -- as I told you, the amount of hydrogen we are making is massive. It is almost 100x more than anybody else has ever built, but all it takes is about 20,000 buses to use it. So if you have some state somewhere in China who says, "Hey, I have 20,000 buses," then it will be 2 stations. If we go and do it all over the world, it will be 50 stations. But it is not -- we are not building 2,000 gas stations around the world. That is not where we are going at all.

Got it. And did you consider...

That is another plan.

Right. Did you consider taking a partner for the distribution side of this project, either for their expertise in distribution or other aspects? Or do you really have the expertise to do this on your own?

We have the expertise all today now because over here, once we produce it, the production I told you, we are dealing with the world experts to produce. Then the issue becomes the transport is regular ships, the car is -- the processing unit is something that we have the expertise in terms of how we can dissociate ammonia. We know hydrogen extremely well. We know hydrogen [ completion there ]. But most important, we have the technologies. We have more than 50 patents on the actual delivery devices that takes the hydrogen and puts it in the tank. We are the world leader on that. We have many, many stations in actual operation. We actually have 250 of them under construction around the world already, and that is our expertise and our know-how. Why would we want to share it with anybody? Nobody is near where we are. Look, I can't imagine any partner, and we certainly don't need a financial partner because we have the money.