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

There is no better way to kick off our conference than with the CEO of Air Products, Mr. Seifi Ghasemi. Seifi has been kind enough to give us that honor since he's been with Air Products. Hopefully, everybody saw APD's press release this a.m., always keeping us on our toes, which contains a new outline of ESG and strategic initiatives through 2030. There's also a little fun video on the site as well in addition to their PowerPoint, which I encourage you all to watch. Naturally, ESG is one of the most important themes at this conference and the world investing at large. And as Seifi pointed out to me this morning, company's abilities to attract and retain the best talent in the industry. Safety is at the forefront of hydrogen mobility and carbon capture technologies among other tech, themes which are clear driving forces of the stock's impressive outperformance. But as I believe he's the best person to explain his strategy and ways to revolutionize the sector, I'm very pleased to hand it over to Mr. Seifi Ghasemi. Seifi?

Thank you very much, Chris. I really appreciate your comments. And good morning, and good evening and good afternoon to all of the people who are listening. We are very pleased to be at this conference. Traditionally, this conference has been the one that every year we announce some new things. And I am very pleased that today, in addition to answering your questions, we are giving a chance to present to you our commitment and our new goals for significantly reducing the CO2 emissions from our operations. So before I get into the details of that, I would like to just say a few words about Air Products in general. Air Products is a leading industrial gas company. We have sales of about $9 billion; 17,000 dedicated and committed and talented employees around the world who work hard to serve our customers every day. We operate in more than 50 countries. We now have a market capitalization of more than $65 billion, which makes us the largest American chemical company as measured by market capitalization, and we are very proud of that. We have been in business for 80 years. We have 170,000 customers around the world that we are very proud to serve every day. And we have more than 750 facilities around the world. And I have to say, thanks to the outstanding effort of our people in the last 6 months -- 9 months, despite the worldwide spread of COVID-19 and all of the issues related to that, our people have kept all of our 750 plants operating, serving our customers. At Air Products, our goal is to be the safest, most diverse and most profitable industrial gas company in the world, providing excellent service to our customers. And by the way, I would like to say -- remind you that it was exactly 6 years ago at this Crédit Suisse conference where we introduced our goal in terms of what we're going to do as part of our 5-year plan. So it's kind of very nostalgic to look at this thing and say that we have done what we said, and we are today the safest, most diverse and most profitable industrial gas company in the world. But in addition to this goal, we also have a higher purpose. In addition to delivering superior financial performance, our people want to feel that they are serving a higher purpose in their lives. And our higher purpose at Air Products is to be a company where we bring people from all different nationalities around the world together so that they can, in an open environment, collaborate, innovate and come up with solutions to solve some of the most significant energy and environmental problems in the world. That is our higher purpose, and it drives us every day. But just to demonstrate to you that we haven't forgotten about financial performance, I just like to show you some slides. And this is a slide that you see, it's our EBITDA margin and the progress we have made since we announced our goal 6 years ago. And you see that our EBITDA margin has gone from about 25% to more than 42%. 1,700 basis point improvement on our EBITDA margin, which means $1.7 billion a year of additional cash flow. We are very proud of this. Air Products people have made this happen, and they should get the credit for it. But this is now giving us the capability to have the financial resources to do a lot of good things as we go forward. And obviously, we have created value for our shareholders. In addition, if you go to the next slide, you'll see that the promise that we would improve Air Products' earning per share every year at at least 10%, and we have achieved a cumulative average growth rate of earning per share of 13%. In addition to that, we do believe in returning money to our shareholders, not in the form of share buyback, but in terms of a healthy dividend. Air Products has been committed to that. And in the last 20 years, we have increased our EPS at 10% every year. And in the last few years, it has been substantially more than that. We gave half of our free cash flow back to the shareholders as dividend. So with that, if I may talk a little bit about what we have achieved in terms of sustainability in the last 6 years. First of all, when you look at our operations today, we are saving the world 69 million tons a year of CO2. It's almost 70 million ton a year of CO2 emission that is being avoided as the result of the use of our products. 53% of our revenue comes from sustainable offerings. We are in 100% compliance with our annual code of conduct and we have saved $100 million in cumulative energy and water costs that we have avoided through productivity programs. The ratio of the CO2 that we save from the CO2 that we emit is on 2.5x. We have had projects where we have worked 27 million man-hours without a lost time accident. 21% of our female workforce is -- of our total workforce are females, and we have a goal to substantially increase that. And we have donated a significant amount to the communities. So overall, we have a very good track record of executing what we have promised in terms of sustainability. And obviously, today, I will introduce our goals as we go forward. When you look at the fundamental drivers for sustainability at Air Products, we are the largest producer of hydrogen in the world. Hydrogen is used for the cleaning of the fuel that we all use for driving the cars and the trucks around the world. Hydrogen is a very key element of that sustainable operation. In addition, we are one of -- we are the largest supplier of heat exchangers for the production of liquified natural gas, which is providing clean energy for the world. And in addition, we have significant developments in our products, oxy-fuel burners and the like, in order to make the operation of our customers cleaner. So overall, when you look at Air Products, we are about energy, environment and emerging markets. The fundamental growth opportunities that we have at Air Products which will help us to even contribute more to the sustainability of the environment is gasification where we can take very low-quality raw materials and convert them into chemicals in a clean and environmentally sustainable way. We are very focused on capturing carbon whether it is from steam methane reformers or gasifiers or other sources of carbon emission where we can capture the carbon and either use it for enhanced oil recovery, we can use it for sequestration or we can recycle it. And these are major projects that we are working on. And then the most exciting part is obviously hydrogen for mobility where we are right now one of the largest producers of hydrogen for mobility, and our goal is to be the leader in providing green hydrogen, carbon-free hydrogen for mobility, which we believe will be the energy source of the future as we go forward. So today's focus is obviously how do we provide solutions to the environmental challenges facing us. I'd like to remind you that sustainability for us is a core value. We are not just doing it because it looks good. It is, like integrity, like everything else, a core value in everything that we do. We have -- our business strategy is focused on that, and our commitment will only continue to grow to this very fundamental commitment. So are we actually doing this thing? What is the opportunity and how are we going to use this opportunity to substantially reduce our emissions? #1 is continued application of our innovations in order to improve on the operation of our existing facilities. The second one is to partner alongside our customers to innovate solutions for their projects. And the third one is executing very larger scale, mega projects that are absolutely focused on sustainable projects that will improve and enhance the use of clean energy as we go forward. So with that, what is really our goal? Our goal is what we call it "Third by '30." That means reduce our CO2 emissions by 1/3 by 2030. Now over here, first of all, why have we chosen 2030 and not why, like others, talking about 2050 -- carbon-free 2050? But first of all, quite honestly, I can sit down here and talk -- promise anything about 2050 because by that time, I might not even be here. So the people who start promising things way into the future, I mean where are they going to be to actually be accountable and responsible for delivering on what they have said. We have chosen 2030 because we hope to be there in September of 2030, sitting here in the same conference and trying to explain to you how we achieved or enhanced our goal. That is why we have chosen 2030 because it is a credible goal, it is short term and it is something that we can measure in a real way. The second thing is that we have chosen the metric of the amount of CO2 equivalent per million BTU of energy that we deliver. I mean some people have chosen the amount of CO2 that they will deliver their profitability. How does that make sense? That we can restructure the company and fire a lot of people and say now we have improved our CO2 emissions. I mean that hasn't done anything for the world. You have to reduce your emissions based on the amount of energy that you are delivering to the world. So that is why we have chosen the metric. And again, it is shorter term, it is a goal that we believe is a tough goal but it's a goal that we believe we can achieve. We are committed to that, and we are committed to be here to explain and be held accountable for delivering this goal. Now how do we make this thing a reality? How are we going to make it happen? #1, obviously, we will execute, as we have done in the past, actual carbon capture projects. We have the world's largest carbon capture operation right now in Port Arthur, Texas, where we capture more than 1 million tons a year of CO2 from our steam methane reformer and use it for enhanced oil recovery. So we have the technology, we know how to do this thing, and we are going to do projects along with those lines with carbon capture and sequestration and carbon capture for recycle. The second pillar is carbon-free hydrogen, where we want to be producing hydrogen which is based on wind and solar energy, and that would be the energy, especially for mobility, for driving buses and trucks around the world. Our NEOM project that we have announced is the best perfect example of that. The other one is executing low-carbon projects and improving the carbon content of the mega projects that we are doing. And the next one is operational excellence, where we take our existing operations and we continuously work on improvement. The same thing we do with productivity, continuously work on reducing water consumption, electricity consumption and all of that in order to make our operations more sustainable. And the last one is continue to increase the utilization of renewable energy for running our air separation units. We use a lot of electricity for producing the liquid oxygen, liquid nitrogen and argon that we produce and the more renewable energy we use, the better it is. And therefore, we are very focused on that, and we have done that in different parts of the world. So these are the 5 fundamental pillars of how we are actually going to deliver on our goal of what we are promising. If I may just get a little bit more into the details of this thing. On carbon capture, it is obviously the most highest impact way of reducing the impact of climate change. And there are significant opportunities because we have gasifiers, we have steam methane reformers that produce CO2, and we can capture those things. And as I said, we do have, as you see in the picture, a real operation that has demonstrated the technology and we are developing other technology. The next item will be hydrogen for mobility. This, I think, is going to revolutionize the world in the future. I think 50 years from now -- 30 years from now, we will be driving -- hydrogen will be a means of energy for mobility for just about everything. We are the largest producer of hydrogen in the world. We do -- but the hydrogen that we produce is based on hydrocarbons. We are putting this structure in place to be the leader in providing carbon-free hydrogen, what we call green hydrogen. We want to produce gray hydrogen we produce today. We want to produce blue hydrogen, where we can use hydrocarbons but capture the CO2, and then we want to produce totally green hydrogen like the project that we are doing in NEOM. If I may tell you a little bit more about NEOM, we have already talked about this thing and I'm sure Chris will ask me a lot of questions about this thing, but the project that we have announced in Saudi Arabia will produce 650,000 kilograms a day of carbon-free hydrogen. This is almost 1,000 times bigger than anything else that exists. It is a real world scale project. It will eliminate equivalent of 3 million tons of CO2 emissions. And it -- but the most important thing is that if we do this project at the industrial scale successfully, then the regulators in the world will be able to say that, look, this is the best available technology, and they can make everybody use it. That is what happened with CO2 capture from power plants in the 1970s. When people came up with electrostatic precipitators, and that became best available technology, then everybody used that. We want to demonstrate to the world that it is possible to produce green hydrogen at an economical cost and, therefore, get rid of carbon forever. So that -- a little bit more about NEOM. Again, we have talked about this many times, but we will use the power of solar and wind in Northern Saudi Arabia to produce green electricity, reduce that to break down water, H2O to hydrogen and oxygen, and we will convert that hydrogen to ammonia so that we can transport it, and then we can deliver ammonia to any stations and dissociate it and put it in cars and trucks. This is a significant investment for Air Products, but it is something that we are obviously pursuing with a great deal of enthusiasm. Now there are -- in addition to all above said, there are other activities that support Air Products set higher purpose. #1, we are absolutely focused on safety, we have improved our safety performance by 73% in the last 6 years. There is nothing more important than the life and limb of our employees. They come to work in 1 piece, and we want them to go home to their families in 1 piece. And we are very focused on this thing, and I think this is going to create a safe work environment which will help with all of the other things that we are doing. We are very committed to attracting talent and creating a diverse workforce. On a separate occasion, we will announce our diversity goals, which are going to be very ambitious, but we want to bring people from all works of life together as a team to be able to attract the best talent, and as a result, have a better company. We are and we have always been for the last 80 years committed to the communities that we are serving, and we are obviously committed to eco-efficiency. Therefore, environment, social and governance, ESG, is part of our DNA. We are committed to that, and we are very happy that -- to see that our investors are also very committed in that and they are pushing us in the right direction. So to close, I'd like to say, as we move forward, the way we are going to achieve our ambitious goal of cutting our emissions by 30% is what I said, I don't want to read the whole slide, you can see that. We are very focused on these elements which will help us. And therefore, I'd like to finish by showing you the slide that we are going to go from 114 kilograms equivalent per million BTU of energy by CO2 emissions to 76 by 2030. And as I said, I look forward to September of 2030 to be here to explain to you how we have achieved these goals. And I'm sure that -- I'm sure Chris will be here to interview me and ask me questions about that. Thank you, again. I really appreciate that. And now I am ready to answer any questions that, Chris, you have. And thanks again for giving us this wonderful opportunity.

Seifi, thank you very much. As a reminder to the audience, I can take questions on Bloomberg or e-mail. But Seifi, Air Products has a clear commitment to sustainability as a core value, as you mentioned, and further reducing emissions over time, but also what makes your platform unique is it's explicitly designed to gain healthy returns in doing so. So how is we, as investors, should be thinking about the Third by '30 targets in the context of your returns and growth profile? Do you expect an acceleration over the last 10 years? Or do you expect growth somewhat comparable to what we've already seen from 2015 through 2020? Just any brief thoughts on that?

Well, thank you very much, Chris. We are very much committed to what we promised the investors 6 years ago. That is, on the average, we are going to increase the earning per share of Air Products by 10% every year, cumulative average growth. We have delivered 13%. And even with the COVID and the impact of that on our results, we will continue doing that. I think by committing to the sustainability and the growth opportunities that we have in this area, we will be able to probably exceed that because this is creating significant growth opportunities for us in terms of, again, gasification, carbon capture and hydrogen. So I'm very optimistic about the growth opportunities for Air Products. But then the other thing that I'm very optimistic about is not only do we have a great group of people who are helping us but our financials, our balance sheet is such that we can actually do these things. We have the financial and the balance sheet capability to go and do a project like NEOM and all of the other projects that we are doing and actually deliver on the returns as we go forward.

Speaking of projects and balance sheet, on the hydrogen front, you mentioned in your remarks, you've committed $3.7 billion for what I think most of us consider 2 separate projects, 1 in terms of the production and also the offtake. Can you speak to what's especially exciting about these 2 projects? Your willingness to do additional hydrogen for mobility projects, your potential willing to assess partners on the downstream front. So just what are the kind of the key factors that you're looking at? What have you been hearing from investors?

Well, the fundamental -- when you're looking at growth, we are -- I don't want to use very big words, but there are 2 strategies you can have. One strategy is what I call the red ocean strategy, which is that you are in a business, other people are in a business, and you are trying to grow your market share in the same business. That ends up to kind of self-destruction, everybody shoot themselves on the foot, the market doesn't grow. And as a result, prices will go down. And as a result, nobody makes money. You have seen examples of this thing in the power sector and all of that. We are trying to pursue a strategy which is blue ocean strategy, that is let us go where nobody else has been. Let us look at new projects, at new opportunities where we can be the leader. And by being the leader and by being the first starter, then we can have very good returns for our investors. So when you look at what we talk about gasification, what we talk about carbon capture and especially what we talk about the green hydrogen, that is where nobody is there. Nobody is doing a project of the size and magnitude of what we are talking about carbon-free hydrogen. If we execute that project properly, bring it on a stream at the right time and have that product available, it will be something that nobody else has. And as a result, if you have somebody that nobody else has, then obviously, you will have a better return because people are willing to pay you more. It's just today, in the race for the vaccine, anybody who comes up with the first vaccine will obviously make a lot more money than somebody who is #10. So that is our strategy to go into new areas. That is why I keep talking about innovation, newer strategies, and that is what we are all about.

And another part of this that I think everybody is really focused on is to truly obtain green hydrogen. It starts with renewable energy, the entirety -- elimination of emissions. Obviously, that starts with the cost as well. Can you speak to your general assessment of costs using wind as well as solar on Saudi Arabia versus the other areas and regions which you've seen potential projects? Just any way you're comfortable in assessing, that would be greatly appreciated.

Well, thank you very much, Chris. First of all, we want to be a supplier to -- we are here to serve our customers. So some of our customers will continue to want to use gray hydrogen. Well, we are the largest producer of gray hydrogen. We will supply to them at very competitive cost. Some of our customers are going to be focused on what we call blue hydrogen. That means give me hydrogen. I don't care whether you are making it from hydrocarbons, but I want you to capture the CO2. We will do that. We know how to do that, and that would be blue hydrogen. It will be more expensive than gray hydrogen, but it will be a different product. The ultimate thing is obviously NEOM where we produce green hydrogen, that is no carbon footprint. It is all solar and wind. That project that we are executing, I obviously don't want to get into the details of all of the economics. But what we are saying is that with the scale of that project and the innovative way that we are going to distribute it, which is through conversion of the hydrogen to ammonia and then conversion of ammonia at the point of use, we will be able to produce green hydrogen at a price which is not prohibitive that nobody can use. We will -- for the -- it is just very much like you are making cars. You obviously make a car which sells for $10,000 for a certain group of people. You make a car at $30,000 for a certain group of people. And then you make cars which are $200,000 for another group of people. So green hydrogen will be for that set of people. The people who want -- it still does the same thing because people say, well, what's the difference? It still drives a car. Sure. You and I can go to work in either one of those category cars, but some people choose the other one because of their preference. So I think there will be parts of the world where the authorities would mandate that, look, I just want to get rid of carbon. I want you to use carbon-free energy. And we are targeting those kind of markets but with a product that is not so expensive that you cannot actually practically use it. It is more expensive, but it is not prohibitively expensive.

So you mentioned another big aspect of your ESG initiatives are carbon capture technologies. And as you mentioned, you already have an existing facility which has been doing this for several years. Can you speak to those capabilities, your technology, the ability to retrofit existing facilities and then also the catalysts such as state and country subsidies to potentially spark some additional projects as we go forward?

Okay. Thank you. First of all, in terms of technologies, we definitely have the technologies on how to carbon capture -- how to capture the CO2. We are doing this thing in Port Arthur with the PSAs and TSAs and all of that, that we have. We have a lot of steam methane reformers around the world. So the technology for capturing it is there. The issue is what do you do once you capture it. When we are at the location like Port Arthur, when we are close to a pipeline that can take the CO2 and use it for enhanced oil recovery, then that becomes an easy solution. Other parts of the world, our plan is to sequester. We will capture the carbon and then sequester it in wells and all of that in the ground. It is a public project on this thing that right now many people are participating in, in Rotterdam, where the idea is to capture the CO2 from all of different refineries, and we are a big participant in that. And then by a pipeline, take that and sequester the CO2 in the oil fields in the North Sea. There is another project, Northern Lights, in Norway, which does the same thing. There is another project where people are talking about capturing the CO2, liquefying it and then put the liquid on a ship and take the ship in the middle of the ocean and sequestrate. There is a lot of these kind of projects going on. And we will participate in those, and we will do sequestration. The third one is the technology we are developing which is called dry reforming, where we can capture the CO2 and just recycle it and continue to recycle it so that as a result, you don't have a -- you have like a closed loop. And that is something that we have been working at lab scale and, hopefully, we will commercialize that. So those are the 3 main areas that we will be pursuing carbon capture.

So you mentioned the -- if I'm not mistaken, the Porthos project. You also did a deal earlier this year with PBF, which has a few refineries in California. Is there an opportunity here over the long term in excess to the initial $580 million captive asset investment?

Well, I don't want to get too far ahead of ourselves. But obviously, with the steam methane reformers that exist in those refineries, you are emitting the CO2. There is an opportunity to capture that CO2 and sequestrate and we are looking at those kind of projects, yes.

So in terms of end market uses, can you just quickly address the essentially 2 or 3, a couple of categories in terms of the uses of CO2 once it's captured, ranging from EOR, which I believe you already mentioned, sequestration and eventually recycling. Can you just hit on kind of your brief -- your expected time lines of those uses just over the next 5 years and what are going to be the most attractive opportunities for Air Products?

I think the most attractive opportunity will probably be sequestration. The total recycle is going to take time for us to develop it in a commercial thing. So within the 5-year time frame that you talked about, I think sequestration will be the most important element of what we are going to do.