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

Terrific. Well, again, this is Duffy Fischer from Barclays Chemical, and I have Mike Leithead, who's on the team with us as well. And we're very happy to welcome the team from Air Products today. We have CEO, Seifi Ghasemi; we have COO, Dr. Serhan, with us; and then we have both Simon and Mun from IR if they need to step in. But Seifi, again, always very happy to have you. Again, normally, we like to do it down in Miami, but we'll do the best we can virtual this year.

Generally, we always start off just by asking you because your business is so concurrent with what's happening in the industrial world. If you could kind of just walk around the world, walk around your end markets and kind of talk about what you're seeing in the market, what your expectations are for COVID impact and for recovery from COVID.

Well, thank you very much, Duffy, and it's a pleasure to be here with you and the rest of the people who are listening to this broadcast. And as you said, I have Dr. Samir Serhan, who is our Chief Operating Officer, with me to help me answer the questions. In terms of what we see, if I may start from the eastern part of the world, we are very bullish, as I'm sure it doesn't come as a surprise to anybody, about what's going on in China and in Asia in general. Chinese economy is back up. The COVID has been -- they don't have any COVID issues. Our people are going to work as normal. Industrial production in China was up 8.3%. The exports from China were up 18%. Our business there has gotten back to normal. Obviously, in the month of February, there is going to be a break because of the Chinese New Year. But overall, we are doing fine in Asia, except for this fund project that we have that the Lu'An thing that it did affect our numbers last quarter, and it will affect our numbers this quarter. Then in Korea, we are doing fine. In Taiwan, we are doing fine. Malaysia, we are doing fine. And in India, we have a joint venture. It's not huge. We do not consolidate it. But again, business is doing very well in general. And now, we are one of the largest supplier -- we are the largest supplier of oxygen in India, and unfortunately, because of COVID, there is a lot of demand for that. And you can see that our so-called equity affiliate businesses are doing very well, actually. Then we get to -- in the Middle East, the biggest thing we have is Jazan, and we can talk about that. In Europe, our people are doing a very good job to live with the downturn as a result of the COVID thing. We have been able to continue to increase prices, keep our costs under control. So our performance in Europe, as you saw last quarter, was actually good, and we hope that, that will continue. But economic conditions in general in Europe has -- have not improved yet. We don't see that. Then when we come to the Americas, that is where we have issues in terms of the impact of COVID. We do not see the U.S. economy picking up, industrial production picking up. And sometimes when I say that people say, well, look at our competitors' volume, they are doing fine. Well, that is because of their portfolio because they have a lot of exposure to health care. So if you are in health care in the U.S., you are going to do well, unfortunately, because of COVID, or same thing in Europe. Right now, if you add oxygen, you can set it for just about any price in Mexico or in Brazil. So we do not have that exposure. Our exposure is mainly to the industrial side. And so I'm not very optimistic about the prospects of the U.S. economy. And Latin America is obviously an issue, and it will continue to be an issue. Although right now, we are seeing some sign of improvement because of COVID, quite honestly, because we are selling a lot of oxygen. So that's kind of a very general way of talking about it. And obviously, I'll be more than happy to go into any further details that you want us to.

Sure. Yes. We'll dig into a lot of it. If you don't mind, maybe I'll lob one to Dr. Serhan.

Sure.

You've been there now 3 years. So -- and you haven't been in front of investors a whole lot. But in this new role, obviously, you will be. Maybe talk about exactly what your purview is today, what are you focused on. And then kind of looking over that 3 years, what do you think Air Products does really well? And where do you think that Air Products can improve?

Actually, thanks, Duffy. It's a pleasure to be with you. Actually, this is my fifth year at Air Products, so it's been really very exciting. I mean my responsibilities at Air Products is technology, business development, engineering, project execution, organization worldwide. I have responsibilities also for the Americas business, Middle East, India and also some of our equipment technology business like LNG and Gardner. It's been exciting. We have a resilient business model where we really have people working together in making their dreams a reality and executing our growth strategy with very strong focus on sustainability objectives. So it's been exciting really dealing with these mega projects all over the world. We're active almost in every single continent, so it's really a great time of my life. We have done a lot at Air Products to execute, to be able to execute these mega projects. So we have developed a program that's called high-performance organization with 14 project leaders. If you look at our organization, how can we simplify it, focus on accountability, make sure that we have talented, committed people, streamline of processes because we're doing execution in 24 hours around the world. So you really need to have solid infrastructure and processes, updated our tools, how we do really our engineering, how we do our procurement, project controls. So we fill in many gaps where we really feel good now about delivering on our projects and our growth strategy.

Perfect. Seifi, maybe jump back to you because you and I kind of have the favorite same chart, your EBITDA chart that you've shown since you've been there. But the last 2 quarters, it's ticked down a little bit. So one of the questions I get from investors a lot is, if you look at the last 4 or 5 quarters, what's the right way to think about the extrapolation of that going forward? I mean how much of that tick-down was just COVID-reduced volumes? How much of that was maybe just a little bit of pricing that came back? From that base for the last 4 or 5 quarters, how should we think about that over the next 1, 2, 3 years in your view?

I think that -- we have talked about this thing, Duffy, and it's a very good question. A while ago, about 2 years ago, we had gotten to about 35%, and we were the best performing. And people, they are asking me, "What should we assume?" And I said, "35%, 36% would be a good number." I think right now, I can say that I think something a number between 39% and 41% is a good number in terms of EBITDA margins. Our margins do go up and down. Right now, there are 2 things that has affected our margin: one is, in general, the COVID thing, obviously. But the second thing is that when you have a project like Lu'An where we are not getting the full income from that. That obviously affects our margin. So overall, when things come back to normal and then when and if Jazan comes on stream, that would -- so I'm pretty confident that in the next few years, EBITDA margin of 39% to 41% would be a good average for Air Product.

Fair enough. And then you mentioned a couple of the big projects, and that's been a big part of the story for Air Products over the last couple of years. So let's drill down into kind of the 3 big ones, maybe starting with Lu'An. Hit a speed bump, your fourth quarter, calendar third quarter, we found out about it. So walk us through kind of what's happened in the interim and how we should think about it is we're doing our modeling or handicapping a value for Air Products. Again, with this 1 particular plant, which, again, coal gasification was a big part of the growth story and a number of the unnamed projects, yet they're unannounced projects that we'd like to do. So how does that follow on to impact future projects as well?

Yes. Well, I think that we have to look at Lu'An in a proper context. Number one, everybody is focused on Lu'An, but we have 4 other gasification projects that we are participating in. The Lu'An investment that we have is about $900 million at the time we made the investment. Obviously, it's lower now. But the other projects that we are involved with coal gasification in China, the investment is around $1.2 billion. Those are all going fine. So Lu'An is not an example of what is going -- the dynamics in Lu'An should not be interpreted as if affecting gasification in China and so on. Lu'An is a particular case. What is the particular case about Lu'An? I hope you get some credit for being transparent and telling you all the details. Because quite frankly, if you hadn't said anything, I'm not sure if people have -- would have figured out if we have 1 or 2 quarters back and forth with EBITDA. A specific issue is that we have no issue with Lu'An. We have been getting paid. We went into the shutdown. It was -- the plan was operating very well. The turnaround was successful. We got paid per contract. Then when it came time in October to restart the facility, that is when Lu'An decided, "Hey, I want to keep the plant shut down because we are doing a reorganization, and our new Chairman wants to take a look at all of the projects," okay? So then the question was, "What do we do?" The first thing that we decided to do is, we should tell the investors, exactly what is happening. The second thing was that, okay, what options do we have? One option is to say, "Well, sorry, you're shutting down the plant. You are obligated with us in accordance with the contract that you need to pay us because this is not a scheduled shutdown or anything." And they would have said no, and then we would have gone to court, right? We figured out that is it worth it to go to court which takes a few months to go to and get hearings and all of that, and then by that time, the plant will get restarted, and then all we have done is done a lot of damage to our reputation, to their reputation and all of that. So we made the conscious decision that, look, customer, we understand why you are shut down. We'll give you some time, I mean, but in the meantime, we can get 0, so give us a reduced fee. And then when you come back on, you come back on. But because of the reduced fee, whatever the length of the time is, you need to extend the contract so that our overall project stays the same. That is what they have agreed to. That's what they have done. So we have done this thing in order to preserve our relationship with the customer that we like, we respect, and we think we have a lot of opportunities for in the future. And this is not just a customer, it's the state of Changzhi province because they -- it's a state-owned company. So that is -- we can get criticized for the fact that, why are you doing this thing? Well, we are doing it because I think it's the right thing to do, and we don't want to damage our relationship with these people. So to interpret Lu'An as if the contracts in China are big or coal gasification is a big thing, that is -- that would not be the right way of looking at it. And I know that we have some competitors who would like to portray it that way, and they say, "I told you so. You see this is why I'm not in this business." While they say they are not in this business, while at the same time, they are doing -- all they are doing in Singapore, they're doing coal gasification, but -- gasification project. But I don't want to go there. Whatever our competitors want to do or say, it's none of my business. We made a conscious decision to work with this customer rather than trying to kind of be difficult, where we didn't think that it would be to our best interest for the long term.

Fair. Yes. And I think, listen, most people would give you kudos for the way you've worked it out. I think the biggest criticism that I've heard on this from investors is just the original decision to put the $900 million in because the way it looks to us on the outside is this plant is close to breakeven on its production at current oil prices. Again, it is -- because we don't know, right? Lu'An's not public, so we don't get to see their numbers. But that seems to be the perception is that this plant is not making the returns that the company would like through Lu'An, and that's why it's been shut down. But obviously, you would have a better view on that kind of stuff. So from your standpoint, do you think the actual Lu'An plant itself is a good economic vehicle to run for years into the future?

Well, that is our judgment. That's why we work with the customer. And besides that, it's one thing to talk about Lu'An then oil prices there, $30, and it's another thing to talk about it today, then oil prices are $60. Yes, the exchange. Yes.

Fair. So let's jump into the next big project in Saudi, Jazan. Give us an update how you think that's going, obviously. On the last call, you talked about it proceeding better than you thought at the end of your Q4. But again, what should people on the outside be trying to extrapolate from that? How comfortable are you that you can get that deal done? And would you or would you not advise people to actually put that in their numbers for Air Products at some point in the next year as we're trying to model you into the future?

Well, I'll have Dr. Serhan here. He is intimately involved in Jazan. He has a lot of his people there, and I'd like him to make some comments. But before that, I'm obviously a lot more optimistic about Jazan than I was in November when we talked. We have been able to reach a principal agreement with the Saudi Aramco senior management. It's just a matter of putting that to work. As far as ventured people put it in their numbers, as long as they have waited this long, I would wait until 2 or 3 months until we actually do it and then put it in the numbers. That would be the safest thing to do. But Samir, would you like to give people a flavor of where we are in the -- not only in the negotiation, but also in terms of the activities in the plants and all of that?

Sure. I mean, definitely, we're having very productive discussions with Saudi Aramco. Financial terms are agreed. We're finalizing now the commercial agreements. Project financing is proceeding well. And behind the scene, there is around 800 people between Saudi Aramco, ACWA and Air Products exports, working on commissioning the facility to get it really on stream as soon as possible. So we do see clearly the finish line, and we are very much aiming for that finish line as soon as possible. And just to put things into perspective, we're familiar with the customer, with that site. We -- as you recall, that mean we had a $2 billion investment there for the ASU. That was a mega project for us. And we managed to execute that on a schedule, quality, under costs, under budget and also 27 million hours without a lost time incident. So -- and this is really what attracted Saudi Aramco to Air Products to do this bigger transaction. And to put things into perspective, you're talking about 1 deal here for around USD 12 billion. I mean this is a one of a kind in the industrial gas business. That takes you sometimes hundreds of ASU projects to do, and each one of them may negotiate for 2, 3 years before you get there. Now you're doing that all in 1 project with 1 BFC. So it puts things into perspective about this project. Yes, maybe it's a little bit behind the schedule, but the size and the complexity of this transaction, it's really warranted to do the right things.