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

Hi, everyone. Good morning, good afternoon, good evening to those of you that are joining us today. My name is Steve Byrne, and it's a real pleasure for me to host Seifi Ghasemi, the CEO of Air Products. I've been following your products for 20 years in the seat that I have and the change that I've observed in Air Products over that 20-year period has been truly impressive. And one of my observations of being in this role is the role of leadership that separates good companies from great companies. And I'm going to embarrass Seifi by saying, he's clearly in that great leadership role. So in fact, one of my sons when he was taking a management class in college, I had him do a deep dive paper on Seifi, just because what Seifi has done at Air Products has truly been remarkable. So he's been there 6.5 years [Audio Gap]

[Audio Gap] the structural changes that you might see in Air Products.

Well, Steve, thank you for the question. And also, thank you very much for the very kind introduction. I really do appreciate that. And it's a pleasure to be here with you and the rest of the audience. Specifically, Air Products, we obviously have our traditional business, which is the traditional LOX/LIN business, our oxygen on-site business, nitrogen on-site business, our helium business and all of that. So those businesses are good. We are at an excellent market position worldwide. But we do not see those businesses producing the kind of return that we would like -- I mean the kind of growth that we would like to have. Our goal from 7 years ago, 6.5 years ago, when I joined, was that we want to grow Air Products' EPS by at least 10% on the average the life span as we go forward. And in the past 6 years, we have achieved that even with the COVID in 2020. So in order to get that kind of growth, we had to come up with strategies, which was kind of a little bit stepping out from our traditional industrial gas business. Again, as our traditional industrial gas business is good, we are supporting that. There's nothing wrong with that, but we need real areas of growth. On that front, on a very macro basis, we decided that climate change is a growth driver, and Air Products does have the core competencies to be able to do things which are related to climate change and solving the climate issues that mankind faces. So as a result, we have chosen 3 specific areas to focus on. The first one is obviously, we had announced it 3, 4 years ago, is gasification of coal, and not only just coal, but also pet coal, but also refinery volumes and all of that. And people said how is that related to the environment but it is very much related to the environment because that is how you can take very low-value raw material feedstock that otherwise would have created a rather pollution and break it down and destroy the pollutants in the gasification process and produce clean syngas, which is hydrogen and COO that can be used for making chemicals. So that -- in that area, we have done great progress. We bought 2 leading technologies. And right now, Air Products is recognized as the gasification company in the world. Anybody, anywhere in the world wanting to do gasification, they will come to us. So I'm very happy with that. We are well positioned, and we are going to expand that as we go forward. The second area is which now everybody is talking about it, and we have been very much focused on it in the last 4 or 5 years, is carbon capture. Capturing CO2 from steam methane reformers or from another industrial processes. And now what do you do with the CO2? We actually have the largest CO2 capture facility in Port Arthur operating for a few years. Over there, we capture the CO2, we know how to do that, and we put it in their pipeline, which is used for enhanced oil recovery. That's one way of capturing CO2. The second thing is capture the CO2 and sequester that into the ground. We are working on that. And then the third one is, is there a way that you can capture the CO2 and just recycle it. That is use the CO2 to break it down again by mixing with the natural gas and producing CO and hydrogen again. And that is the technology we are working on. So those are the 3 areas that we are very focused on in carbon capture, and I believe the opportunity will be huge. And now I don't need to talk about it because everybody else is talking about it and everybody else wants to do the same thing. Then the third area is hydrogen. But hydrogen in terms of either blue hydrogen or green hydrogen. Why is it that we are focusing on hydrogen? Because we believe that the end game, if you want to take it 50 years from now, 75 years from now, all of the energy, just about all of the energy that mankind will use will be produced by wind, solar or hydro. Those 3, wind, solar and hydro produce electricity. So that electricity is going to be used about half of it to drive electric cars, light transport. It is going to be used in heating, air-conditioning, cooking and it is going to be used for light industry. But then there are applications that do not use electricity and that is why we think that half of this electricity generated by these global sources will be used to down water and produce green hydrogen. And that hydrogen will be used to fuel heavy trucks, heavy buses, ships, trains, planes and heavy industry, such as the steel. But that's the thing, it's the end game. Now the transition from today's hydrogen to there will be gradual. Today, we have the core competency in hydrogen because we are the largest producer of hydrogen worldwide. We produce close to 9,000 tons a day of hydrogen. But we have been dealing with hydrogen for 60 years. But that hydrogen is produced from hydrocarbon resources, mainly natural gas. So what the -- we want to go to the next step, which is capture the CO2, which comes with the generation of the hydrogen and produce what is called blue hydrogen. And then go to the next step, which is green hydrogen. But we don't want to go sequentially. We say we are producing a gray hydrogen from natural gas. We want to, at the same time, be able to produce blue hydrogen and, at the same time, green hydrogen because we think different parts of the world are going to move at different speed in adopting these new hydrogen. And therefore, we want them to play in all 3 levels: gray hydrogen, blue hydrogen and green hydrogen. And we think the potential is huge. And again, I don't need to talk about it because now everybody is talking about it. So to specifically answer your question, Steve, we are aiming for significant growth and in the areas of gasification, carbon capture and hydrogen. And we believe that we have the core competencies to do that, and thank God, we have the balance sheet to be able to actually make these projects a reality and make them happen without having to wait for government handouts.

Well, you just gave me about 10 questions to ask you. So why don't we -- maybe we'll just kind of go through what you just talked about there because I had some follow-ups. And the first bucket you mentioned was gasification. And I have the pleasure of touring a Chinese urea plant a few years ago that had -- the old and the new technology, and the new technology had a air separation unit and the old one did not. It was just air-fed gasification. And the new one had an Air Products' oxygen source. So and the difference between the 2 was just remarkable. In the old one, 15% of the coal was just going out the stack. So let's talk about that a little bit. You had a little bit of set back with Lu'An and give us your outlook on that one, but maybe the broader gasification opportunity that you see? Maybe touch on both of those, please.

Sure. Absolutely. Well, first of all, the situation with Lu'An is in no way a setback for gasification technology. The situation in Lu'An is one specific customer who has had some issues with management changes, and they are keeping their plant down longer than we expected. It is no reflection on the viability of gasification because we have 4 other very large gasification facilities in China that are running, and there is no issue with that. So I think it would not be appropriate to kind of take the Lu'An situation where we have decided on our own to give a break to a customer for a lot of good reasons because of the future and the relationship and all of the auditings that we are doing with them today to keep the plant shutdown for a while after we had the turnaround because, quite frankly, they can sell coal for higher price than running the plant. And we're working with them, and I think that the issue will resolve itself. So that has nothing to do with the fundamentals of gasification technology. And we are seeing other countries being very interested in gasification. I think you are going to see gasification projects, larger scale gasification projects in India, larger scale gasification projects in Indonesia. We have already announced one of them that we are working on. And you are going to see more of them in China and maybe other places. And then the other thing, Steve, that I would like to remind everybody is that the biggest project that we are working on, the $12 billion acquisition of the Jazan gasifiers, that is gasification. And that is gasification of the bottom of the barrel in the refinery that otherwise people didn't know what to do with it. Because in the old times, that bottom of the barrel, high sulfur was being sold as bunker fuel to ships, but now with IMO 2020, you cannot do that. So the only way to solve that problem was to gasify it and that will be the largest gasification plant in the history of mankind. So the gasification strategy is well aligned and with significant application.

Your remarks on your assets were certainly more constructive about Jazan. Perhaps you could give us any update that you are working your way through the financing on that project? Anything you can update us on, please?

Well, Steve, on that one, we are about that -- we said that in the last public call, which was that we have reached financial agreement with Saudi Aramco management. And right now, everybody is working very diligently to try to see when we can close the project. We have the issue of COVID-19 that is getting in the way of getting the people together. You are talking about many, many different contracts. It's a $12 billion acquisition. I literally have -- I wouldn't be exaggerating to say 4,000 or 5,000 pages of contracts of different kind that has to be negotiated and finalized and all the Is dotted and all the Ts crossed. And then they have to go to the banks. We are in the process of talking to the banks to finance that. So it is going to take a little bit of time, but I'm very optimistic that we will get that done. You just need to be patient about giving us enough time to do that in the right thing.

Okay. Very good. Let's switch over to -- let's switch over to blue. You mentioned carbon capture for enhanced oil recovery. That is clearly an area where you have a solid infrastructure. That second outlet for the carbon capture being sequestration, where are you at in that process? Is that something that you -- could be a near-term opportunity for you? Would this require some more investment in pipeline infrastructure or what have you? Seifi, I can't hear you.

Do you hear me now, Steve? I don't know why I got disconnected.

You are okay now.

Okay.

You're good. Go ahead. Sorry about that.

No, I was saying that I'm hoping that within the next 2 to 3 years, these projects take a long time to develop and so on. And I'm hoping that within the next 2 or 3 years, we'll be in a position to announce significant carbon capture project somewhere around the world.

Okay. Well, I'm thinking of it on the U.S. Gulf, which is where I suspect that sequestration would occur. We've clearly had a strong freeze down there in recent weeks. Any impacts on your pipeline infrastructure or plant operations down there as a result of that freeze, or particularly, any of your customers that rely on your pipeline supply?

Well, see, the freeze in Houston, which happened about 2 weeks ago, was a significant event. Everybody has read the headlines. I don't need to repeat that. It did have a significant effect on our customers. It had a significant effect on a lot of our plants. We had to shut down a lot of our facilities in order for the electricity to be used for the civilian population so that they don't freeze. And as a result, we have had additional costs. Our merchant business, as you can imagine, we have to shut down our merchant plants, delivering product to our customers with a freezing rain was just about impossible. We had to incur cost, we lost volume. In terms of our pipeline, obviously, we have the take-or-pay. But -- and the energy is passed, too. But we have a spot volume in the pipeline that obviously disappear. So there has been a negative impact on us. We are in the process of assessing that. They haven't -- we are still gathering the data. But I do not expect it to be material, Steve, but it will have a negative impact on us. So some of our customers haven't started up yet, but it was a major event in that part of the world, obviously.

Okay. Very good. So let's switch over to the third bucket and that is the green hydrogen. Any update on NEOM? Is there any upcoming catalysts or project starts or groundbreaking or anything along that front that you can give us some visibility on? Or is this going to remain pretty much a 4-year project out there that will be hard to track?

Well, see, we will be very helpful on that because, obviously, this is a major project that we are doing and we want the people to see how we are doing and how we are progressing. Right now, we are obviously finalizing the formation of the company and the contracts and all of that. But we have started the engineering which is a massive job in terms of the size of the facility. I think next visible event for the public would be you see a picture of some of us in our website covering some sand around in the desert. That would be so-called groundbreaking ceremony, if I may say. And then after that, I would fully expect that periodically, we would show you a picture of something and talk to you about the progress that we are making. Yes, we're not going to talk a lot about who we are going to sell the product to and all of that because that's confidential. But in general, in terms of the progress of the physical plant, I think we will be very open so that people see how we are making progress.

You mentioned electricity a few minutes ago with respect to the deep freeze. And it -- I think it reflects on what level of electricity consumer Air Products must be with your air separation units. Is it reasonable to assume that you are one of the largest energy consumers and thus would have favorable pricing on electricity, particularly renewable electricity and where that could potentially lead you in the U.S. Gulf region? Would you ever consider using that favorable power using your hydrogen pipeline and building an electrolyzer down in the U.S. Gulf?

We will consider building electrolyzer if we can get truly green electricity because otherwise, you're not accomplishing a lot. I mean if you are going to use electricity, which is generated by coal and then use that to break down further to make hydrogen, you haven't really helped the environmental picture in the world. That was the issue that I kept talking about when we announced NEOM and when people were talking about the distributor model and so on. But if we get to the stage where we have truly green electricity, sure, we can do that, that's not an issue. But my hope is that we would be able to get access to green hydrogen by producing it in Saudi Arabia or other locations. And we have come up with an innovative way of shipping hydrogen where it is very practical, which is through ammonia, and so we can bring that in Texas and load it and crack it and put it in a pipeline and then we have green hydrogen even in the pipeline. So that is another possibility, for sure, that we will consider.

Very good. The ammonia shipping around the world is clearly a cost-effective way of shipping hydrogen. Is the technology of disassociating that back to hydrogen, for example, at a hydrogen refueling station somewhere that you could deliver that ammonia too and then disassociate it back to hydrogen, is that technology sufficiently advanced? Or do you think you could take it to another level? My understanding of dissociaters are that they're rather small and where -- as you might need something larger for your end use. Is that an area of concern? Or do you feel like the engineering on that is pretty solid?

Steve, that's an excellent question. First of all, there are commercial ammonia dissociaters on the market. Actually, if you Google that, you probably will get about 50 manufacturers who would want to sell you those units. But at the -- so that is a known technology. But what we are trying to do within Air Products is to come up with our own technology where we think we can use different catalysts to do a better job and have a much more efficient conversion of the ammonia to hydrogen and a lot more economical. So one, I mean, 4 or 5 years from now when these things come on stream, I expect us to be using our own dissociaters rather than having to go and buy somebody from the market.

Okay. So you're putting some of your own engineering capabilities to develop this technology for you?

Absolutely, Steve, and this is well within our scope of knowledge. Our people -- we do these kind of things all the time. And we are definitely working on this thing with some other technology providers and I'm very optimistic about that. That is not going to be a roadblock at all.

Okay. I want to jump to another topic that's hydrogen related that you really tweaked my interest on your last earnings call when you made a comment about the volume in your hydrogen pipeline and the U.S. Gulf had slowed, which was consistent with, I think, most expectations given your refinery customers have slowed. And you made a comment about your hydrogen pipeline in California was running strong, and it really provoked some interesting due diligence on our part. And I recently had some dialogue with some engineers at Haldor Topsoe that I'm sure you know quite well, but they have a group of engineers that have really done a lot of work on renewable diesel. And that's really where our due diligence went. And I'm assuming that what has been driving the strong demand for hydrogen in California. But the dialogue that I had with these engineers at Haldor Topsoe would suggest that the hydrogen required to produce renewable diesel versus petroleum-based diesel is not 2x, but could be 4x. I don't know if you have a view on that yourselves. But perhaps you can just comment on the potential demand driver for hydrogen with renewable diesel as potentially an offset to what I think is broadly viewed as maybe an expectation for demand shortfall from traditional refinery hydrogen.

Steve, I'm very impressed you have really done your homework to the detail. That is great. What you are saying is absolutely true. We are very familiar with those technologies. And depending on how -- what kind of feedstock you're going to use for making the renewable diesel, a better of diesel produced in the conventional way if it uses 1 unit of hydrogen. A barrel of renewable diesel could use 10 to 20x more. It's not even 2 or 4. It could be order of magnitude higher. So -- but again, it is per barrel. Right now, some of the refineries in the Gulf Coast are thinking, and some of them have converted. I think it's public knowledge that Valero is going to expand. What they are doing in Texas, obviously, they need more hydrogen. And we are competing for that volume like everybody else. So it is very correct that if refineries replace every barrel of diesel that they make from renewable will require significantly more hydrogen. That is correct.

And do you think longer term, that hydrogen could be green to really have an impact on the carbon footprint? You got every carbon in that renewable diesel is going to be released post-combustion as CO2. It happened to start as atmospheric CO2. But the hydrogen required to produce that renewable diesel, is that, longer term, going to be gray, blue or green in your view?

Well, I think there is significant value if you can make that hydrogen either blue or green. Right now, if you are selling that hydrogen in California, if you can use blue hydrogen or a green hydrogen, I guess it can be more income for that. I mean you can see subsidies are significantly higher. So there is significant value. And therefore, one of the things that we are looking at is how do we make our pipeline in Texas more and more blue. We are getting some credit for it because of the carbon capture we do at Port Arthur because that hydrogen goes into our pipeline. And now if we consider putting additional CO2 recovery on different SMRs that we have and sequester it, then the hydrogen becomes more and more blue. Obviously, the ultimate thing, if you put green hydrogen and you use green hydrogen for making renewable diesel, then it's the ultimate case. So all of the things that you are saying are very accurate and all in a positive direction as far as our business is concerned.

So you mentioned that moving towards blue over the next 2 or 3 years was realistic on the U.S. Gulf for you. Perhaps you could just comment on where you think blue hydrogen could cost or be priced at relative to where gray and green is? We have our own estimates for what the hydrogen cost structure is at NEOM. And so we got a spread between gray and green. Is it likely in your view that blue could be meaningfully closer to gray and, therefore, potentially have a more meaningful opportunity in terms of demand?

I think the demand for blue hydrogen, probably, in the short term, will probably exceed the demand for green. I mean if you take the next 10 years, probably blue hydrogen will be more in demand than green hydrogen. I think there will be demand for green hydrogen that's why we are building the NEOM. But I think the potential for blue hydrogen is great. Because right now, it is no secret that Japan has announced as a policy that they are going to use green ammonia, which is basically green hydrogen -- not green -- blue ammonia, which is really blue hydrogen, to put it into their power plants, and that's how they're going to decarbonize their electricity production. And they have given numbers which are astronomic, that by 2030, it will be more than 3 million. And by 2050, it will be 100 million tons. So I think that there is a significant demand for blue hydrogen. That is why I said we want to be in gray. Because the demand for that will continue for the reason that you just mentioned, with conversion to renewable diesel and so on. We want to be in blue. And we want to be in green. But in terms of the volume, I think blue hydrogen will be significant demand for that, Steve.

And that comment you just made about Japan and their commitment towards blue ammonia for their power production, does that change your own view on the potential opportunity for NEOM? I know when you announced NEOM and the plan has been to go down the path of delivering that green ammonia and ultimately build hydrogen refueling stations for city bus fleets, whether that could be in a number of different countries. but here, you just made a comment about a potential demand for blue ammonia. I don't know whether they would also consider green ammonia. But does that -- is that an end market that interests you?

The blue ammonia obviously interests us, and we will get into blue ammonia. But the comment that the NEOM is still very, very solid ground because we never expected to sell green hydrogen in Japan because we knew what they were going to do. The biggest user of green will be in Europe because those countries have made a commitment that they want to go green. You see, right now, Europe wants to go green. Japan is leaning toward being blue. The rest of the world, still struggling with which way they want to go. So as a result, a company like us, they need to be in all 3 of these things in a big way. We are, as I said, fortunately, the biggest producer of gray hydrogen. Somebody wants gray, we can do it at the cheapest possible cost. Now we want to produce blue, and we are -- we have announced about green. So we are positioning ourselves. You kind of -- I don't want to kind of to simplify it, but it's just looking at the gas station, some people want leaded gasoline, some people want unleaded, and some people want super. The oil company provides all those 3 at a different price for those, and people can choose what they like. And that is the way we want to have gray hydrogen, blue hydrogen and green hydrogen for [ different ] application.

Okay. I'd like to ask you a little bit about capital deployment. You've had this 5-year capital deployment plan, and you're approaching 2/3 of the way through it. Do you think that there's a perception out there that this initiative has basically run its course? Because based on that 5-year plan, you've committed almost all of it. When if you were to roll this forward and look at free cash flow on a rolling 5-year basis, you could be adding $4 billion or $5 billion of capital into that, presumably. Is -- one, do you think there's a concern out there that you've already placed your bets on big projects, which I would assume you would not share that view? And then secondly, is it reasonable to think that you were going to be rolling forward and coming up with another capital deployment plan here before the full end of the 2022 period?

See, that's an excellent question. We had made an announcement that between 2018 and 2023, we will commit about $15 billion. As you said, we are almost there in the middle of it. You should expect that after that, that in the summer of this year, we will make an announcement about what is our goal for 2023 to 2028, so that we have a 10-year plan. And obviously, we have not run the course. I mean using somebody else's words, not mine, but what we have announced is not the end. It's not even the beginning of the end, but it's the end of the beginning. So we have a lot more to go, a lot more to go and a lot more opportunity there.

Very good. Thank you. Maybe another question for you. We've seen energy prices rise. Does that increase your outlook for any of your businesses that could be impacted by higher Brents? Or is that pretty much a wash for Air Products?

Well, we do not have a lot of business on the upstream. That means that if people produce more oil, they don't use a lot more industrial gases. But if energy prices go up, it is a very positive thing for us because it makes all of the other things that we do much more viable, Steve. So if oil prices go to $250 a barrel like it was at some point in time, we put the pressure on conversion a lot faster because then the economics are even there, not only just the desire for climate change, but also the economics become even better. So for us, specifically, higher energy prices are obviously a positive. Now you can kind of counter that by saying high energy prices, would that depress activity and all of that? But in terms of the areas that I talked about what we want to do in terms of gasification, carbon capture and hydrogen, higher energy prices would be very beneficial.

Okay. Very good. Maybe drill into one of your end market and that's healthcare, your oxygen to health care is not the same as some of your competitors. I don't know whether that's a kind of just a near-term differentiator. But long term, how do you view that particular end market for Air Products?

I'm not a particular fan of the health care business for industrial gas companies. And I have had that view for the past third -- I mean, as you know, I've been in this business one way or another for the past 40 years, and I've seen a lot of companies getting into those businesses and then getting out because you can never make money. But if you -- so I don't expect Air Products to expand our footprint of health care beyond what we have. We don't have any health care business in the U.S. We have some in Europe. We have a lot in Latin America, but it's not big. And then in Mexico, through our joint venture company, we are in health care. In Italy through our joint venture company, we are in health care. And in India, we are in health care. Now those businesses, right now, with the COVID, they are doing great. If you look at -- even our numbers, you'll see that equity affiliate income is significantly better than before because those people are selling oxygen. Right now, if you have oxygen in Mexico, you can just sell it for any price or in Brazil. But that is a short-term thing. That's not a long-term play. I've never been a fan of industrial gas companies being in the health care business because that is a very, very intensive, very -- requires a lot of overhead. There is liability and all of that. So I don't expect us to expand our business in that beside beyond where we are. But in the short term, our competitors who are in that business are going to benefit from that. But hopefully, we'll get out of COVID in a year or so, and then that would be a different story.

Okay. And with respect to regions in the world where you do deploy your capital and where you are looking at your pipeline of projects that when you roll out this next 5-year plan, you're going to have plenty of capital to deploy. Is it reasonable for us to think that Asia will still be a target region for a lot of that capital? And is that appropriate in your view?

We are going to deploy capital all over the world. Asia right now looks like a lot because we have done some gasification projects there. But as we go forward, I see us deploying a lot of capital in the Americas, in the U.S., Canada and Latin America. I can see us deploying capital in Europe, in Central Asia, in the Middle East. So we will be all over the world. We are not going to put all of our money in one region of the world. We're going to be very well balanced, Steve.

And having followed the gas stocks for quite some time here. One of the observations is clearly traction in merchant pricing even during periods where demand is a little bit sluggish. Is that something that you expect will continue, this kind of inflation in the merchant business over the coming years?

Steve, we do not comment on forward-looking on prices. But historically, you have seen the record that for some regions, like Asia, it's 15 consecutive quarters that we have increased prices on our Merchant business by about 6%. 12 consecutive quarters that we are doing that for Europe and in Americas. That is obviously because of a conscious decision for us that, look, inflation has gone up, we need a higher prices in order to justify our business. And -- but if you take that, I mean, 12 consecutive quarters, that means 3 years of 6% combined, that means that prices have gone up 20%, 25%, 30%. So obviously, that cannot continue forever. When is it going to end, I think -- or modify, depends a lot on supply, demand and what the situation is around the world. So I don't want to comment on that, but I think it's important to just keep the history in mind and the trajectory. I mean like everything else, it's just not going to go on forever. But the pricing was a conscious decision on our part, and we have paid a price. We have lost market share in order to increase these prices, but that was a conscious decision on our part.

Thank you. We are out of time, and I'm grateful to you for this little chat we've had. And my best to you, sir. Have a good year. Thank you.

Thank you very much, Steve. I really enjoyed it, and thank you for your good questions. Have a nice day.

Very good. Thank you.

Bye.