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

Good morning, everybody. Thanks for joining us as we continue on our agenda today. This session will be with Air Products, and we're super excited to have Seifi Ghasemi, who's the Chairman, President and CEO; also got Scott Crocco, EVP and CFO. And Dr. Samir Serhan, who is EVP and COO. Simon Moore from IR and also responsible for sustainability and Mun Shieh also joining in. As usual, we're going to spend about 35 minutes asking Seifi and Dr. Serhan questions. You can submit your own or e-mail those to us. We'll obviously prioritize our client questions. But in the meantime, Mike and will ask a series of questions we've prepared. Maybe if we could start out, Seifi, I think most people know you and know the Air Products story, but maybe just give us a brief overview of your corporate mission, what the key end markets are for you and what you see as Air Products' competitive advantages. I think you've got to unmute, Seifi, sorry.

As I was saying, it's a pleasure to be on your call and talking to you and Mike. I have to start, with Air Products, we are a leading industrial gas company, as you know, market cap of $65 billion. We have 750 facilities around the world operating in 52 countries. The key products that we have, obviously, is different in industrial gases, but I do like to point out that we are the largest producer of hydrogen in the world, and we are the largest producer of helium in the world. In addition to all of the other industrial gases like oxygen, nitrogen and all of that. People are very familiar with the past history of Air Products, so I don't want to dwell on that. But in terms of the future, we have positioned Air Products in the last 7 years to use our core competencies to be the leader in 3 areas: one is hydrogen, whether it is gray hydrogen, where we are already the leader. Blue hydrogen, where you produce the hydrogen and capture the CO2. And green hydrogen, we definitely will be the leader of these 3 hydrogen categories. The other one is CO2 capture and the other one is gasification. And gasification would be gasification of refinery volumes, coal, natural gas or whatever you want. And we are the leader on that. So as we go forward, our core focus, as we always say, is on hydrogen, CO2 capture and gasification, which are at the core of the energy transition. And that is why we are so excited about the future of Air Products. And that is why, quite frankly, we are seeing significant, significant opportunities for growth in all of those areas and some of these projects are really big projects. I mean we are right now executing $7 billion, $5 billion projects. So the potential for growth is very much there. And I'm also happy to say that in the last 7 years, we have positioned Air Products that we have a incredibly strong balance sheet. We are -- net debt-to-EBITDA is really like less than 0.5. So we have a lot of -- we have the financial capability, the core know-how and the right strategy to grow with the energy transition, which is obviously in the making right now.

Seifi, you said you have the ambition and the balance sheet and willingness to spend and pursue some of these larger scale deals and transactions, assets that maybe the peer group hasn't. Can you just talk about your confidence and comfort taking that approach?

Yes, because about the -- right now, we -- as I said, we have a very -- our net debt-to-EBITDA is less than 0.5. So we have significant capacity for investment. In 2018, as I'm sure you recall, we announced that between '18 and '23, we will invest about or commit to invest about $15 billion. But right now, it is 2021, only after 3 years we have already committed close to $14 billion. And in 2 or 3 months in the summer, we will announce a plan, for our investment and strategy from 2018 to 2028. In terms of our confidence, in terms of executing these projects, we are very confident because we have already executed a lot of these big projects. We just finished the $2 billion project in Saudi Arabia. We have done $1.5 billion, $2 billion project in China, in the United States. That is -- the essence of Air Products is that we are very good engineers and we are good operators, and we know process plants very well. And all of these new energy transition is all about that. So I have a lot of confidence in our people. We are obviously gearing up for all of these big projects. In the last 2 years, we have had another 2,000 people, which is an addition of 10% to our workforce, in order to strengthen our capabilities. And my colleague, Dr. Serhan, who is our Chief Operating Officer, is very much in charge of all of these projects, and he has done a lot of these before in his life. And I don't know if, Samir, do you want to add to what I said?

Thanks, Seifi. Yes, definitely, it's really very exciting to, to be with Air Products with this very compelling growth strategy that's really very much focused on sustainability. I mean our current project portfolio, we're talking about more than around 125 projects. And again, I just want to emphasize, lots of attention gets paid to -- on the mega projects, but many of these 125, more than half is really we're talking about the projects in the $2 million, $3 million range. What we call a standard plant. So it's a very wide portfolio. We do believe that we have really assembled a very strong team worldwide to execute these projects successfully. Very much focused, starting really from the beginning with technologies. I mean, having developed our own technologies, having edge commercially proven and when we don't have some of this technology, we really utilize some of our first-class partners with some exclusivity to use their technologies and developing this project. From the beginning, we go over very strict investment criteria to assess the different opportunities. Then when comes a project, we really do a very strict risk management. With lots of attention to the details and really managing these projects and making sure that we really deliver these projects, again, from a safety, quality, cost and schedule. So again, we're really very proud of having this strong team, very committed, very competent people coming from different backgrounds experience, and they're really excited because they are innovating, developing solutions to solve word energy issues and also sustainability environmental issues.

That's terrific. Seifi, when you originally embarked on this strategy, took on the gasification side, again, there was maybe some folks not quite so sure. And then you started up the Lu'An, called the fuels project, gasifiers in Asia, and you really had superior leading growth in that region because of Lu'An. And then you started the gasification efforts at Jazan as well, a very large project. And certainly, investors were excited about the potential. And then late last year, of course, there were a couple of pauses in those projects, which I think has caused some investors to revisit the -- or question the integrity of the whole model. And I know, certainly, you don't see any issues there. But can we just talk briefly on those 2 projects since they're more topical and near-term. On your call, you mentioned that after a pause, Lu'An is going to be commissioning 1 of the 4 gasifiers and there's hopes to work towards all 4. So maybe just give us, if you wouldn't mind, the CliffsNotes version of exactly what transpired there, what took you by surprise? And then what gives you comfort that this is not any indictment of the entire gasification strategy as some maybe bearish folks have suggested?

Well, on that front, I'm glad you're asking me that question, Bob, because we fully believe that gasification is something that we grow significantly in the future, and you are going to see us announce significant gasification projects in the future. The situation with Lu'An is something which is very interesting. We have multifaceted relationship with Lu'An. It is not just the gasification. As a result, they are more than just the customer. They are a partner for us in several different things. And I think in the future, as we go forward, we can announce projects and people will see with more clarity what I'm talking. Therefore, when Lu'An particularly went through a transition in terms of management because the Shangxi province put all of the chemical facilities together. So the Lu'An told us, look, I want to make a strategic assessment of what is going on. Therefore, you have taken the plant down for maintenance, let's keep it down for a while until we finish our assessment. And we being a good partner with them, we agreed to do that. I was very adamant to mention in November that, look, we are being transparent with our investors as we should always be that look, the Lu'An plant is down. There is nothing wrong, but it is down, and I want to tell you myself that it is down rather than somebody else picking up the phone and saying, well, the plant is down. So that is the spirit with which we announced that. But obviously, people misinterpreted that there is something wrong with gasification, and this is the end of the world. So we are very confident that the customer will restart the facility. That is what they have asked us to do. We are, as I told you, we have started going gasifier, and we will start the second one, the third one and the fourth one. So I don't see any issues with that. And then people say, why did you change your contract? We didn't change the contract. They are our partner, we just gave them a break during the time that the plant was down and a little bit of a break as we go forward. But fundamentally, there's nothing wrong with gasification. That's the Lu'An situation. The situation with Jazan is very simple. Again, I always tell investors what I know at the time that I'm talking to you, whether it is good news or bad news. With Jazan, it was a very simple situation. We had negotiated a details of the contract with Saudi Aramco about 2 years ago, in terms of the financials. And those financials, they're saying that we are buying this thing for $12 billion, we are going to put $5 billion of equity, and we are going to borrow $7 billion. At that time, the -- our return was calculated was based on the fact that the $7 billion that we borrow will be at interest rate of about 5.5% to 6% because that was project finance. Well, when they got closer to the closing, it became very obvious that we can borrow money at a lot lower than 5.5%, right? So the issue became that Saudi Aramco said, look, you are going to be borrowing at lower rates, I want all of that difference, your return on equity doesn't change, but I want all of that saving. And as you would expect, I mean, that's part of my job, I took the hard line of saying, "Oh, wait a minute, we took the risk because the interest rates could have gone either way. Therefore, we want it." So that is why we got into a little bit of a discussion with them. We are not fighting with Saudi Aramco, we love Saudi Aramco. They are a great company. It was just a commercial negotiation. And so right now, if we close this thing and if people read between the line, what I'm saying is that, look, the deal is going to be better than what we told you before because the interest rates have come down, even if we gave some of that back to Saudi Aramco, it is still better than what we have, right? So that's the story with Jazan. But I would not change our communication with the investors. I tell you exactly where we are. We wanted to tell you that the -- Lu'An was shut down, and we wanted to tell you that we are having issues negotiating the contract with Saudi Aramco. Those were the facts, and I told you the facts. Now quite honestly, in my humble opinion, I think our investors overreacted and our stock lost $60 but now we have gained of it, but that was the background. Again, if I had to do it again, I would do that. Every time I have a fact, I'll tell the investors, whatever it is. Sorry for the long explanation, but I hope I addressed the issue you wanted, Bob.

That's helpful. And a couple of client questions in -- related to this. I think you said on the call, you were hopeful Jazan would get squared away financed and therefore, start adding to the earnings stream during this fiscal year. Is that the right interpretation? And so as we look to next year, we should see that $0.80 or $0.90 a share of earnings contribution?

Well, if we close, you are going to see all of the contribution -- you are going to see order of magnitude, that kind of a contribution for next year. As far as fiscal year '21, it depends when we close. That's why we gave people our forecast, excluding Jazan. And we said, if we closed Jazan in August, then there will be 2 months of contribution. If we start in September, there will be 1 month of contribution for fiscal year 2021 but hopefully, all of it will be there for 2022.

Another question here, Dr. Serhan talked, as you did about enabling some of this new enter evolution. It's a question about potentially the contradiction of China trying to become more carbon neutral and still pursuing coal gasification projects. Can you talk about if that is a contradiction, if it is a challenge to the growth of the business, whether in China or other -- India, Indonesia, et cetera, this debate between carbon -- decarbonization and yet deploying their natural resources?

Can I just address that quickly and then I'll turn it over to Dr. Serhan. When you are talking about carbon emissions, you're talking about net carbon emissions. So number one, China can continue to do gasification, which puts CO2 into the air, but if at the same time, they are going to use green hydrogen or blue hydrogen. In terms of their other applications, the net effect of that will not be that much. So that is one strategy that they can do both at the same time. The second thing is that with gasification, there is possibility of capturing the CO2 in a very efficient way. And those are some of the things that I think they will focus on. But they can do gasification as long as they do other things. That reduces, then it will be a net positive. It's very much like Air Products. We put CO2 up in the air because of our steam methane reformers. But that's -- that hydrogen that we could use is going and saving CO2 emissions from our customers. Therefore, the net net, we are actually reducing the CO2 emissions in the world by about 65 million ton a year. So they can't do that. Dr. Serhan, do you want to add to that? Samir?

Definitely, the world really needs more energy and also needs more clean energy. And for Air Products, we're really not going to dictate to our customers what color hydrogen they want. So we really produce the gray hydrogen, we're producing also blue hydrogen. We have, of course, [ ARS ], we're capturing 1 million ton CO2 a year already, and we've been doing it for a number of years. And this hydrogen ends up going to be used in refineries. And also, we have the green hydrogen. So we really can do all, and we really don't see a freight with the low-carbon footprint, with the gasification because as Seifi mentioned, gasification is very designed to capture CO2 out of the process. So that's easily can be done if we can really find sequestration field where we can put the CO2 under the ground or use it for other applications. So definitely, that is doable to do gasification. And at the same time, really have a lower CO2 footprint.

Okay. And if I could jump in. We have one client question to come in through the portal that says, if you could kind of speak to your interest or the potential to maybe partner or JV with a North American ammonia producer, I mean someone say like a CF to produce green hydrogen?

Well, in principle we do joint ventures, then we see significant added value. So I don't want to comment about a specific customer or a specific person. But fundamentally, we have the capability to do everything ourselves. And obviously, when we do things on our own, we are a lot more efficient, and we can move a lot faster. But in some parts of the world, like, for example, in NEOM, we do have a joint venture because, obviously, the government of Saudi Arabia wanted to be part of it, and we had a local partner, ACWA, who is expert in power and all of that. So we will look at joint ventures, if there is significant added value. But if there is something that we can do ourselves, I mean, we don't really want to make life complicated with all kinds of joint ventures. Is that okay, Mike?

Seifi, I wanted to ask you, when you announced NEOM, back last summer, it was sort of the first real flag planting. It seemed like in the industry green hydrogen really was capturing folks' imagination. And subsequent to that now, it seems like every sort of Tom, Dick and Harry company has got some attachment and effort to insert themselves in that hydrogen ecosystem. So I was wondering if you could tell me what is the Air Products' distinct advantage? And how do you see you winning more than your fair share of opportunity when -- as Mike was asking, we've got ammonia companies there. We've got utility. We've got energy companies. We've got the electrolyzer industry. We've got machinery companies. It seems like the whole world has found that talking about green hydrogen can be beneficial. So give us a little context of why Air Products wins here?

Well, Bob, that is a very, very good question. Our -- if you like going to say competitive advantage are the following. Number one, we have been dealing with hydrogen for more than 60 years. We were the people who first started providing NASA with hydrogen for the space program in the 1960s. So you can't come out of the blue and suddenly say, now I want to get into the hydrogen business. You need to understand the business, you need to understand the product and all that. How you make it, how to deal with it without any kind of a safety issue or a lot of other things. So we know the hydrogen, we have experience with hydrogen. The second thing is that we have the core competency to design this facility, fill these facilities on time and on budget. The third thing, which I think is significant is the way we operate as a company. We make decisions quickly, and we can execute them. I think that is we are not bureaucratic, we don't have layers and layers, we don't take 5 years to do a project to feed and then refeed and then evaluate and it takes 5 years to make a final investment decision. The agility and the commitment of our people, our background in hydrogen, our know-how, those are the things which are our competitive advantage. And also being innovative. I mean, right now, everybody says, "Oh, yes, it's obvious that you transport hydrogen with ammonia." But until 1 year ago, everybody was saying that, no, we are going to build a ship to transport liquid hydrogen around it. So I think that is one thing. The second thing is I think there is significant advantage to being a first mover and doing -- actually doing these things, putting a project like together like the Saudi -- the project we are doing in the NEOM. It took us 5 years to put that together, 5 years. So I guarantee you that right now, if anybody else wants to do anything like NEOM, we are 5 years ahead of it or maybe more. So those are the competitive advantages that we do have. But the first mover, I always use an example, Bob, that you know that my background, 15 years ago we were talking about electric cars and all of that. And at that time, a lot of people were saying, well, this electric cars, come on. There was a company called Tesla at the time [indiscernible] saying, well, what are these guys about? I mean electric car is a motor and 4 wheels, right? If they can do it, GM and Volkswagen can do it 10x better. But look, 15 years from now, how come GM and Volkswagen are not doing it, they're a lot better and Tesla's stock is $600. It's because they moved fast. They moved quickly, they were the first movers, and it is more than just, "hey, I want to get into hydrogen business," knowing how to do that and putting the project together and putting the pieces together. But right now, obviously, anytime anybody announces that they are in hydrogen, their stock goes up. So everybody is making all of these announcements. I'm not concerned about that. I think most of them is, as you said, it's 3 guys and a dog who want to do projects now. So -- and we know what we are doing, we are the leader, and we will continue to be the leader.

Okay. So NEOM, obviously, you're industrial gas experts. But the project encapsulates quite a bit more than just industrial gas. You've got desalination. You've got fuel, solar cells, electricity conversion downstream into ammonia. Along that chain, one, how do you get comfortable about the ability to execute in those areas that aren't your necessarily bread and butter skill set? And then two, where should the economic profit -- what is the critical function in that chain where a profit should be made? Or do you feel it's distributed across each stage of that kind of supply chain?

Well, Bob, again, another excellent question. First of all, on that project, we have explained that we knew what we didn't know, and that is why we have partners. On the power, power generation, our partner is ACWA Power, who have built many, many mega projects based on solar and wind. So they know what they're doing. They are our partners. In terms of electrolyzers, we have partnered with [indiscernible], which is by far the leader in making the electrolyzers. In ammonia, we have partnered with [indiscernible], which are the world experts on that. And then there is [indiscernible] that, obviously, we know how to handle the hydrogen and all of that. Then in tens -- so that takes care of the technology for producing the product. The real -- the real profit and the real know how is not so much in making a green ammonia. But in the distribution chain and the marketing capability of taking that to the market. And all of the hydrogen refueling stations and all of that in terms of how do you actually get this thing to a trucking unit. That is where Air Products is experts on. That is what we do today. That is what we'll be doing helium, for example. In helium, we don't make this stuff. But our ability to take the helium and market it and manage the distribution chain. And that is where it is 100% Air Products, and we know how to do that, and that is where a lot of the value lies.

Yes, that's helpful. Dr. Serhan, I think you said you were maybe a bit agnostic to gray, blue, green. You're going to pursue what your customers' needs are. But you guys obviously have lots of access and dialogue within the industry. I'm curious, what do you think wins out? Do we go straight to green as maybe the European Union is desiring? Do we go to blue first in order to get the scale -- economies of scale benefits to enable cost competitive hydrogen in the future? Do we just go to a carbon sequestration? Maybe give us your sense, your insight into how you see this whole hydrogen ecosystem developing?

As Seifi mentioned, Air Products is the world leader in hydrogen production. It's really a part of our DNA. I mean, it's very exciting to really to see that how deep it is. We're currently producing around 3 million tonnes per year of hydrogen. Out of that, the 3 million tonnes, around 6% of it is blue, we're -- basically we're capturing the CO2. We are currently executing the projects that will add around 0.7 million tonnes of hydrogen. Part of that is really the NEOM project, which is adding around 220,000 tonnes per day -- per year, 220,000 tonnes per year of green hydrogen. We are really positioned to be the leader in all 3, in the gray, in the blue and the green. With the NEOM, as Seifi mentioned, we started working on this for like 5 years ago. And executing the NEOM project just to put things into perspective, is around 35 million hours that we started a year ago. So we're really way ahead of anybody else basically in really developing this green hydrogen molecule where it really gives us this first-mover advantage. And are we doing everything perfect? I'm sure not. But part of this industrial gas model is the 360, is the continuous learning and optimization to really give you the efficiency, the safety, the reliability and also have you on the right cost curve and that's really where we basically feel we're going to distinguish ourself, Air Products, from the rest. It's very hard to forecast what is going to be that market volume. I mean, definitely, where it is right now, Europe is somewhat taking the lead when the initiative to drive the green energy, the green hydrogen. But again, to put it into perspective, all of that hydrogen we're making, we're going to be making out of NEOM, which is 650 tonnes per day, that can only fuel 20 buses. How many buses in this world? The 3 million or whatever is the account, add the trucks, you're talking at a very smaller proportion. So we really see a tremendous growth opportunity here for the green hydrogen space.

And Seifi, on the...

If I may just add, Bob, with your question, we think that as we go forward, there will be demand for gray hydrogen, blue hydrogen and green hydrogen, depending on which part of the world, and the policies that the politicians say. So that is why Air Products wants to be in a position that we can go to a customer and say what do you want? Gray? It's just like gasoline, you want leaded gasoline, unleaded gasoline or super. We have all 3 of that for you.

And Seifi, you surprised me a bit on your last conference call when you talked about carbon capture being a major use of your capital going forward. Can you talk to us a little bit about what's involved in carbon capture, where your competitive position is and why that may be even larger than hydrogen investments for you?

Well, carbon capture goes with blue hydrogen. I mean if you want to make blue hydrogen, you need to capture the carbon. And therefore, that is a huge part of the whole supply chain. You need to capture the carbon. In capturing carbon, as Dr. Serhan just mentioned, we are operating the world's largest carbon capture facility in Port Arthur, and we have been doing that for a few years, and we capture the carbon from the steam methane reformers and put it in the pipeline, which is used for enhance oil recovery. The biggest challenge in carbon capture is obviously finding the whole space, finding a place to sequester. So we know how to capture the carbon, we have the technology, with the PSA, TSA and all of that kind of stuff. And then the challenge for us, depending on where we are, is to find the appropriate forest space so that we can sequester in terms of taking it and putting it into the ground and making sure it stays there. That's the challenge. But I think if the world wants blue hydrogen, blue hydrogen means capturing the CO2, so the 2 go hand-in-hand together.

And would you expect that carbon capture to be on -- an add-on to existing hydrogen reformers? Or you would be building traditional steam methane reformer with a carbon capture unit on it as well?

Well, that's an excellent question, Bob. I think that, number one, we have many, many steam methane reformers like on the Texas Gulf Coast. We envision capturing the CO2 from those and sequestering that in time. I think we want to make our hydrogen pipeline in the Gulf Coast or other places to be a blue hydrogen pipeline. So number one. But in the future, if we are going to build a new facility to produce hydrogen, we would probably build an ATR rather than a steam methane reformer because with the auto thermal reformer, you can capture more of the CO2 than you can from a steam methane reformer.

Got you. Makes sense. And then I think we have just time for one last one. And maybe it's my interpretation of your comments. But the last couple of quarters, you didn't sound all that excited about the economy. We've had some vaccine success now. We started to see miles driven pickup. Travelers starting to improve a little bit. And I would say maybe at the margin, you sound just a little bit more optimistic on the last conference call. Tell us where you see the economy and particularly the end markets that affect Air Products, the progress so far and then what you see in the rest of the year?

Well, Bob, thank you for the question. I was not very optimistic when we were talking in November, when we were talking in January. And quite honestly, I hope I'm vindicated a little bit when you look at the jobs report, which came out last week, the economy is not growing as fast as everybody wishes to. I think the economy is, whether it is in the U.S., Europe or anywhere else, it depends how people handle the pandemic. In India, the biggest mistake, unfortunately, the biggest issue was that they declared victory too soon, and the pandemic spread. So I just hope that the authorities keep the pressure on to make sure that we don't go too fast and then recreate the problem. But it is true what you just said that we are now more optimistic about the economy in the U.S. We are very optimistic about the economy in Asia, that is growing pretty good. And I hope the same will happen in the U.S. and in Europe. But we are a little bit maybe more cautious than other people, but we definitely feel more optimistic now than we did 2, 3 months ago.

Terrific. Unfortunately, our time is out. Dr. Serhan, Seifi, always a pleasure to talk to you guys. Really appreciate it, and thanks for all the clients that joined in. Everyone, have a great day.

Thank you very much.

Thank you. Pleasure being with you, Bob. Thank you. Bye.