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

All right. Welcome, everyone. I'm Marc Bianchi, Cowen's industrial gas and hydrogen analyst. I'm really excited to be joined by Air Products. And from Air Products today, we have Simon Moore, who is Vice President Investor Relations, Corporate Relations and Sustainability. So Simon, thanks so much for being here. I've tried to figure out how to describe how long you've been at Air Products. And the thought was, well, he's been there longer than Google has been around, but that might not be descriptive enough. So maybe you could tell us a bit about where you have been at -- how long you have been at Air Products? And some of the various roles you've had and then maybe kick it off and then we can have some Q&A.

Great. Well, first of all, let me say thanks to you, Marc. Thanks for the rest of the Cowen team, and thanks, everybody, who's joining us today to listen in. Really appreciate the opportunity to be here. And so let me just -- I've been with Air Products longer than 30 years. I don't know what the right analogy is in the tech industry. But really, one of the things that's helped me have an opportunity to experience our businesses at kind of an operational sales level. I started as a liquid bulk salesperson in our merchant business in Southern California, spent some time in Allentown in our small on-site business. 6 years in Texas running our pipeline networks there, so a chance to experience the on-site business. I was in Taiwan for 6 years, working on our electronics business, including on-site. And then about 10 years ago, back to Allentown with the responsibility for Investor Relations, and then added in Corporate Relations, which is for us is our global government relations team. And then perhaps, most interestingly, a year ago, Seifi asked me to also be responsible for sustainability as we started to see sustainability more and more integrated in with the external conversations and less and less of a separate function. So with that, Marc, I'd be happy to jump into any questions you might have.

Okay. Great. Well, thanks, Simon. And for anybody on the line, if you do have a question, feel free to put it into the chat, and I'll do my best to work it in. So Simon, gasification has been a major growth focus for Air Products over the past several years. Can you explain to us just briefly what gasification is? And why you think that will continue to be a growth area?

Great question, Marc. And I'd tell you where I'd like to start is, why does the world want to use gasification? Let's forget Air Products involvement for just a second because gasification has been around for decades. And there's 1,000 operating gasifiers in the world today. And the reason for that is, it's a technology that allows companies or countries to essentially use lower value hydrocarbons, heavy oil, coal or bottom of the barrel and transform that into in syngas. And then with that syngas, you can do a lot of different things. You can make power. You can make chemicals. You can make transportation fuels. So the world in certain geographies in the world where those are the natural resources those countries have, gasification has played a really important role in growing the energy resources for that country. Again, turning, let's say, in the case of China, coal into a clean syngas. Well, a few years ago, Air Products was in a position where we were supplying oxygen to our customers who are owning and operating their own gasifiers. And they would generally outsource the oxygen supply, Air Products would build an air separation plant. And we saw a strategic opportunity to expand our on-site business model, essentially go one step further down the chain. Because for the customer, the concept of outsourcing oxygen production is not fundamentally different than the concept of outsourcing syngas production. So we positioned ourselves by purchasing, acquiring 2 of the leading gasification technologies in the world. And then we could go to the customers and say, "Okay, rather than outsourcing oxygen and you doing syngas, just outsource syngas to us, and we'll take care of the whole thing." So again, I think the key point is gasification has been an important solution for many companies and countries around the world for decades. We think it will continue to be for a long time to come. What we've come along and done is allow those customers the option or the opportunity to considering outsourcing to somebody who's really got a lot of expertise in this area. So we do think this will be a big part of Air Products going forward.

And you mentioned the process to produce syngas is less carbon-intensive perhaps than burning coal or using coal for other things, but it still does produce a bunch of CO2. Do you see that aspect of gasification being a hurdle as some of these places, like China, try to go towards a carbon-neutral economy? China is trying to do it before 2060.

Yes, great question. To be blunt, the simple answer is no. In fact, it's the other direction. Let me expand on that for a second. So I think if we think about gasification -- I'll come to CO2, it's a critical part of it. But would just make sure we remember there's other significant environmental benefits of gasification, and that's have to do with particulates and NOCs and SOCs, and it's really particulates. If you've been in a part of the world that has what we would consider to be a heavy pollution problem, wherever that might be, it's really the particulates in the air that make your eyes water and make it hard to breathe. And so you really don't have any particulate emissions from a gasifier. And again, if we broaden out the concept of ESG and consider societal benefits, for these countries, it really is a way to use natural resources that they have in an environmentally friendly way and minimize the need to spend their currency to import materials. So there's a broad benefit there. But let me come back to where your question was, which is CO2. Well, it turns out to be blunt chemistry as chemistry. So you're going to produce the CO2, but one of the great benefits of gasification is it's a very concentrated, a clean stream of CO2 that is produced from this process, and we call that a capture ready stream of CO2. So we actually think that as the world becomes more and more focused on minimizing the CO2 footprint, it actually -- the benefits of gasification perhaps even become more and more important. Because you can put a carbon capture system on a gasifier and capture almost 100% of the CO2 that's being produced. So you could envision in the future a process that takes a heavy hydrocarbon, a low-value dirty hydrocarbon, builds it -- we build a gasification plant with carbon capture, you end up with a very clean syngas and yet you have almost no CO2 emissions. So we actually think the future bodes very, very well for additional gasification opportunities.

All right. How much more expensive is it to capture CO2 off of gas fire versus just letting it go into the atmosphere?

Well, it's a good question. I mean, the real answer is, it depends. And I know that's an incredibly unsatisfying answer, but that's really the answer. And it's the same, whether we're talking about retrofitting a gasifier or quite frankly, retrofitting a, what we call, SMR, which is a natural gas-based steam methane reformer, primarily used to produce hydrogen, which also produces CO2 amidst that. So in both of those cases -- and let me unpack it for just a second, the capturing of this CO2 is relatively simple. The important question is, what are you going to do with this CO2? Are you in a position in the world where there's an existing CO2 pipeline that can be used for enhanced oil recovery? And we've got direct experience with carbon capture. We operate a large carbon capture system in Port Arthur, Texas. It captures the CO2 off the back of 2 of our big hydrogen plants, capturing about 1 million tons a year of CO2, and we provide that CO2 into an enhanced oil recovery pipeline that others operate. So if you are in that position where that occurs, it's a relatively simple solution. Kind of the next option is sequestration, which is essentially putting the CO2 in the ground where you have the right geological formation, you have that poor space that's going to essentially absorb the CO2. And again, if you're in the right part of the world, then that's a good solution as well. But obviously, you can see even in those 2 dynamics, that the cost of doing that very significantly, never mind, of course, the scale. So certainly, it's a significant investment to reduce the footprint of the CO2. But again, we see that as the world's appetite for lower carbon energy, really just almost every day seems to grow, we see that as a good solution going forward.

So you mentioned the SMRs. You already have the gasification. You're running these facilities that create the CO2. So that's an excellent position to be in to participate in CO2 capture. But besides that, what is it that gives you a competitive advantage in carbon capture? What special sauce do you have, if there's anything to talk about there, besides just already being at the facility?

Yes. I mean, we've got a couple of things. First of all, to be blown, we have the CO2, right? We have a lot of CO2 that's emitted from our facilities. And maybe just mention for a second, yes, we don't have the downside risk of that. In our contracts with our customers, with our refining customers, they have the financial risk and responsibility for those CO2 costs. But it's at our facility. And we also -- I think the strongest thing we have is, I mentioned Port Arthur, well, 8 years ago, we retrofitted this carbon capture system to an operating hydrogen plant. And I can tell you, when you talk to our refining customer, of course, they're very focused on CO2, but they're very, very focused on the reliability of the hydrogen plant. So being able to demonstrate that we can retrofit a plant, and we can do that successfully, and we can keep the hydrogen plant at the highest levels of reliability that the refining customer depends on, I think that's very, very powerful. And then finally, we have the technology to actually capture the CO2 and the experience. So I think when you put all that together, certainly, for our assets, I think that there would be a great opportunity for Air Products to do carbon capture.

I guess just because you mentioned the pipeline and my understanding is that there's quite a bit more capacity on that pipeline that is being utilized right now. And I guess really where I'm going with this is, are your assets arranged in a way that are there other refineries in that region that can access that pipeline? Are there other capture projects that you can do and the infrastructure is already there? Or is it just too -- geographically too far apart or are there limitations that may exist?

No. I mean we certainly have hydrogen assets that are within, let's say, a reasonable piping distance of some enhanced oil recovery systems. But again, if you are -- those enhanced oil recovery systems don't occur or don't appear in many, many places around the world, but there's some different options. Let me take another example, and this project has some visibility to it, some public visibility. There's a potential project under development called Porthos in the Port of Rotterdam where we have a hydrogen facility. And the idea there is that 4 or 5 companies, all capture their own CO2, but then we put it in a common pipeline. And you can see as the volume of the CO2 grows, it improves the capital efficiency or the capital -- or the utilization of the capital. And that concept would be as that pipeline takes 4 or 5 company's worth of CO2 in a pipeline back in the cavern under the North Sea. So maybe that's a little bit different than we were talking about. But again, you can see where with some creative approaches to this, there are some opportunities in different places around the world.

Yes. Great. So we're talking about gasification projects before. There's other projects that you do. But one of the things that perhaps differentiates Air Products a bit is a focus on large projects. Over the past year, there's been a little bit of a road bump, speed bump, however you want to describe it with 2 projects, Jazan and Lu'An. Those both appear to be back on track. But what can you say to give investors comfort about sort of your diligence on these types of projects, the commercial terms that you're agreeing to, what makes investors feel comfortable that you're continuing to pursue things in the most responsible way possible?

Absolutely. Great and very fair question. I'll be honest with you, it was a fair question before we had these 2 road bumps or speed bumps how you described them, right? So look, the diligence that we do about these customers, I mean, essentially, we're spending a large amount of capital and that customer is kind of stay in operation for 15 or 20 years for us to earn our expected return. And we've had a very, very, very good track record over the years of doing this because we really focus on 2 things when we're looking at an opportunity. We, of course, look at the customers -- I won't say credit quality, but I'll say financial wherewithal to be -- it's not just a matter of looking up their credit rating. It's understanding their financial health. Is the project the customer is doing kind of commensurate with the size of the customer? Or is this a big step out for them? But then equally, we look very hard at the customer's asset, the plant we're going to be supplying. Because we have seen many examples over the years where a customer of ours went bankrupt but the asset that we were supplying, somebody bought it and it maintained its operation and our relationship kind of sailed through that process. So we do look at the customer itself, but we look very, very hard about in the quality asset. And I would just like to take a second and just maybe remind people of a couple of the unique aspects of Jazan. And in this conversation, one of the most unique aspects and important was, it's an acquisition. So it's very different from normally we would sign a contract, we would start spending capital, take us 3 or 4 years, and we would come on stream. So you need to have certainty of the deal before you start spending the capital. In the case of Jazan, it's an acquisition. So even today, we've spent no capital on that project. Now we spent time and effort in energy, certainly, working on the project. So that is different, right? Anytime you have an acquisition, whether it's an asset or a company, you don't actually know with certainty you're going to get to closing until you get to closing. And so with that project, it has a little bit of a different profile. And so obviously, there was a little bit of a delay relative to expectations on closing timing. But I think it's important to recognize that at no time did we have capital at risk as it related to the Jazan project as well. So...

And with Jazan and now NEOM, for 2025, you've got a lot of exposure to Saudi Arabia. Some investors have expressed some concern about that. How do you respond to that?

Yes. So look, I think that we are -- again, I'd start with -- we get very, very focused on the customer and the asset. We certainly think about geographic dispersion as well. But if I -- we're comfortable doing business in Saudi. We're comfortable -- I know not both projects are with Aramco, but we're very comfortable and think we have a very strong relationship with Saudi Aramco. And while those are 2 very large projects, I mean, we -- that is not the only place we're doing projects. Of course, we got very large projects in China. We got a $2 billion project in Indonesia. We've talked about the potential for additional projects there. We've got large projects. We're building on the U.S. Gulf Coast. So I don't think we'd ever sort of put all of our eggs in one single basket, but we're comfortable doing business there. And I want to point out that in the case of both of those projects, that's where it makes sense for those projects to be. So let's talk about the Jazan project, right? That's where Aramco is building the refinery. That's where that heavy bottom of the barrel is. So we didn't set out to build an IGCC project. There was an opportunity to bring our gasification expertise to that project. Similarly in NEOM, we didn't say, "Oh, let's go build a carbon-free hydrogen project in Saudi." We looked around the world for what we thought the best place to build this project is. And we really believe that the combination of the quality of the sun and the wind and being on the water there in Saudi really generates a very, very strong project. So again, comfortable doing business in Saudi, very comfortable making additional investments, but I do think we have a pretty good balance around the world.

I think on the earnings call, you mentioned that -- or Seifi mentioned that renewal fuels, like renewable diesel, is 4 to 5x the amount of hydrogen that would go into conventional diesel or maybe even ultra-low sulfur. I'm just curious, do you see that as an incremental investment opportunity in hydrogen production? Or do you think your existing footprint can satisfy that?

Well, I think it's a little bit of both, Marc. It's a great question. And I think for yourself or others who follow this industry, right now, there's a lot of excitement. I don't know exactly how many projects for renewable diesel have been announced, but I suspect it's more than ultimately will actually get built. So I think there's, first of all, one has to be a little bit careful as you look at the opportunities here. But some of those opportunities are going to be in a place, maybe it's an old refinery that's being converted or a new refinery where there isn't any hydrogen infrastructure or what there is, is very, very small, and that would absolutely be a new investment opportunity. We also think that some of these opportunities might be in places where there's existing refineries that are already, let's say, connected to our pipeline network and we'd be able to supply them with modest additional investment. So I think it just depends on where they are. And I just want to also -- you're absolutely right, in terms of the hydrogen intensity, but I want to emphasize intensity. It's probably 4 to 5x more hydrogen per barrel. And so whether that's a net increase of total hydrogen or not is going to depend on the number of barrels the refinery is going to produce. So it could be the same amount of hydrogen they were using before. It could be additional hydrogen, it could be a little bit less. We absolutely do see additional hydrogen demand in this area, but we'll have to kind of see how this plays out as these projects come together.

And along the lines of the hydrogen. I think if you're -- if you're producing renewable diesel with blue hydrogen or if you could even do it with green hydrogen, there's a pretty juicy credit you can get from California. But we just haven't seen a lot of these projects move forward. Is it just that they're coming and we're too anxious to see projects announced? Or is there -- are there others -- are there some other roadblocks? And you mentioned earlier sort of the sequestration availability as maybe being one. I'm just curious how you see that evolving?

Yes. So I mean, I think it's a great question because, clearly, California's low-carbon fuel standard creates incentives or creates economics that make a lot of these things make sense. But I guess I would just go back to all of these are really big projects, and it takes a long time to put big projects together. And whether we're talking about a potential customer of ours, doing a renewable diesel facility or whether we're talking about us retrofitting one of our hydrogen plants with carbon capture, those are big projects. And they take quite some time to put together, both commercially, from a kind of a legal standpoint, from a permitting standpoint. Even though these projects are clearly aligned with where California wants to go, there's still a process to get permits for these kind of projects. And again, we're not an expert in the renewable diesel projects, right? We're a potential supplier to them. So I don't know that there's a situation where necessarily people are sitting back and waiting. I think it just takes quite some time to put these projects together.

There was a production tax credit for green hydrogen introduced a couple of weeks ago. And assuming that this goes through and there's $3 a kilogram of credit available federally, how likely is it to see Air Products moving forward on green hydrogen production in the U.S.?

Well, I think, Marc, it's -- I smiled a little bit, right? It's more than a full-time job right now to keep up with all the potential legislation that could happen in the U.S., never mind in Europe. And so -- I think our view is rather than a specific focus on one element of this, these are all indicative of the direction the world is moving, right? And again, whether that be policies by different states in the U.S. EU policy or federal policy. We think it's all kind of moving in the same direction, right, lower carbon footprint, cleaner energy, less carbon for the transportation fuels. So obviously, we're watching this very, very carefully. If there was a production tax credit, as you mentioned, we would certainly take a look at that. Again, our view is -- what you want to do is, you want to produce carbon-free hydrogen in the most economic sense or place possible and then be able to deliver it to the marketplace that needs it. And as various incentives are put in place, we'll see how that plays out. So -- but again, I think the most important thing is all of those proposals, while they may have different specific aspects to them are just indications of kind of where the world is moving, and we're very, very excited about where the world is going and how we're positioned to be successful in that future world.

Okay. Shifting over to NEOM. This is the green hydrogen project that you mentioned in Saudi. There's been a lot of Q&A on this since you guys announced it, but I think investors are still -- they've got a lot of questions about the cost structure. And I kind of -- the first part of the cost structure, in my mind, relates to the electrolysis. Many expect CapEx for electrolyzers to come down dramatically over the next 5 to 7 years. Is Air Products at risk of signing up for a high-cost electrolyzer and then the costs come down and you're not as competitive as you otherwise would be?

Well, I don't think so. Let me say it that way, and we don't think so. Let me expand on that a little bit. I mean, how do you reduce the cost? I mean, scale is one big thing, right? So to be honest with you, Marc, I've seen some of those analysis that kind of compare -- well, here's what today's cost of a modest-sized electrolyzer is versus a big project in 5 years. Well, guess what, we're building a big project in 5 years. As you know, our project is orders of magnitude bigger than anything anybody has built. So we're very excited about our relationship with ThyssenKrupp. But they have recognized this for them is an order of magnitude, bigger expansion opportunity. So we're going to have world-class scale. I mean, we're creating what the definition of world-class scale is around this project. And again, our project is coming on in 2025. So we believe that there will be an opportunity to improve the economics relative to, say, a small project being built today. But I would also make another point here is, let me just take your hypothetical for a second, let's pretend that's true. We're going to have carbon-free hydrogen available for the marketplace in 2025. And I don't need to tell anybody on this phone today that every morning, when you open up your computer, there's more and more indications the world is going to want that carbon-free hydrogen. And we fundamentally believe there's going to be significant demand for carbon-free hydrogen just for transportation in 2025. So again, it's a hypothetical. We don't see it happening. But even if it does happen, we think that we're going to be in a very, very strong position. There will not be a lot of carbon-free supply on the market in 2025, and there will be a significant amount of demand. So we're really excited about the position that we'll be in there.

And just quickly on the cost side because I got a few more -- and we've only got a few more minutes. The ammonia conversion, transport and dissociation add some more costs. We've seen estimates that it's about $3 a kilogram. I don't know if you would agree with that or not or if it's in the ballpark. Is your plan contemplating a reduction to that $3 or whatever the number is? And how do you think you're going to get there?

Yes. So as you're probably aware, we haven't commented at all on the cost, so I'm not going to make a comment on that. But I just want to also -- I mean -- we didn't just decide we were going to use ammonia, right? We transport everyday gaseous hydrogen via pipeline, gaseous hydrogen via truck. We liquefy hydrogen and move it by truck. So we've got a lot of experience. So we looked hard at what made sense. And again, you're looking at the overall supply chain -- tremendous efficiency on your capital investment on producing this product in Saudi, right, a very high quality in the wind. And then, okay, you've got the hydrogen. Do I want to transport it via gas? Well, to be honest with you, that's not really practical for large distances. I can liquefy the hydrogen. We know how to -- we understand the -- but it takes a lot of energy to do that. So the reason that we came up with this innovative idea to use ammonia is because it really optimizes the cost of that supply chain. And yes, you're going to make the ammonia in Saudi and you're going to move that ammonia around, as you well know, there's a good robust ammonia supply chain around the world. And we do absolutely are focused on the opportunity -- cracking ammonia for hydrogen, that's been practiced for many years. I think there's probably some engineering optimization that we can do in that step that we will be doing. But again, what that allows you to do is be able to flexibly kind of move those hydrogen molecules where the marketplace needs them the most. So...

Last one on NEOM. As an investor, what sort of updates should we expect to see from Air Products over the next 12 to 24 months? Will there -- is it too soon to potentially see customers announce? Will there be updates on the project status? Or are we just too far away from startup to really see any of that?

Well, I think that I wouldn't be surprised if we don't get a question on the status of it on each quarterly earnings call from now to when it comes on stream. So that might be an opportunity. But I got to be honest with you, we've said pretty clearly, Seifi said pretty clearly, we're really not looking to provide updates on where we're signing contracts, to be honest with you. I appreciate the investor base would like to know, but from a competitive standpoint, we're going to have these molecules. We want to move them to the highest value place. And we'll certainly provide updates on the progress of the project, but things are going very, very well.

Yes. Super. Well, the last one that I had is a big gear shift over to semiconductors and electronics, which is a pretty important part of your business. There's a semi shortage right now. There's thought that there's going to be a lot of investment around capacity there. Can you help maybe frame for us what that could mean for you? What's maybe the size of a project or content that you could have? You're going to give us an update on your capital deployment? Maybe you could talk about the proportion of your capital deployment that could be allocated towards electronics?

Yes. You know what, Marc, it's a great question. The reason is it reminds us that we're not just about the big projects, right? We've got a big business today, the merchant business, the more smaller, more traditional on-site business, and that's a very strong market for us. Specifically, electronics, we got more than 15% of our sales today into the electronics market. Anybody who's followed us for years knows that we have a leadership position. We obviously spun off our electronic materials business, created value for shareholders who are doing that. But we still have a very strong position supplying big nitrogen plants, very high-purity nitrogen and other liquid bulk products. We've got a great relationship with the leading players around the world. So -- and finally, we have nitrogen pipeline networks in some of the major science parks in the world. So like we have a big hydrogen pipeline network on the U.S. Gulf Coast, in some of the science parks in Taiwan and Korea, we have nitrogen pipeline network. So now, to be honest with you, the investment opportunity for industrial gas company at a world-class semiconductor fab is not going to be as big as these gasifier projects, but it's a great market opportunity for us. We'll stay focused on it, and we look forward to growing both with the big projects and the more traditional projects as well.

Great. Well, I think that's all the time we have, Simon. Thank you so much for participating. We appreciate it, and look forward to talking to you soon.

Marc, thanks a lot. Great conversation. Thank you, everybody. Have a great day and stay safe. Thank you.