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

Good afternoon, and welcome to the Air Products and Chemicals Investor Conference Call. Today's call is being recorded at the request of Air Products. Please note that this presentation and the comments made on behalf of Air Products are subject to copyright by Air Products, and all rights are reserved. Beginning today's call is Mr. Simon Moore, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Rochelle. Good afternoon, everyone. This is Simon Moore, Vice President of Investor Relations, Corporate Relations and Sustainability. I am pleased to be joined today by Seifi Ghasemi, our Chairman, President and CEO; Dr. Samir Serhan, our Chief Operating Officer; Scott Crocco, our Executive Vice President and Chief Financial Officer; and Sean Major, our Executive Vice President, General Counsel and Secretary. Air Products, this morning, announcing our multibillion-dollar Net-Zero Hydrogen Energy Complex in Edmonton, Alberta, Canada. We hope you had a chance to watch the government-hosted live stream event earlier today, where Seifi was joined by Jason Kenney, Premier of Alberta; François-Philippe Champagne, Minister of Innovation, Science and Industry Canada; Seamus O'Regan, Minister of Natural Resources Canada; and Don Iveson, Mayor of Edmonton, to announce and support this transformative project. The press release and the slides for this call are available on our website at airproducts.com. This discussion contains forward-looking statements. Please refer to the forward-looking statement disclosure that can be found in our release and on Slide #2. Thank you for joining us to discuss this very exciting opportunity. After our comments, we'll be happy to take your questions. Now I'm pleased to turn the call over to Seifi.

Thank you, Simon, and good day to everyone. We thank you for taking time from your very busy schedule to be on our call today. We are very excited to be announcing this significant investment. This is a perfect example of our 3 growth platforms because it includes gasification, carbon capture and hydrogen, coming together to support the energy transition and enable Canada to advance its competitive low-carbon economy. And it leverages our mega project execution capabilities. As Simon mentioned, we are honored to have key government officials from Canada, both federal and local, the Alberta and Edmonton governments, join us on a live stream event this morning to announce this important project. This investment is totally aligned with Canada's clean energy diversification strategy, invest Alberta's development focus and Edmonton's low carbon future. And we sincerely appreciate the support of all of the government officials. This project is also totally aligned with Air Products' growth and sustainability strategy that we have discussed with you over the last few years. This multibillion-dollar Net-Zero Hydrogen Energy Complex in Edmonton brings together all 3 elements of our strategy. As I said, this project is essentially a gasifier with carbon capture, producing net-zero hydrogen for our pipeline and hydrogen for mobility market. Once again, we are creating a first-mover advantage in a critical growth market in Canada. As you know, at Air Products, our sustainability focus drives our growth strategy, and the success of our growth strategy drives our sustainability success. This project will directly support our Third By '30 carbon intensity reduction goal. We are already Canada's leading hydrogen supplier. We have had significant hydrogen production and pipeline investment in this region for many years. We appreciate the opportunity to significantly expand our investment with this landmark project. The project site was strategically selected to permit expansion of the complex, including replication of net-zero hydrogen production assets to meet growth in demand and help customers improve their sustainability performance. My colleague, Dr. Serhan, our Chief Operating Officer, will take you through the details, but I want to emphasize our commitment to this transformative project. We have been working on this project since 2018, and we are looking towards the first phase of this project of CAD 1.3 billion to be on stream by 2024. We will further extend our leadership, providing net-zero hydrogen for pipeline customers and liquid hydrogen for the merchant and mobility markets. So now I would like to turn the call over to Dr. Samir Serhan, as I mentioned before, our Chief Operating Officer, to talk about the very details of this project. Samir?

Thank you, Seifi. Good afternoon, everybody. I'm pleased to be able to discuss this transformational project with you today. This project combines so many of the areas where Air Products truly excels and leads: gasification, carbon capture and hydrogen. This project will improve our competitiveness in the important Alberta heartland and allow us to grow together as part of the energy transformation in Canada, supplying net-zero carbon emission hydrogen. This extraordinary emission performance is rooted in our more than 60 years of experience, designing, building, operating and maintaining large-scale hydrogen plants. First, I would like to present an overview of the project visually and then discuss some of its unique aspects and the guiding principles we follow. Please, if you don't mind, turn to Slide 3. This project consists of an award-scale hydrogen production facility using autothermal reforming, or in short, ATR. Feedstock is natural gas and oxygen, and this is in place of our traditional method of hydrogen production at this size, which is with a steam methane reformer, or in short, SMR. I will explain in a moment the significant benefit of ATR over SMR in capturing carbon dioxide. The majority of the net-zero hydrogen from this facility will be fed into our 55-kilometer Alberta heartland pipeline, where it will be used by refining and industrial customers. This system, Canada's largest today, is fed by 3 hydrogen plants operated by Air Products and has delivered leading efficiency and reliability since it was started in early 2000. A portion of the net-zero hydrogen from the new project will be used to generate green power in order to power the entire facility and have excess available for export. The balance of the hydrogen will be used in a 30 ton per day hydrogen liquefier. This liquefier will generate net-zero liquid hydrogen for the mobility and industrial markets. Air Products was the pioneer in liquid hydrogen technology in the 1950s for the space program, and our technology is market-leading today. A large air separation plant, in short, ASU, powered by the net-zero power will produce the oxygen acquired for this ATR. The ASU will also produce net-zero liquid products for industrial and medical markets in Western Canada. We started air engineering on this project in 2018 based on very clear guiding principles. First principle is safety. Safety is at the heart of everything we do from design through execution to operation. Nothing is more important than safety at Air Products. We're proud of our industry-leading safety record, including operating over 1,100 kilometers of hydrogen pipeline worldwide with no incidents. The second principle is that this facility must be of the most competitive design and allow Air Products to grow our leadership position in hydrogen supply. The scale of this facility, coupled with the innovative design, will allow Air Products to serve the Western Canada markets with low-carbon, very competitive hydrogen and other industrial gas products to support the energy transition and industrial markets. The third principle, this project must be an enhancement to our leading hydrogen position and deliver efficient, highly reliable, and now, net-zero hydrogen to meet the requirements of our existing and future new customers. As I said, the core technology of this project is an ATR. Using ATR for hydrogen production enables carbon dioxide produced in the processing of natural gas to be captured in the process as steam, meaning that we can capture over 95% of the CO2. In an SMR, almost half of the carbon dioxide is released to the atmosphere as a byproduct of the combustion process as a flue gas, and it's not easily captured. We're very pleased to partner with an industry-leading company, Haldor Topsoe, for the ATR technology. I mentioned that a portion of the hydrogen will be converted into power, and we are equally pleased to partner with Baker Hughes for the turbine technology to convert this low-carbon hydrogen into green power to power our facility as well as have excess power, which we can market to such customers who would value that. This low-carbon power will also drive our hydrogen liquefier, which is a state-of-the-art design benefiting from Air Products' long experience in liquid hydrogen production. The integral cryogenic machinery is provided by our own Rotoflow division, and the resultant net-zero liquid hydrogen will serve the growing mobility market in Western Canada. The facility can be expanded in the future, however, which given the continuing focus on decarbonizing transportation, we see this as a strong possibility. We also will produce net-zero liquid oxygen and nitrogen, which we are excited to market to industrial and medical customers. By volume, most of the exports from this facility will be by pipeline. We will export pipeline hydrogen to existing and new customers through our Alberta heartland pipeline network. As I mentioned, today, this system is fed by 3 SMRs or hydrogen plants supplying important refining and industrial customers, and we look forward to not only this ATR but the future investment in Alberta, adding additional low-carbon hydrogen to supply existing requirements as well as new products. What is the customer benefit? It is the multi-source pipeline network, unmatched in terms of competitiveness, reliability and efficiency. And with this project, we're upgrading our network to lower the carbon footprint. I mentioned before that we have been working on this project since 2018. We look forward to this CAD 1.3 billion investment coming on stream in 2024 to produce net-zero hydrogen at the most competitive cost position. Today, Air Product is executing over USD 14 billion over projects globally, and we continue to add to our capability to deliver mega projects in geographies all over the world. In this project, we will also use the experience from our best large investments in Canada to deliver on our commitments, safety, on time and on budget. Finally, we're incredibly excited that there is a lot more potential here in the future additional capacity and upgrade to our current hydrogen system to create the world's most competitive and lowest carbon intensity hydrogen network. We see that this could total over 1,500 tons per day of hydrogen and capture more than 3 million ton per year of CO2. We're very proud of our existing 55 kilometer hydrogen system, which since 2006, has operated with unmatched safety and reliability. This new investment will improve upon our reliability with the new products to serve our customers and the marketplace. We're very pleased with the support from all levels of government, federal, provisional and local, which have helped us to bring this project to life. When we initially invested in 2006 in Alberta, we mindfully reinvested in capacity to support the growth. It has been a steady journey since then. And today, we're making our fourth hydrogen investment and our first of its kind anywhere in the world. We look forward to more to come. Thank you for your time today, and I would like to turn the call back to Seifi.

Thank you, Dr. Serhan. With those comments, we are more than happy to answer any questions that you have. So with that, operator, we are open for questions.

[Operator Instructions] And our first question today will come from Jeff Zekauskas with JPMorgan.

Congratulations on your project.

Thank you very much, Jeff. Appreciate that.

In the first year that the plant is on stream, how much hydrogen will be produced? I know you referred to the 30 metric tons per day of liquid. What's the other amount of hydrogen that would be produced? How much is that?

Jeff, it's a very good question. I don't want to give you an exact number, but let's say, yes, roughly, it's more than 150 million cubic feet a day. Yes, that's approximately 300, 400 ton a day, yes.

300 or 400 tons per day. And secondly, is there any arrangement with Canadian entities in terms of the sale of the hydrogen to them?

Well, that one is something that our customers don't want to announce, and we don't want to announce, Jeff. Obviously, we are building this thing to be used by customers, but I don't think anybody wants us to give too much of the details of that. We have existing customers and new customers and all of that. Okay?

Next, we'll move to Kevin McCarthy with Vertical Research Partners.

Yes. Seifi, I think you have a number of existing hydrogen plants along the pipeline. Is today's project going to be additive to all of those plants or is it meant to replace a portion of that production over time?

Well, our plan today is that it would be additive to those plants. And it has the potential of reducing the carbon content of those plants also. As you can imagine, we can blend it with -- we can blend the new net-zero hydrogen with the other hydrogen to make the hydrogen 50% blue or something like that for some of our existing customers. But we are working on that. It will be a combination of the two, Kevin.

I see. And then secondly, if I may, can you talk about the economics of blue hydrogen production in this paradigm in Canada? So for example, I imagine that the cost of natural gas is relatively low in the region, and I also noticed that you're using an autothermal reformer, which sounds like it's more conducive to carbon capture relative to an SMR. But I don't know how the economics of those processes might compare. So any thoughts along those lines would be appreciated.

Sure, Kevin, obviously, about the price of natural gas, that is competitive, but the ATR does give us an advantage. And overall, we feel very good about the economics of what we are doing. We think we can produce blue hydrogen, or in this case, really, net-zero hydrogen, which is very much in demand. And we are pricing it accordingly with the benefits that it provides.

And next, we'll hear from John McNulty with BMO Capital Markets.

This is Bhavesh Lodaya for John. Congrats on the project announcement.

Thank you. Thank you very much.

So following up on Jeff's question a bit, a question on the contract side of the equation. So just in terms of the business model for the project, do you envision this to have contracts over time for your pipe in liquefied hydrogen? Or are you okay with leaving some of this commodity exposed to the market? And then depending on how you plan to run that, how should we think about the returns for the project?

Well, the thing is that, first of all, the output of this plan will be a combination of both of those long-term contracts, and some of it would be like a merchanting, like the liquid hydrogen and all of that. And we also want to leave some of this thing open because like blue -- net-zero hydrogen, like anything else, is a price based on supply/demand. We have something which is net zero and others don't have it. There will be a premium. But when we approved this project, we, obviously -- as you know, we only approve them if we're kind of confident that we will get the kind of return that we have mentioned to you before about the projects. So this -- the return on this thing is in line with what we have disclosed before in terms of our target for investments.

Got it. And then in the decision of going by -- on the ATR versus the SMR, thanks for the color on the carbon capture benefits there, can you add some color on your decision-making process of retrofitting the -- maybe a couple of existing SMRs versus building kind of like a brand-new project? And then going ahead in a scenario where demand kind of like continues to shift towards sequestration, will you be adding other plants -- other ATR plants? Or does it make sense to do the retrofitting of SMRs first?

We plan to do both. We definitely plan on additional ATRs, and the existing assets are there. If it is appropriate, we will put carbon capture on those things. And -- but as Dr. Serhan mentioned, the existing SMRs, you can only practically capture 50% of the CO2. So it will become 50% blue, not 100% blue. But we are looking at all of those options, whether it makes economic sense. Thank you.

And next, we'll hear from John Roberts with UBS.

Congrats as well. Is there a reason why Alberta would be an advantaged location for this project over the U.S. Gulf Coast, or say, Saudi Arabia? Or should we assume something similar is going to come to those regions eventually?

John, we are doing this project in Edmonton because we do have a pipeline, and we do have customers and we think the demand is there. So this happened to be the first one. There is no -- but there is another significant issue here. And that is that in Edmonton in Canada, there is an existing CO2 pipeline trunk, that means that you can use it and tap into that and get rid of the CO2 once you capture it. So that is an advantage. But in the future, as you and I have talked about before, John, we will do projects like this in the U.S. Gulf Coast, in Saudi Arabia, in Europe. There are many locations that we are working on to try to do something similar to that. We are committed to be the leader in blue hydrogen, and we will be doing that all over the place. But Edmonton happened to be the first place and their local officials, they're very cooperative. So that's why we are doing it there. And the demand is there.

And how much is the LIN/LOX output? And will you get a premium on that as green oxygen, green nitrogen?

We are not pulling a lot of LIN/LOX on that. Dr. Serhan, do you want to comment on that?

No, this is really mainly an ASU to produce oxygen, which we need for the autothermal reformer. There's going to be very limited quantities for a merchant, which will be at zero carbon.

Next, we'll move to Laurence Alexander with Jefferies.

So could you just put in perspective how much hydrogen capacity you're adding relative to the total supply in Alberta, yourselves and any other supply?

I don't want to comment on the other's detail, but our current hydrogen capacity in Canada -- not in Canada, but in Alberta, we have 3 SMRs and the output is approximately 300 million cubic feet a day. And this one will be, as I said, more than 150 million. Otherwise, we'd give the exact number. So we will be -- we are adding about 50% to our existing capacity.

And do you have -- if not -- it sounds as if you do not have all the contracts lined up yet for the facility. But do you have at least the capacity spoken for by visible contracts? Or are you waiting for if some of the capacity going to be contingent on partners who have not yet moved forward with their own projects?

Well, I really shouldn't comment on that because we have NDAs with a lot of customers that doesn't allow us to talk about those things. But obviously, for the part, which Dr. Serhan mentioned about the liquid -- 30 ton a day liquid hydrogen, that is something which is like a mission thing, and we are going to build it and sell it as the demand arises. We might have some long-term contracts for that, too. But if you don't mind, I don't want to comment about the customers, please, because we really can't and shouldn't talk about that.

And we'll move on to Laurent Favre with Exane.

Seifi, I was wondering if you could talk a little bit more about the sequestration part. Will you also own some of the infrastructure there? Will there be sensitivity of returns to the cost of storage? Or is it something you've already agreed with the government of Alberta?

Again, obviously, we are going to put the CO2 in the CO2 trunk line, and that will go into sequestration fields that the Canadian government is providing. I think the public officials made some comments about that this morning. In terms of what is the details of the arrangement and the contracts we have with them, again, we are finalizing those, and I don't want to kind of comment on those prematurely.

We'll move on to Steve Byrne with Bank of America.

Seifi, I was wondering if you could comment on your outlook on 2 items. One of them was the capacity of this carbon sequestration trunk that you talked about. I recall one of the government officials saying they refer -- view it as the second largest capacity globally. Have you done your own due diligence on that and feel comfortable that, that's not going to become a limitation for you down the road of sequestering the CO2? And then the other item that I'd like to hear your view on is just down the road, do you see the renewable power conditions in Alberta as really being too limited, particularly on the solar end, to go down the path of installing some electrolyzers and going the green route rather than the blue route?

Those are very good questions, Steve. First of all, on the sequestration, I think the Premier of Canada made a reference to the fact that they have studied the geology. We have seen those numbers and so on. There is plenty of so-called forest space there, so I don't see that as being a limitation. In terms of the producing green hydrogen in Canada from the grid, we are not there yet. We haven't really looked at that and -- or we have looked at it and we haven't gotten too excited about it. I don't see a lot of possibility there that we would build electrolyzers in Canada to produce green hydrogen. I think they have a long race to go in terms of having a grid that is green. They have other things that one can use as green, but certainly not the grid. I think that -- but you never know. It depends what the grid is, what it is connected to, where is it located and all of that. But overall, we are right now focused on in Alberta. We are looking at other things in Canada. But right now, our focus is on the use of hydrocarbons to produce blue hydrogen.

We'll move on to Vincent Andrews with Morgan Stanley.

Congratulations.

Thank you. Thank you very much.

Just a couple of things. One, just a follow-up on the LIN/LOX merchant volume. Just curious, is the amount that you're going to have, is that a function of your assessment of what the demand in the relative market would be? Or is that a function of sort of the engineering or design requirements of the facility? And I guess I'm thinking ahead to my second question, which is, as you think about doing another one of these somewhere else or you think about scaling this up somewhere else, what other flexibilities would you have to sort of enhance the product availability or return capability of the project?

Well, there is nothing in the design of the project that limits us from putting LOX or LIN on this thing. It's an ASU. We can do what we want on that. But the fact of the matter is that there isn't a lot of demand for LOX and LIN in that part of the thing. We do have some capabilities for supplying that. So that is not a material part of this project, and that's 5 year. In the future, we might put a small liquefier there, but there is no engineering limitation for us doing that if you wanted to. But I don't think we plan to do that because the demand is not there that much.

And that will conclude today's question and answer. Let me hand it over to you.

Okay. Now I'd just like to, as usual, say thank you very much for taking time from your very busy schedule. We appreciate your interest in the company, and look forward to talking to you when we announce the next project or our quarterly results. Thanks again for being on the call in short notice. We appreciate that.

That will conclude today's call. We thank you for your participation.