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

I'm Josh Silverstein from Wolfe Research. And with me today, we're very excited, from Air Products, to have Simon Moore, VP of Investor Relations, Corporate Relations and Sustainability. We're excited to see what's -- we've been covering the company. We launched on the chemicals in mid-June and excited to be doing our first event with Simon and the team here. So Simon, welcome and glad have you here today.

Thanks, Josh. Really appreciate the opportunity to join you this morning. Thanks to you, and thanks to the rest of the Wolfe team putting this together. And thanks to everybody who's joined us today, and look forward to a great conversation.

Great. Well, thanks, Simon. You guys are certainly at the forefront of a lot of emerging technologies, but also some legacy positions here that are helping you kind of [ explore ] some of those technologies. We'll talk on pipe gen, some of the gasification, some LNG projects.

And maybe just kicking off on hydrogens, as you guys are the leader in this, can you just talk a bit today about the size of the market? What it's being used for? And then are you trying to convert the sales that you have right now over to blue and green? Or is there actually some pretty big growth ahead for product and usage?

Josh, that's a great question. That's probably about a 3-hour answer. So let me see if I could saw it down a little bit. So I appreciate you recognizing that Air Products today is the leading supplier in the hydrogen business. And if you go back 30 years or so ago, all the refining companies did their own hydrogen. And we were the company that helped the first refinery in California see the value of outsourcing. And we've built from that position today to maintain that leadership position. Most of the hydrogen today is actually used for environmental benefits, specifically, most of the hydrogen goes to the refining industry, which helps them clean up the transportation fuels and reduces the sulfur content and cleans up the environment in that way. We also, today, have a hydrogen business that supplies the mobility transportation market. And I know we'll talk about that in terms of where it's going and what the massive opportunities are, but I think it's important to recognize that's a market that we've been serving for more than 10 years, although it's relatively small now. So that's kind of where the business is today. And I would say, emphatically, no, we're not looking to replace our existing business. What we see is tremendous growth opportunities in really kind of all stages of hydrogen. We do think that there will continue to be some markets for the hydrogen as we have it today. We think there will be markets for hydrogen, so-called blue hydrogen, which is sourced from hydrocarbons, but with a 0 or very low CO2 footprint using carbon capture. And we think it will be a market for so-called green hydrogen, hydrogen made from renewable energy. So we see opportunities in all 3 of those areas. And we think what Air Products brings to the game is our decades of experience in the safe and effective handling of hydrogen. As I said, Josh, we've been producing hydrogen for many, many years. Every single day, we transport hydrogen via liquid in a truck, via gas in a truck or via pipeline. Every single day, we dispense hydrogen into forklifts and cars, so we have the dispensers. We have the portfolio of technologies that allows us to bring together the right solution for the specific situation. And then, of course, we have the balance sheet, the capital capacity. And one of the most important things we have is the ability to execute these megaprojects. And so when you put our history, our current position and the position we have for the future together, that's why we're very, very excited about it. And again, we really see this as tremendous growth, not replacing our existing business.

Got you. That's helpful. And maybe just talk a little bit -- I mean, you mentioned it a bit there, but just the competitive landscape today for like Air Products, given that you guys are incumbent here. There's obviously some upstarts starting to come together here. So how are you working with some of your customers today? Or what are they doing to try to evolve for blue and green hydrogen?

Yes. And I think this is an interesting one, right? Where you think about your competitors, I think you need to think broadly. Clearly, there's opportunities and there will be peoples outside of the industrial gas business who are important in the hydrogen business when we go into the future. But I think the other thing you need to reflect on, Josh, is for the world to make the transition it wants to make, for there to be enough hydrogen for the world to use hydrogen in this energy transition, it's going to have to be done by a number of different companies. No company in the world could do all of the hydrogen projects the world is going to need. Certainly, Air Products could not. So on the one hand, we are thinking about our competitors, of course, as you would expect us to. We're proud of our leadership position, our first-mover advantage we're creating. But at the same time, there's no way we could do it all. And so we will need other projects because there will be a significant amount of hydrogen. But again, when we think about what we bring to the opportunity, it's that decades of experience with the safe handling, the technology, the portfolio of technologies we have today, the proven track record to execute these megaprojects around the world and then, of course, the capital, the balance sheet capacity to do that. And I think we're putting all these things together, and I know we'll get into some of the specific projects, but we're actually doing real projects. And I don't have to tell you or anybody else on this call today that you can't open up your computer any morning without seeing a bunch of press releases about companies doing stuff in hydrogen. And all I'll say is we're doing real projects. We've kicked off 3 massive projects, and we're going to have hydrogen for the energy transition market in a few years.

That's great. Well, let's talk about one of the big projects for you guys in the NEOM project, which was the first of your 3 mega products that you guys are tackling. It's unique in its location in Saudi Arabia. Can you just talk about what makes this project work there? And how is the project getting kicked off? Because I imagine the equipment, sourcing and everything is taking a bit of an effort from you, guys.

Yes. So Josh, I could use a really complicated set of words, but you asked why is it there? And the simple answer is because the wind blows and the sun shines there, and let me impact that a little bit. I don't need to be too simplistic. But if you really think about it, when you're doing these so-called green hydrogen projects or the hydrogen projects that come from renewable power, a big part of the cost is what's the cost of the renewable power. Now in this case, the project is not buying power, we're making power. But at the end of the day, that spot, NEOM, in the northwest corner of Saudi Arabia, has abundant sunshine and it has significant wind. And so when you build a solar field and when you build a wind farm, you get tremendous leverage of the capital that you've invested there. And so you essentially create very attractive low-cost renewable energy. Well, that's great. Now you have this in Saudi Arabia. You're going to use that renewable energy through an electrolyzer. You're going to make hydrogen. Now what do you do? The markets you want to serve are not in the northwest corner of Saudi Arabia. They're currently the transportation markets around the world. So we got to get that hydrogen from point A to point B, C, D, E and F. And as I said earlier, we know about moving hydrogen. We know what the economics are of liquid hydrogen, and it's difficult for long transportation. So one of the innovative things we're doing with this project is we're going to turn that hydrogen into ammonia. And the only reason we're going to turn into ammonia is to facilitate the transportation of those hydrogen molecules around the world. Ammonia is a much more effective way to transport those hydrogen molecules. And as you and everybody else knows, there exists today the global infrastructure to move ammonia around. So the innovation is to take that -- the sun and the wind in Saudi, leverage that to have a good cost position and then innovative, using ammonia, to move these hydro molecules around the world to the market opportunities that we see. And yes, this is a very, very significant production project. But I would also just share that, although it's an unrelated project, a few years ago, our team successfully built the largest industrial gas project in history, which was the $2 billion ASU project for the Jazan gasifier network. And we built that on time, on budget and with excellent safety performance. And quite frankly, it was another part of Saudi, but that was an area that was relatively new in development. So it's certainly a challenge, Josh, but we're proud of the team, and we're confident that we're up for it.

Got it. Well, maybe just going back, a little bit over a year, you announced these projects. What assumptions were you guys making on new technologies that would have to be developed versus what you currently know from your existing technologies and producing and transporting hydrogen?

Yes, it's a great question. And I think one of the very exciting things about this project is it doesn't depend on brand-new technology. And so maybe let's talk for a second about kind of what is the project, right? Because we'll talk about the different steps. Again, as I said, a solar field and a wind farm, well, they're very big, but certainly, you wouldn't say that that's brand-new technology. The electrolyzer technology has been around for decades. Now this is deploying electrolyzers at a scale far beyond anything that's been done before. But at the end of the day, the electrolyzer technology itself, this is about scale-up and multiple modules, not a brand-new technology. We have an air separation plant. I'm pretty confident that we know the technology about that. And then we have an ammonia plant. And again, while it's innovative in the sense it's green hydrogen and green nitrogen, the ammonia plant doesn't know what color the molecules are. It's the same ammonia plant that's used in other places in the world. So again, I don't think any of the individual technologies are, let's say, brand new or need to be proven technologies. But bringing them together in this configuration, in this scale, and that's where the innovation is. So one of the reasons, to be frank, that we're comfortable committing, the total project is probably about $7 billion, our share, about $3.7 billion, including the downstream, is that -- exactly to this point, is it doesn't depend on the brand-new unproven technology. It utilizes proven technology, in some cases, are being deployed a little bit differently and certainly in a scale-up type mode.

Got you. Yes, that's helpful for background there. Maybe moving over to the 2 more recent projects that you guys announced, 1 in Louisiana and 1 in Alberta. Can you just talk about the differences between the 2? Obviously, the location difference is there, but what are the similarities and the differences in the 2 projects?

Yes, it's a great question. And I think -- maybe I'll hit the similarities first because, at a high level, both of those projects are proving to the world that you can take hydrocarbons, both of them happen to be natural gas, in this case, and you can make, in one case, net-zero hydrogen, in the other case, very low-carbon intensity hydrogen. And in both cases, these projects are making hydrogen for our pipeline networks. The one in Alberta is going to be connected to our existing hydrogen pipeline network out there. And the one in Louisiana will be connected to the world's largest hydrogen system, our U.S. Gulf Coast pipeline network. So both of the projects are going to make hydrogen for pipeline customers and, again, either net-zero or very low-carbon intensity. And then also, they're going to do something else to the hydrogen, and this is where one of the differences is. In the case of the Alberta project, we're going to take some of that hydrogen. First of all, we're going to make power out of some of that hydrogen to create that very low-carbon intensity power to offset the 5% of the CO2, but we're also going to make liquid hydrogen. Again, I talked about our experience and the different portfolio technologies that we can bring to bear. So for that project, from a location standpoint, we see a tremendous development opportunity, particularly for the truck market up in that portion of Canada. So we're going to create liquid hydrogen, which allows us to efficiently transport the hydrogen in that area. So again, you're taking the natural gas, net-zero footprint, creating hydrogen for the pipeline network, and then also, hydrogen for the local transportation market. And then if I look at the Louisiana project, again, in addition to the hydrogen for the pipeline, we're going to take some of that hydrogen, and we're going to make ammonia out of it. And so from that standpoint, it's almost exactly the same perspective as I just shared around NEOM. We're not getting in the ammonia business. We're in that business to move those hydrogen molecules around. Obviously, the location of this project is amenable to shipping that ammonia out on ships around the world. And so that will, again, have an opportunity to supply hydro in the pipeline network, but also supply ammonia, which is really a way of moving the hydrogen around the world to, again, support that similar transportation market. Now I've overly simplified. There's a lot of differences. The technologies are a little bit different. But at the end of the day, they're both gasifiers, slightly different types of gasifiers, but the key is that technology allows you to capture 95% of the CO2. And so that's what, I think, is innovative about these projects, starting with natural gas and creating either net-zero or very low-carbon footprint in hydrogen.

I want to touch on the CO2 capture as well because you guys had a plant already in operations in Port Arthur. The new facilities that are being constructed, is this based off the same technology? Or is it something that's changed over the past few years that you guys are now adapting in the new plants?

I think you're talking about the actual carbon capture technology now, right?

Right, yes.

Yes. So I mean, I think, again, in terms of carbon capture, the capturing of the carbon is one thing. And as you said, we've had a plant in Port Arthur, Texas. We brought it onstream about 8 years ago, which captures the CO2 off the back of 2 of our big hydrogen plants. And actually, what's great about this is we retrofitted this on to the hydrogen plants. So we've got proven expertise in how to retrofit, install and successfully continue to operate the hydrogen plant while you're capturing the CO2. Obviously, it's great to capture the CO2, but if that reduces the reliability of your hydrogen plant, that's not a good idea. And so that CO2 captures -- it's about 1 million tons a year that we capture and provide to another partner, who takes that CO2 for enhanced oil recovery. So the technology for the CO2 capture in that project is similar to what we're going to deploy in the other 2 projects. It's our Air Products technology, and we believe that, that brings a significant advantage. Now I also want to emphasize, though, that the capturing of the CO2 is one thing, but you got to have something to do with it, right? There's no point in just capturing it. And in both of those projects, we're very excited about the ability to sequester the CO2, both in Alberta and in Louisiana. And sequestration is a big fancy word, and I think sometimes people underappreciate what that means. In the case of the Louisiana project, as we talked about, the CO2 is going to be a mile under the earth surface, 1 mile down. And it's actually in what's considered to be the pore space in the rock. And there's a certain geology of the rocks there, where the pores in the rocks actually absorb the CO2 and creates a very, very stable framework where the CO2 is in the ground. So I just wanted to spend a second on that. I think sometimes people think that you just put a hole in the ground and dump some CO2 in. It's a very specific geology that will create the confidence that CO2 will stay in that core space.

Got you. There are things we just take for granted, for sure. I get it. Can you just talk about some of the dialogues that you have with potential customers for these projects? So is this something that you guys have already been in discussions with and have some undisclosed contracts signed? Or is it, they want to see how the project is being developed, and then they'll come to you to figure out what their needs may be?

Josh, it's a great and it's a very fair question, but I think most people have probably heard Seifi Ghasemi, our Chairman and CEO, not answer that question a couple of times. So as you can imagine, I'm not going to go beyond that. But I will add a couple of thoughts on this, right? So I mean, obviously, we don't need to tell anybody on the phone today how incredibly focused the world is on hydrogen and decarbonization and low-carbon hydrogen. How many announcements out of COP26 over the last 2 weeks talked about hydrogen? So the interest level is massive. And whether that be from a government, a bus authority, our existing customers, I mean, to be blunt, everybody is focused on lower-carbon hydrogen. So I think that, that gives you a sense of the opportunity set. The other thing I wanted to point out for just a second is let's turn to the mobility market and talk about that. So if you are the city bus fleet manager of these fleet of buses in a certain city, and you're clearly thinking about lowering the CO2 and you're contemplating, you want to think about some hydrogen vehicles. Well, the great thing is, you don't have to wait until we have the NEOM product available to get going. You can start today, and we're seeing this. People want to do trial programs. So we can bring them hydrogen today, and we can install dispensing stations. They can get some buses, and they can begin a trial program. Because, again, as we say, the hydrogen-powered vehicle doesn't know where the hydrogen came from, right? So you can kind of get going today with hydrogen that, admittedly, is not green and so kind of be ready for a full conversion. The other point is, nobody is going to just wake up one day in 2026 and throw away all their perfectly fine buses. They're going to want to kind of slowly roll the fleet into this transition. And again, we have the hydrogen today to support that, and then it can just be transitioned over seamlessly from so-called gray hydrogen to green hydrogen in the future. So again, I realize I didn't directly answer your question, but those are a couple of thoughts that make us -- continue to make us very, very excited about the opportunity.

For sure. I mean, it's a good transition a little bit into the mobility angle as well. You keep mentioning fleets. Is it -- is this a market targeted more towards these with central stations and kind of going in and out of certain areas? Is -- and why are you guys also trying to target the heavy truck -- heavy-duty truck sector as well?

Yes. I'm glad you asked that. And I want to make sure I will -- I'm going to come back to mobility, if it's okay, in just a second because I think, certainly, the NEOM project, we talk a lot about the mobility market. But I want to emphasize that what -- the so-called industrial market, we see tremendous opportunities for hydrogen there. And whether that be a different process for making steel that uses hydrogen directly, or chemical refining operations that want to have lower hydrogen footprint, we see tremendous opportunities there. There's the -- there's the, essentially, the energy or the power market itself, which could also be a very, very significant market for hydrogen. So we are focused on working on those 2 markets. So I wanted to emphasize that. Now let me come back to the mobility market. As we look across the mobility market, Josh, we think it's just, fundamentally, the bigger and the heavier the vehicle, the advantages of hydrogen versus batteries are more obvious. And that's what it boils down to. Because, of course, in all of these cases, we're talking about an electric vehicle. We're talking about electric power driving the vehicle. It's just a question of whether that electricity is made elsewhere, stored in the vehicle in a battery, where it's actually made in the vehicle in a fuel cell. And so if you have a very light vehicle, a passenger car, quite frankly, the ease and convenience of battery probably makes sense. But when you start talking about a heavy truck or a bus, the substantial weight of the batteries required to store the energy becomes significant. And from a trucking standpoint, it starts to eat into the payload or the ability to deliver material with that truck. So that's why we see that heavy transportation market being the right fit for the hydrogen fuel cell vehicles, and that's why we're focused on that. So I've talked about the city bus fleets. I talked about the heavy truck market. Certainly, trains are amenable to that, potentially ships. And obviously, some folks are excited about airplanes because it turns out weight's pretty important in an airplane as well. And let me just give you a sense of the size of this, right? So we talked about NEOM, and it is orders of magnitude bigger, a real game-changing project, $7 billion. And now we have enough hydrogen to support roughly 20,000 city buses, if it all went to the city bus market, 20,000 city buses. There's probably 3 million city buses in the world. So I'm just trying to give you a sense as we don't need like half of the city buses in the world to convert to hydrogen to support the NEOM project. We need a very, very small quantity. And quite frankly, the way the world is going, and again, back to everything that came out of COP26, we think there's going to be significant demand for this green hydrogen. And we're excited about the position we're going to have, to have that for customers in the marketplace in 2022.

Got you. Maybe just switching gears to one of the other firsts, which is gasification, something that you guys know very well. You guys are undertaking massive projects around the world. What -- why is this still a driver for Air Products? And what does the development pipeline look like for you guys?

Yes. And I'll step back and say that it's a driver for Air Products because it's a driver for the world, right? I mean, we're not creating the need for gasification. It fundamentally allows countries around the world to utilize the natural resources they have in a more environmentally friendly way and create, in many cases, chemicals, so they don't have to import the chemicals. I mean, if you look at China, for example, obviously, most of the projects there are full gasification. Why has China been doing full gasification for decades? Because, quite frankly, they have a lot of coal. And gasification is a way to use that in a more environmentally friendly way. And it allows them to make chemicals and not have to import them. So that's why the world wants to do gasification. And as you pointed out, and we talked about in the case of Alberta and Louisiana, you can gasify natural gas and essentially have net-zero projects. In the case of our [ green ] project in Saudi, it's actually gasifying the bottom of the barrel, the heavy vacuum resid, and creating electric power out of that. So it's a very flexible technology that can process a lot of different hydrocarbons. So quite frankly, whether Air Products is around or not, the world is going to continue to focus on gasification. What we bring to this opportunity is finally a chance for the customers to outsource. And remember earlier, a few minutes ago, we started to talk about how Air Products got the existing hydrogen business going by getting the refiners to see the value of outsourcing their hydrogen production. Well, up until a couple of years ago, all of the customers had to do their own gasification projects. And now they have an option to consider outsourcing to Air Products, who has the technology, the people, the execution capability, the balance sheet to do these large projects. So we're excited about it because we think it's a tremendous fit with the world. And one more point I want to make about gasification. Gasification, of course, produces CO2, but it produces CO2 in a very clean capture-ready stream. So the ability to combine gasification with carbon capture, which is exactly what we're doing in Alberta and Louisiana, and you certainly could do that on a coal gasifier, that's a tremendously exciting opportunity. So being able to demonstrate to customers and countries they can take the hydrocarbon that might have a little value, they can create syngas that can be used to make chemicals, and you can do that with a very low to no CO2 footprint, quite frankly, that's one of the reasons why we're excited about this opportunity in the future.

Got you. That makes sense. One of the last drivers here you guys have also mentioned is floating LNG. And obviously, that's been very topical of recent, just given the spikes in prices that we've seen in Europe and in Asia. Can you just talk about the technology that you guys have here and specific project pipelines? And where you guys are targeting for growth opportunities here?

Well, great, Josh. I appreciate you recognizing the floating market. But I mean, obviously, Air Products has had of a leadership position in the LNG market for decades. And maybe just to clarify for everybody, I mean, our business here is to sell equipment. We sell essentially the heat exchanger and a process package, et cetera, to the people that are building these big LNG projects. And so one of the things that we point out is, in an LNG project, what we provide the customer is actually the thing that turns the G into the L. It's actually the place where the gas is liquefied. So the effective and efficient performance of that part of the plant is absolutely critical to our customers. And we've had a leadership position, like I said, in especially the large-scale LNG projects for many, many years. And a few years ago, as people started to contemplate the floating LNG opportunities, we were successful in the first 2 or 3 of those opportunities. So I think both floating and the more traditional, if you will, non-floating or land-based LNG projects, we do see tremendous opportunities going forward. That will continue to be a very valuable part of Air Products. But again, it's a sale of equipment model as opposed to building the projects ourselves or using our balance sheet.

Got you. Got it. I think we're just coming up on time here, but I'd be remiss, just given how big and global the company is, just any -- 1 or 2 minutes to talk about end market exposure and where there's real growth that you guys are seeing right now and maybe where there's still some headwinds in the global economy.

Sure. Well, again, as we talked about, half of Air Products' business is the on-site business. And there's many great things about the on-site business, but the stability of the volumes with the take-or-pay agreements and the ability to pass-through energy prices really creates a significant amount of stability there. And if we look at the other part of our business, roughly 40%, it's the merchant business. That's where we obviously see some volume variations. And I think that, obviously, versus prior year, the COVID impact is much smaller. But really, that business is driven by general manufacturing. It's really hard to call out 1 specific subsegment, if you will, of general manufacturing. So we expect our merchant business to grow roughly in line with underlying industrial production. And then, obviously, there's a need and the opportunity to work hard on pricing in that part of the business to recover the unprecedented power and energy costs that we've seen recently. So we continue to focus on this business. The semiconductor segment is a key part of our business, always has been, and a great opportunities for us going forward. We're winning our fair share of projects there. But at the end of the day, we see that base business growing something like underlying industrial production manufacturing. And quite frankly, for Air Products, the real growth driver is going to come from our role in the energy transition portfolio.

Great. Well, that's been -- that does it for time here. Simon, thank you very much. Ivo, I know you're there in the background. Thank you as well. Certainly, I appreciate you guys joining us today. Thanks, everybody. Have a good rest of the day.

All right. Thanks, Josh. Thanks, everybody. Talk to you later. Bye.

Thanks.