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

Good afternoon, everyone. My name is P.J. Juvekar, and we are very pleased to have Seifi Ghasemi, Chairman and CEO of Air Products. As many of you know, Seifi has been seen since July 2014 after a 13-year career as the CEO of Rockwood and before that, with industrial gas producer BOC. And under his tenure, APD has really turned around in terms of EBITDA margins and improved its return on capital. And in last few years, Air Products has taken on some major contracts around the globe in blue as well as green hydrogen. So to tell us more about Air Products' strategy, we have Seifi Ghasemi. Seifi, good afternoon.

Good afternoon, P.J. It's always a pleasure to be on your program. And I also like to extend good morning, good afternoon, good evening to all of the people who are listening on the call. I think, P.J., as we always do, rather than me making a speech about Air Products, the best way is to leave it up to you to ask me questions, and I will respond to that, if that's okay with you.

That would be great. That will be great. And let me start on the strategic side, Seifi. You've been very active in blue and green hydrogen/ammonia space and you spent about 2/3 of your $34 billion in capital deployment that you've talked about over a decade. And you've taken on some big projects like NEOM, Alberta, Louisiana, what are the next few opportunities that you see? And what kind of returns do you see on a risk-adjusted basis from these projects versus your traditional industrial gas projects?

Very good. First of all, we have articulated several years ago that we are focusing Air Products on a path of growth, and the growth is based on the energy transition. And we think that the requirement for that growth is the combination of gasification, carbon capture and hydrogen. They are really the same thing. They are not separate things. But the combination of that gives you the ability to produce the energy of the future, which is hydrogen. That's really the focus. So if I take some of the projects that you mentioned, we obviously are the largest producer of hydrogen today. But it is what we call gray hydrogen, where we use hydrocarbons, make hydrogen and we don't capture the CO2, and we sell a lot of that with good margins. We believe that the next step of the transition is still using hydrocarbons to produce hydrogen but capturing the CO2. And the way that happens is like our project in Louisiana, where we take the natural gas or it can be any other hydrocarbon, they gasify it first because by gasifying you give yourself the ability to be able to capture 95% of the CO2 that is generated as part of the process. That is the advantage of gasification. So the gasified, it captures 95% of the CO2 and sequester. And now we have hydrogen that we call blue hydrogen. There are several ways of selling that blue hydrogen. Number one, in Louisiana, we will put it in our existing pipeline. And therefore, we are selling now blue hydrogen in the same pipeline, which means that if there is demand, we can put blue hydrogen in one location and take it out in another location and create a product which is significantly more value. And then part of the product for export to other parts of the world, the best way is to convert that hydrogen into ammonia and then transport the ammonia because hydrogen by itself transportation will be economically prohibitive. So that is a solution we have found for that. So the project in Louisiana uses our know-how in gasification, carbon capture and hydrogen and the end use will be through our pipeline system for mobility and as ammonia for export for people to get access to hydrogen energy. But then we think that the opportunity for blue hydrogen will be significant so we hope to do more of these kind of projects in the U.S. or other parts of the world. Then the next step for people who want basically saying that I don't want to deal with hydrocarbons. Then we have the project in NEOM when we are taking the power of the sun and the wind generating green energy, a lot of it, close to 4 gigawatt of it, 4,000 megawatts of it, and we use that in order to break down water to produce hydrogen. And that is why we call green hydrogen. So that's a very unique product. So to me, just to simplify, the gray hydrogen we make is like silver, the blue hydrogen we make is like gold and the green hydrogen that we make is going to be like diamond. I mean -- and I think that's how they are going to get value because of the scarcity because it's very difficult to make the green hydrogen. So that is the focus of our projects. And as we go forward, you will see us do more of these projects in these kind of categories in terms of either green hydrogen, blue hydrogen and then our existing hydrogen business is still going to grow because people will still need gray hydrogen. But that's the progression as we go forward.

Great. That's a good overview. And you talked about the 3 categories, sort of silver, gold and diamonds. That's a good way to put it. And in terms of scarcity value and so I guess that's a good segue into my next question about the future price of blue versus green hydrogen. And during your NEOM project, you mentioned that you'll make good returns at $10 per kg price of green hydrogen, but some experts believe that prices will come down over time. I mean -- so how do you think about this sort of transition?

P.J., we are talking about energy. We are talking about hydrogen as an energy source. The price will be based on supply-demand. I mean, to be very specific, P.J., what is the price of oil? I mean, we all know that it costs Saudia Arabia $3.50 to take all out of the ground. And some days, we go and pay $200 a barrel for it. Some days, we pay $30. Some days, we pay $80. It is supply-demand. So when people ask me, what is going to be the price of product out of NEOM. Well, if by 2026, Air Products is the only company in the world who is making green hydrogen, that's going to be an interesting position to be in and then what is the price. And that is why in one way, people say, well, you are building NEOM without having any customers. But in some days, I say that's a good thing because I'm not sure I want to sell it right now because who knows what is going to be the price in 2026 or '27 or '28. So we are making unique products. And if there are very few people making it, then the price will be significantly higher. I mean, if governments are pushing their companies or citizens that look, x percentage of your trucks have to use green hydrogen. Well, if it comes 2030 and only 2 companies in the world are making green hydrogen, then they can sell it for a significantly higher price. So that's why it's very difficult to price this thing today.

Okay. Okay. And you have significant world-scale gasification projects that you have signed on over the last 2 years. We've talked a lot about Lu'An, Jazan and others. And you mentioned that there is no shortage of opportunities. Do you see constraints on your capital availability? Do you see constraints on your time when you're talking about these projects that will be competing with sort of these green and blue hydrogen projects?

Well, to me, they are all almost the same thing because the drivers for Jazan, for example, the driver for Jazan is environmental and energy transition because in the old times, that refinery in Jazan, which is processing 400,000 barrels a day, it produces 120,000 barrels a day of the bottom of the barrel right, which is 6% softer. In the old times, people would have taken that and sell it to ships to be burned in the middle of the ocean or converted into coke -- I mean they would have coked it and make petcoke and sell it for fuel in power plants and nobody cared about the fact about 6%. So -- but now you can't do that. So what is Saudi Aramco doing? They're saying, "Look, I have this 120,000 barrels. How do I get rid of it environmentally friendly way. So we said, the best way is to gasify, and then you make syngas and you use the syngas to drive turbines to produce electricity. So to some extent, that is an environmental project. Lu'An has a much better use of coal, gasifying it and making chemicals out of it then burning the coal in a power plant and putting a lot of stuffing to the air, especially in terms of particulate. So to some extent, all of the projects that we are talking about in one way or another is related to the environment and the betterment of the environment. And that is one of the good things about us as a company because what are the products that we are focused on. We are focused on oxygen, nitrogen, argon, hydrogen, helium, CO2, all of these products -- most of them are the basic elements on the periodic table. There is a lot you can do with these things in order to affect the environment. And that is why we think it is our core competency to go after trying to do these kind of projects that we are doing.

Great. Thank you for that. Now you announced 2 blue hydrogen projects this year, 1 in Alberta, 1 in Louisiana. Can you compare and contrast that? I know both these projects are sitting on the hydrogen pipeline, which I would imagine is advantageous. But can you just compare the 2 projects on the blue hydrogen side?

Sure. There is a subtle difference between the 2 of them. Number one, in -- we use 2 different technologies for gasifying the natural gas because we want to gain experience, both of them are good, and we want to gain experience with making sure which one is even better. But the other thing is that the project in Canada is going one step beyond just blue. That is we take natural gas. We gasify it. We capture 95% of the CO2 and only 5% of the CO2 goes into the atmosphere. But when we produce the hydrogen, we take that hydrogen and produce all the power that the facility needs. So the facility will not be buying power from the grid. So it will be self-sufficient and therefore, powered by hydrogen, which means 100% green. Then in addition to that, we are going to take some of the hydrogen and produce green power that we will sell to the grid to compensate for the 5% of the CO2 that we are putting in the atmosphere. So that is why we call that project net zero. That means that project is producing energy without having any impact on the environment. No impact. We are not buying electricity. So when we talk about a Scope 1 and Scope 2, there is only Scope 1 and Scope 2 the CO2 is captured. So that is almost making green hydrogen through hydrocarbons. So that is the unique feature of that facility. And we might do that in other places in the world, depending on the circumstances and also depending on the incentives that we will get because the Government of Canada will support us by doing that thing because we are basically making a net-zero project.

And what kind of incentives, production tax credits or tax breaks do you need to make the economics work? Or is this independent of any future incentives that governments might put?

Look, we are doing these projects basically on the fact that we don't get much of an incentive because we think that the economics are okay. But obviously, if we get incentives, that would -- the incentives will help us do more of them. The incentives will help us. So right now in the U.S., the 45Q that is already in place where they give you $50 per ton of CO2, if you sequestered that is a good incentive. If they enhance it, then they will accelerate what we are doing.

Great. And then last year, you did a decap project with PBF Energy during the pandemic. How has that turned out? And are there any more opportunities to do decap projects like that?

That transaction was a very beneficial transaction for both parties. PBF got the capital they needed and we got the hydrogen plants that we wanted. So I think that has been a very successful transaction for both parties, and we are very happy that we did that. And I believe PBF is also. So that was a good win-win situation. Are there other opportunities? Yes, they are. Are they actionable? That remains to be seen. But it's very difficult to do projects like that because you have to get circumstances right that the interest of both parties align. And right now, with a lot of people who own hydrogen facilities of their own, it's very difficult to convince their operating people to let go of those because those people -- I mean, if you are a refinery manager, if you sell your hydrogen plant to Air Products, then what happens. The capital that we give to the company to buy that is cost to the corporate so the refinery manager doesn't see any benefit of it. But now he has to pay Air Products for this hydrogen. So it's a little bit of those kind of dynamics that makes it difficult to make more of these deals but it is possible that some of them will happen.

Before I go on to my next question, I would remind investors that on your landing page, there is a link to ask questions. Please click that link. And those questions will come to me and I'll read them out. So please make it interactive. The other thing, Seifi, we always like to talk to you about your overall views because I know you have some unique views and they're very insightful. And one of the things I've noticed on 4Q call that you sounded somewhat cautious. If I look at your guidance and take sort of the impact of Jazan out, you're guiding to EPS growth of only 5% to 6%. And you sounded quite cautious on the comment. And I know there is a lot of things going on with this new COVID variant on the supply chain issues. Can you just sort of take a minute and give us your view of sort of the state of the union on what you're seeing around the world?

P.J., I'm very happy that you asked the question. As you did the numbers very nicely, with our guidance, we are expecting -- our business, excluding Jazan our business to grow 5% or 6%. That is very ambitious, I think, because you know industrial gas companies very well. We only grow other than the new projects that you do, the business grows with GDP or with industrial production. So in the world, as we look at it, assuming 5% or 6% growth, is significant. Now we are hoping that we get some pricing so that the volumes don't have to grow 6%. But that, I think -- to me, that sounds a little bit bullish because when I look at it right now in terms of, as you said, a state of the world, as we said on our earnings call, I mean, China is not growing at 7% or 8%. It's growing more like 3%, 3.5%. Europe is flat. U.S. industrial production is flat. I know that people say, GDP is growing, but GDP is because of their people traveling and going to restaurants, which I think that might even slowdown with these new variants coming up. And then Latin America is not growing anywhere. So fundamentally, when we give guidance, we need to take these things into consideration. And then in addition to that, we live in a world and until last week everybody thought that we are getting this COVID thing under control gradually. And then suddenly, you come up with a new variant. What is that going to do? So I think that we are responsible for the guidance that we give you. For 2021, we gave a guidance of 902, and we delivered 902. So that, to me, is the way we should behave. That means when we give the guidance to investors, we should have reasonable confidence that we can deliver that considering that there are variables. So that is on the basis that we have come up with the guidance for 2022 or fiscal year '22.

Okay. And then with that view, what is the merchant utilization in different regions that you're seeing today? And then I have a question -- a follow-up question on pricing.

The utilization rates, if you take the Americas, we are at around mid 70s; Europe, we are mid 70%, 75%, 76%. And in Asia Pacific, overall, we are at around in the low 80s. That's the utilization rate for our merchant business.

Great. And then when you look at pricing, pricing has been ranging around 3% to 4%. You've been getting consistent pricing in U.S. and Europe. How much of that was driven by sort of logistics and fuel costs? And if those were to reverse, is the pricing sustainable in your view?

Well, there are 2 elements to the pricing. Before this energy crisis started and so on, as you have seen, we have been announcing price increases for 18 consecutive quarters. So we were increasing prices in the normal times, and those price increases are needed to justify the fact that we pay people more, our raw material costs go up and all of that. Recently, the price increases in Europe especially have accelerated because energy prices in Europe has gone up significantly higher than we expected. I mean, energy -- electricity prices in Europe are almost 3x what they used to be last year. So that -- we have to increase prices to keep up with the power price increases. Not a lot of it doesn't go fall into the bottom line. And as you have noticed, we haven't been able to act fast enough to recover all of that. Now if energy prices start to continuing to go up, then we just need to continue to increase prices to keep up with it because we don't want the margins. But if energy prices flatten and it stopped going down, we might get a benefit of 1 or 2 quarters before we have to give all of that back to the customers.

Great. And I have a question on China. As China has been the real growth engine, as their economy has been slowing somewhat, what kind of impact have you seen from the slowdown in growth? And then specifically on this Chinese energy shortage, the dual control policy, has that impacted any of your projects?

Well, the dual control is impacting the Chinese economy. The impact on us, at least as of not now, is not that material that we want to make too much of a big deal about. But we have some of the customers that we serve have been impacted by that in the sense that they have been asked to shut down or slow down and all that. But I think the overall dual control in China is affecting the GDP growth of China. How long they will pursue that? The reasons for that and so on remains to be seen. But overall, I think there was a little bit of an issue that I'm sure everybody is very familiar about the nuclear submarines and they didn't want to buy coal from Australia and then there became a shortage of coal in China, and that affected the whole energy balance and all of that. So there is all of those sort of things coming into play. But we are waiting -- a wait and see attitude on that. But up to now, the impact on our business has not been material, but we'll see how it will develop.

Great. And as you look forward, you've gone with the alkaline technology for electrolyzers. Do you think you need M&A? Or do you need to acquire or get electrolyzer technology at some point in the future?

No, not at all. The way I look at the alkaline technology or any other technology, electrolyzers are a piece of equipment that is used for breaking down water. To me, there is no difference between that and a compressor that we use in a plan to move air through our air separation unit. We are -- we didn't go and buy a compressor company. So I don't think that is that critical piece of equipment. There are many people who are making it, and there will be other -- they will expand. There will always be competition, and we will be able to have access to competitive pricing for that. So no, we are not looking at acquiring any electrolyzer companies, no.

Okay. That's very clear. And then as you look at the hydrogen market, whether it's blue or green, is going to be so big in the future that you might see some new competition come in and the new technology nodes, whether it's in green hydrogen or blue hydrogen, maybe the big oil companies are interested in sort of carbon capture and sequestration and creating blue hydrogen. Do you see more competition coming in, in blue as well as green hydrogen?

Well, I'm sure at some point in time, a lot of competition will come in, P.J., but I think there is significant advantage to be the first mover. I don't want to make light of it, but everybody knows how to make a hamburger, but McDonald's has a very successful business because they were the first mover, right, and the brand name and all of that. So I think by being the first mover, we will have an advantage. But the market, P.J., you know these numbers rather than I do. The energy market in the world is $86 trillion. What we need is that thing to move a very small amount, and we will have a super great company. I mean I also lose an example. I did that in a session we had before we talked to you the investors that I mean the Ford makes 75 million, 80 million cars a year. Tesla is making 500,000. But look at what has happened to their company. So you don't need a huge movement in these kind of situations in order for your business, the particular business that we are in to grow exponentially because we are such a small part of the equation that just a small change, we grow our business significantly.

Great. Great. And then, Seifi, as you take on these so many projects and they're getting bigger and bigger, do you have the engineering capability, the finance organization to deal with it at the same time? Are you growing? Or are you hiring? How do you keep up with the growth that you will see in the future?

Well, we obviously need to hire more talented people, P.J., but just to give you any statistic, it's not that confidential. But in the last 2.5 years, we have added 3,000 people to Air Product payroll. And this is 3,000 people over a base of 16,000 to 17,000. So we have significantly grown the human capital in the company because at the end of the day, you get things done through people. The fortunate thing that I'm very happy about is that people like to come and work for us, and we are getting access to good talent. So that's the part that I'm very proud of and very happy about. We have no problem hiring people.

That's great. And I know we're almost running out of time, and I have 1 or 2 questions here. So let me make this my last question. Just quickly on capital allocation. You've been raising dividends, returning capital to shareholders. But as you dedicate your balance sheet to future growth, what are your thoughts on shareholder remuneration over the next several years?

Well, our goal is to obviously return money to the shareholders through the dividend. We have continuously increased our dividend every single year. I think this last year, it was the 38th consecutive year that Air Products has increased its dividend. And since I've been the CEO of the company since 2014, we have increased the cumulative average growth rate of dividend has been 10%, which is in line with our 10% growth in EPS in total. Every year, on average, we have increased our EPS. So I believe in returning money to shareholders in form of dividend and in terms of target, we are looking at heading to 15% return on capital employed for the total company.

Great. And one question here from an investor who's asking, are you expecting business in hydrogen to be more or less capital intensive than your base business?

About the same.

About the same?

Yes, sir.

Great. And I think that's all the time we have today, Seifi. Thank you again for your insightful comments. Always love talking to you and hearing your insights.

Thank you very much, P.J. Thank you for inviting me to be on the show with you and have a wonderful conference. Thank you. And thanks everybody who is listening. Bye-bye. Thank you.

Thank you.