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, Justin. 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; Melissa Schaeffer, our Chief Financial Officer; and Sean Major, our Executive Vice President, General Counsel and Secretary. Air Products issued a press release this morning announcing we are teaming up with World Energy to build a $2 billion conversion of a sustainable aviation fuel production facility in Southern California under a long-term take-or-pay agreement. And we were honored to join the World Energy leadership and key elected officials at the carbon-cutting ceremony held this morning here at the site in Paramount, California. 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 will be happy to take your questions. We will be limiting our comments and only taking questions pertaining to this project. We look forward to discussing our quarterly results with you on May 5. Now I'm pleased to turn the call over to Seifi.

Thank you, Simon, and I'd like to thank everybody who is on the call for taking time from your very busy schedule to join us on a very short notice. I kind of feel obligated to explain to you why we have decided to have a conference call about this exciting, fantastic project on a Friday afternoon -- late in the afternoon. The reason for that is that we wanted to announce this project on Earth Day, which is today. And it's very appropriate to do that because this project is at the heart of what can be done to save the planet from ruin. This is the ultimate example of sustainable development and replacing the current fuels with sustainable fuel. So we thought it was very appropriate to announce it on Earth Day. But then considering that the project is located in California and appropriately all of the local officials wanted to participate in this ceremony for announcing this project, we ended up being where we are in terms of timing. So that is the reason why we are announcing it so late during the day on a Friday afternoon. I have to say that all of us are really excited about this project because it meets all of our requirements for our strategic plan. It is at the heart of energy transition, which is our growth strategy. And it is sustainable, which is our strategy. It is a major project, $2 billion of investment from Air Products at good returns in the United States of America, which is our home base. We, quite frankly, couldn't have asked for a better project to work on. And I'd like to make sure that people understand that this project didn't appear on our radar screen last month. We have been working on this project for more than 3 years. It took us a long time to develop the project. It took us a long time to get the appropriate permits. But now we are at the stage that we can confidently say that this project will happen. It will come on stream in 2025, and it will provide sustainable airline fuel, which is in great demand, and we are excited to be working with a company like World Energy. Simon pretty much explained to you what we are doing, and the details are on Page 4. We are #1. As part of the $2 billion investment, we are building significantly-sized hydrogen plant because these renewable facilities require a lot of hydrogen. We have told you that before. We have expanded our pipeline system in Southern California to give this plan significant reliability in terms of hydrogen supply. And then we are also building the sustainable airline fuel part with using the UOP technology and all of that. So as I said, a great project at the right place at the right time. On Page 5, you have a little bit of a schematic diagram of that. I do think it's self-explanatory. And on Page 6. I do like you to pay attention to that. We haven't given you all of the details of exactly where our pipeline goes, but we have an extensive pipeline -- hydrogen pipeline in Southern California, which is extremely valuable. And we have connected the Paramount refinery to that now. It took us a while to do that with the congestion in Los Angeles and so on. You can imagine that. But that has been done. And actually, today, we are supplying the existing facility of World Energy through that pipeline, and that pipeline will be of immense value in the future when we bring in green hydrogen to this part of the world. Then again, on Page 7, it kind of summarizes why we are so excited about this and why in addition to everything else, it also meets our higher purpose of trying to do something good for humanity and for the planet earth. At this point, I'll stop. I think we want to make sure that we give you enough time to ask your questions. So operator, we are ready to take questions from our investors.

[Operator Instructions] And our first question today comes from David Begleiter with Deutsche Bank.

Congratulations, Seifi. You mentioned good returns on this project. How will this compare to some of the other large projects you've announced in Louisiana, Alberta and Saudi Arabia?

Well, obviously, with the return on projects on Louisiana, Alberta and Saudi Arabia, the returns are connected to the price that we will get for green hydrogen and blue hydrogen. This project, since it is a take-or-pay, we pretty much know the return. And therefore, I can say that the return on this project will be better than the general guideline that we have given you. That means that we will make more than 10% operating profit on the $2 billion investment that we have made.

Okay. And just -- maybe just from the World Energy perspective, why did they increase you from a customer to a partner in this project? What was the attraction for them rather than just using you as a hydrogen supplier?

We are really not partner with World Energy in terms of the financials. We are investing $2 billion to build this facility. And then they give us raw material and we give them the product, and we get a processing fee. So we are not partners in the downstream or anything like that. It is very much like any other on-site deal. We chose the World partnership because we like World Energy, we like working with them and so on. But we do not have a financial partnership, David. It's very much a tolling agreement. They give us raw material. We process it, and we give the product to them, very much like a hydrogen plant for an oil company.

And our next question will come from Laurence Alexander with Jefferies.

This is Dan Rizzo on for Laurence. Can we talk about the regulatory process going forward? I mean are there like environmental impact studies that have to be done or more approvals that might be needed?

The key question, the key permit was the, I think, the CVQA or that's the -- I think probably I am misspelling it. It was the permit that we obtained 2 weeks ago. We hadn't announced the project. We have been working on it, as I said, for 3 years. We didn't announce it unless until we got the key permit. That permit allows us to do the construction. And therefore, we feel confident that the rest of the regulatory things are things that can be handled properly.

Okay. And then I don't know if I'm overthinking this. But given it's California, has there ever been like energy issues with your current facilities there? Like I don't know, brownouts or blackouts or something like that? Has that ever been an issue in the region?

We have not had that issue with our existing hydrogen facilities.

And our next question comes from Marc Bianchi with Cowen.

It seems that the initial hydrogen will come from fossil fuel gray hydrogen. Maybe correct me if that's wrong, but the press release mentioned the opportunity to incorporate green hydrogen over time. Maybe discuss that outlook and what the GHG intensity or CO2 intensity of the fuel might look like when you go from gray to green.

Marc, thank you. That's a very good question. Obviously, today, there is no green hydrogen or blue hydrogen. Therefore, the hydrogen for the project will come from a hydrogen plant that is using natural gas to break down and to produce the hydrogen. But since the renewable facility, when they are taking the hydrogen and then the raw material for making the sustainable airline fuel is renewable, therefore, the carbon intensity is significantly lower than the jet fuel that you have today. In terms of hydrogen, obviously, we have plans, as you know. We are building a significant plant in Saudi Arabia to produce green hydrogen. We obviously have the ambition of taking that green hydrogen, converting it into ammonia and bringing that ammonia to the Port of Los Angeles, converting it back to hydrogen and put the hydrogen to the pipeline that we have and supply this unit and other units with green hydrogen. That is a possibility that we can do, and we will do that if the incentives and so on are appropriate. That green hydrogen is a great demand all over the world. Whether we bring it to Los Angeles, it depends in terms of the economics of what price we can sell it and what kind of incentives that are there. But the important point is that Air Products is the only company which is profitably positioned with the pipeline system and the infrastructure and the green hydrogen that we can actually do this. That is the competitive advantage that we have created for ourselves. Then obviously World Energy will benefit if we ever do that. Thanks, Marc. Anything else to follow up?

Yes. Just one other question in terms of scalability. Is there opportunity to expand upon these existing facilities and help us with what the potential magnitude could be?

Well, I'd rather have, quite honestly, World Energy address that rather than us making a decision for them about how much they expand this facility and can it go from 20,000 barrels to 40,000 and all of that? There is obviously expansion capability, but I'd rather not, on a public call, commit them to something that maybe they want to use different numbers.

And our next question comes from Kevin McCarthy with Vertical Research Partners.

Seifi, in a traditional refinery, the hydrogen function would be to remove sulfur from the crude oil and various refined projects -- products rather. Can you speak to the function of the hydrogen as it relates to SAF? And also does the amount of hydrogen needed vary with the feedstock, whether that's vegetable oil or some other input? Can you help us out with how to process that?

Sure, Kevin. I will take a crack at that, and then I will ask Dr. Serhan to expand on it in case I haven't covered it properly. But fundamentally, the role of hydrogen in this kind of facility is to basically help break down the hydrocarbons that are in vegetable oil and all of that. It's the hydrogenation process that breaks it down and makes it -- takes it, converts it -- converts vegetable oil into hydrogen. That's the function. The amount that is used is significantly higher than a refinery would use per barrel of fuel they produce for desulfurization, but it does vary. But over here at World Energy, the plant design is very much related to the kind of the raw material that is expected to use so we have matched that. But we can go up and down in terms of the capacity. But that said, just a rough explanation. Dr. Serhan, do you want to add to that? Or did I cover it okay?

No, I think you covered it, Seifi. I mean you -- just again, the whole process to produce renewable diesel or the sustainable aviation fuel is very hydrogen-driven. Even the feedstock, like if you want to use animal fats or used oils to process that, you need also hydrogen. Then you treat it, then your hydrogenation. So it's really all over the process besides the sulfurization, I mean, what you have mentioned in the refining. But to also quantify something Seifi mentioned before, this sustainable aviation fuel, even with using gray hydrogen, will have around 80% lower carbon footprint than your traditional fuel.

Yes.

Seifi, if I may, I had a very broad follow-up question for you. As you well know, interest rates are rising very rapidly. And so in that context, do you think that industrial gas producers will need to seek higher returns for projects in general, this one and others moving forward in the context of a new interest rate regime?

Kevin, you are asking me an excellent question. If you allow me, I will -- I promise you I can answer that question when we have our results on May 6. Because on this call, we kind of -- as a rule, we don't talk to investors a month before we announce our results. But obviously, we have to make an exception. And we said at the beginning that we will only answer questions about the project. But your question is a good question, and I will make sure that I address it on May 6. Just remind me, okay?

And our next question will come from Chris Parkinson with Mizuho.

Very quick, kind of a broad question. Since 2020, you've made a few interesting deals, even going back to the PBF deal. I think one of those assets was actually in Torrance, just north of the [ Burgess, probably matches the ] pipeline. When I look at that and I look at some of the other deals, which presumably would be assisting those customers to also facilitate LCFS and everything that California is striving towards, what percent of the capital over the last 3 years that you spent either directly or indirectly helping -- let's say with your customers facilitate things for the state of California? What percent of that would have been kind of in that bucket? And when you look out over the capital that has yet to be spent, let's say presumably over the next 2 years, are there presumably other opportunities which would further this, let's say, theme or scenario?

Well, first of all, Chris, good to hear from you. Again, on this one, I promise that I will have an answer for you. I know the numbers and so on. But as I said, I don't want to talk about anything other than this project at this point for the reason that I explained because I don't want to break the rule that we have that we don't talk about anything before our -- because now I have to get involved into things which are not related to this project. So again, if you allow me, I will definitely answer your question and go through the details of that at our May 6 call. And please remind me to do that. That will be okay?

Of course, that's perfectly understandable. Just if I may, just a real quick follow-up, just how many people would have the capabilities to look at these types of projects? You mentioned you were looking at this specific project for 3 years. Was this really Air Products or nobody? Or were -- presumably were there other people potentially involved?

Well, I don't want to be presumptuous to say we are the only one who could do that, but we have done a lot of homework to lay down the groundwork of being able to talk to people intelligently about real options. Over here, why did World Energy do this project with us? Fundamentally, number one, we do have a pipeline system in -- hydrogen pipeline in Los Angeles, and it makes sense for them to get their hydrogen from us versus buying liquid from other people. So that was step #1. But then the second step, which is very important, is what we talked about before that if you look 10 years down the line, 5 years down the line and somebody is thinking that at some point in time, I want to get the additional benefit of having the hydrogen being green, then who else are they going to go to? So what we have done is laid down the foundations to be able to have a real sustainable and long-term solution for customers. And once we explain it to them, then they gravitate towards us by saying, well, these guys have done their homework and they are able to deliver. That is, I think, the part that a lot of people don't fully appreciate about a lot of things that we are doing for the long term because we are laying the foundations to be able to talk to people about, hey, this is your requirement, and this is why we are the best positioned person to do that. And once they look at that, then they realize, well, that is very true. It's no different than the work that we have done on gasification. Everybody says coal gasification. No, it was gasification about trying to turn to natural gas and be able to capture 95% of the CO2, which is important for the future. So it's all building blocks that have built up to put us in a good position, Chris.

And moving on to John McNulty with BMO Capital Markets.

I guess just taking a step back. It seems obvious to me why Air Products would be a great partner for the hydrogen side, whether it's gray or green or somewhere in-between. But I guess I'm not completely sure why that requires you to be essentially the capital source for this and to put your capital and heft behind it. I know you have it, but it seems like you could be -- you could probably provide a lot of the advantages without putting up the capital. So I guess can you help me to understand the rationale for the capital being put to work here and where Air Products comes in, in the actual, what seems like, the biodiesel refining process itself?

First of all, John, the question that you are asking is very relevant, and we obviously think about these things before we commit. Number one, we are going to build something in Paramount refinery in the middle of Los Angeles. It's a very, very tight space, a very tight space. So if we are having contractors and all of that [ staff ] that goes with that to build the hydrogen plant there, then having a separate contractor and a separate contract management team and all of that to build the rest of the facility is just not very productive. We can save money by having one group of people managing this thing totally, number one. Number two, by us so-called having skin in the game gives World Energy a lot more confidence that we will deliver on time, and [ we built it ]. Because without having their part of the project complete, we cancel the hydrogen. So it gives us a lot of incentive to do the project on time. The third thing is we are committed to promoting green projects. This is the ultimate green project, and it's not going to be the last one, and a lot of prospective customers around the world are looking at doing this. And this would be a significant reference for us that we know how to design these plants and all of that. And then the fourth one, which is as important as anything, is the question of returns. We were able to negotiate a good contract with World Energy to get a good return on this project. And by us being involved as a significant company, with World Energy, we were able to get the permitting done. We were able to add a lot of credibility with the authorities and all of that. So the combination was -- it was -- the sum was better than the parts, it's for everybody doing something separate, and that is why we did this. We don't do this often. We don't do this with anybody. There are a lot of other projects, as you know, that is happening around in the U.S. or around the world that we do not participate in the other part. But on this front, we felt that it was worthwhile to do that.

Our next question comes from Jeff Zekauskas with JPMorgan.

A couple of questions. What's the size of the hydrogen production that you expect? And of the $2 billion to be spent, what's it going to be spent on? How much is spent on the hydrogen unit? How much is spent on other things?

Jeff, I am going to be a little bit not too responsive here, if you don't mind, in the sense that -- what I can say about the size of the hydrogen plant is that it is a world-of-scale hydrogen plan. It's not a small hydrogen plant. Number one. And secondly, I obviously do not want to disclose how much we are spending on the hydrogen plant. This hydrogen plant will be connected to the rest of our pipeline, and it is going to do more for us than just supply World Energy. It will be a significant backup for the other plants that we have in that part of the world, where some of them are 40 years old or 30 years old or more. Therefore, it is a combination of what we are doing. Therefore, if you don't mind, I'm not going to break down the details for you.

All right. Well, let me try it a different way. You're going to be building all kinds of things. And one of the things you said is you said is usually, we get a 10% EBIT return. So is there a sustainable $200 million pretax EBIT return on this? Or does the EBIT return only apply to a component and what you get is some kind of onetime fee for constructing various parts of the facilities?

John, on this -- Jeff, on this fund structure is that we get a certain percentage of the total capital spend as a fee.

Yes. Okay. Is it big percentage or a small percentage?

It has to be more than 10%, right?

If I could, if you don't mind. Maybe I think Seifi, what you clearly explained earlier is we expect to earn our minimum commitments on the full $2 billion under a long-term take-or-pay agreement, right? So it's on the whole $2 billion. There's no sale of equipment as part of this. It's a long-term take-or-pay agreement.

Exactly.

How big is World Energy? Forgive me for not knowing it. Is it a very, very large company or a small company? Do they have the capabilities to pay you $2 billion?

The way you should look at it, first of all, World Energy is a good company. And you can have the details, and I think they have public information. The owners are public and all of that. But the way we look at it is that we are looking at the product that is being made out of this facility, which is 340 million gallons a year of product. 340 million gallons. Right now, these people are selling sustainable airline fuel. And with the LCFS and all of that, they are getting a significant premium over these. So the sale of this facility, once it is on stream, is going to be close to about $3 billion a year. So it's not going to be a small operation, and our fee will not be -- it is part of the cost. But compared to the sales of the company, this is like -- this is going to be a big margin. I said you just take the 340 million and multiply it by anything you want to assume. You can call people and -- I don't want to quote you what sustainable airline fuel is selling for right now. But that's pretty much public knowledge, and somebody like you, I'm sure, has access to that. But it certainly is a h*** of a lot more than $5 a gallon. So that is how we look at it in terms of the project, Jeff.

So I did look a little bit on, I can't tell whether the World Energy that I've -- the World Energy Alternatives, LLC that I found is the one that you're partnering with. And it seems that its current revenues are, I don't know, $30 million, is that right, order of magnitude?

Yes. I don't want to confirm that, John. But if you are -- I mean what is going to happen at the end of the day, John, is this is a facility that is going to produce this product. We are investing on this facility. The way we have the contract is that if we don't get paid by World Energy, we take over the facility. It becomes ours, and we sell the fuel, if you're worried about somebody not paying.

I'm not worried. I just wanted to understand that.

And that does conclude the question-and-answer session. I'll now turn the conference back over to the presenters for any closing remarks.

Well, thank you very much. I would like to thank everybody, as I said, for getting on the call on a Friday afternoon on short notice, but we do appreciate that. But at the beginning, I explained the timing of why the timing was what it is. But anyway, we will be more than happy, obviously, to take a lot more detailed questions about this project when we announce our results on May 6. Thank you very much, and have a very wonderful weekend, everybody.

Thank you. And that does conclude today's conference. We do thank you for your participation. Have an excellent day.

Thank you.