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

Okay. Everyone, Marc Bianchi here from the Cowen energy transition team. I'm excited to be joined by Simon Moore from Air Products. Simon is Vice President of Investor Relations, Corporate Relations and Sustainability. If you might have noticed, they also published their sustainability report simultaneously with our conference kicking off. So thank you for that timing alignment. But anyhow, Simon, thanks so much for being here.

I want to give you a chance to talk about the business broadly. Over the past year, we've spent a lot of time discussing all of these mega projects that you have, your gasification projects, low-carbon hydrogen. So I don't think we need to go into all those specific projects in great detail. That's all out there for people to pull up. But for those that may not be as familiar, give a few minutes on the company's strategy, summarize these big projects at a high level, why did you pursue those projects and what's the philosophy. And then maybe if you want to make a couple of comments on the sustainability report along with that, that would be great.

Sounds great. Well, first of all, Marc, let me say thank you to you and the rest of the Cowen team for giving us the opportunity today. I think we were indeed here about a year ago. And since then, we've had announced the 3 major projects. So it's good that we keep things fresh and we got some new things to talk about. So I'm actually just going to make a quick comment about the sustainability report. Yes, we just published it this morning, and the title of our report this year is Sustainability in Action. And I think that really represents where we are. As you and I have talked a number of times, Marc, Air Products does not have a separate sustainability strategy. Our sustainability strategy is completely aligned. In fact, it is one and the same with our business growth strategy. The projects that I'm about to talk about that we're going to spend most of our time talking about today, they are driven by the world's appetite and need for lower-carbon energy. And Air Products is an opportunity to create those solutions for the world. And so those projects are going to drive our sustainability metrics, and they're driven by the world's focus on more sustainable energy. So again, sustainability in action is what Air Products is all about right now. Well, let me step back then and let's talk about the strategy. And fundamentally, I think, Marc, one of the things to recognize is Air Products has a great existing business. Our industrial gas business is a very strong business and will continue to generate cash flow and deliver growth for many, many decades to come. So I want to make it very clear that while we're very excited about the new energy transition projects, we're not abandoning, we're not giving up on, we're not defocusing or deemphasizing our existing business. And maybe to make that point, we recently announced a $900 million win in the electronic semiconductor industry. And I think we have to stop and pause on that. I mean I was responsible for chasing electronic semiconductor on sites a few years ago, and I would never have been able to conceive a $900 million order. That is a major project. And I think that is just indicative of the fact that we are staying focused on that existing business. And we're going to be -- continue to be successful with our semiconductor customers. We're going to stay focused on raising prices in our existing business and driving improvement. So I just want to make sure that we are starting from a position of strength that will continue to be a good place for us for many, many years to come. Now why are we interested in the energy transition? Well, Marc, fundamentally, Air Products has got a tremendous footprint in the hydrogen business. As you know, it's over $2 billion of our revenue today. We are the world's largest hydrogen pipeline network in the U.S. Gulf Coast. We kind of got the outsourced hydrogen business starting about 30 years ago by convincing the refineries to outsource hydrogen. So we're in the business today. We also see with the world's focus on lower-carbon energy that hydrogen has to play a critical role. Certainly, low-carbon electric power will be used for a lot of applications, but there's a number of applications you cannot use power directly. You can't make chemicals out of power. We think that for heavy transportation, hydrogen fuel cell vehicles are a much better solution than battery electric vehicles, again, for heavy transportation, buses, trucks and trains. And then we have -- not only do we have the operating experience, but we have a portfolio of technologies, some of which we've acquired, some of which are relationships. We've got a team that is expert at executing these major projects. And quite frankly, we've got the balance sheet that gives us the capability to do this. So when you put all of this together, what we see is building off of our strong existing business and opportunity to leverage our first-mover advantage, continue to drive our hydrogen global leadership and create significant shareholder value in this energy transition going forward. So quite frankly, that's our strategy.

Fantastic. Well, I guess, a broader strategy for the company outside of energy transition, but I guess also including energy transition, is just this focus on mega projects. And the company has historically done that. That's been consistent. But as we've moved into energy transition, it seems like the way you're pursuing those projects is a bit different where you're taking a bit of a speculative position where, historically, all these big projects had firm offtake contracts before any dollars went in the ground and now you're taking a bit more risk. So maybe talk to investors about the diligence process to pursue those projects. What questions needed to be answered internally to get comfortable with making those decisions and perhaps taking on this additional risk?

Well, Marc, great question. And I'll answer that, but I want to unpack that question, if I could, just for a second, and I'm going to quickly kind of run through our 4 major energy transition projects because I think it's important to put this in context. First of all, we look at the sustainable aviation fuel that we -- project we announced in California most recently. That is 100% take-or-pay. Air Products has no volume risk, no price risk in that. So quite frankly, that's a $2 billion investment that's backed with 100% take-or-pay. And then if we look at our Canada project, approximately $1 billion; and our Louisiana project, about $4.5 billion, they really have -- they both have kind of 2 business models coming out of them. As you know, Marc, a substantial amount of the hydrogen from each of those products is going to be delivered down our pipeline networks, physically delivered. And although we have not announced any end-customer projects or agreements or contracts yet, we've been selling down the pipeline network for decades. And the business model for customers at the other end of that pipeline is secure long-term take-or-pay type agreements. So I think it's important for investors to maybe differentiate between, hey, Air Products you haven't told me who your customers are going to be yet to I think it's reasonable to assume that for those pipeline sales, a substantial amount of that is going to be under long-term agreements just like we sell hydrogen in the pipeline today because, again, our customers are going to be operating plants that they need a long-term secure supply of low-carbon hydrogen. So I think that's important. And then let's start kind of unpacking this. In the Canada project, the other place the hydrogen is going to go is to liquid hydrogen. Well, Marc, that's a business we have today. I mean we have 4 or 5 liquid hydrogen plants in the U.S. We have an existing merchant business today in hydrogen. It serves a number of markets, including a growing mobility market. And yes, we don't have a committed off-taker of that product but that's the same as the merchant business that, quite frankly, our peers have more exposure to. And so again, that will be primarily focused on the growing heavy truck and transportation market in the Alberta area. So to specifically answer your question, it's consistent with the business we have today, and we take a look at what Alberta is doing to drive the energy transition and create the opportunity for heavy transportation hydrogen fuel cell there. So then we turn to -- again, back to the Louisiana project. So a substantial amount of hydrogen down the pipeline. Some of the hydrogen will get converted to ammonia. And then in our NEOM project, similarly, all of the hydrogen will get converted to ammonia. And I'm bringing those together because at the end of the day, that's kind of around the same market. So Marc, you know that we are not getting in the ammonia business. Ammonia is just here as a transport mechanism for hydrogen. And from both of those projects, we're going to have the ability to move that hydrogen basically anywhere in the world because once you convert into ammonia, you can leverage the existing ammonia supply chain. So we are watching every day and a lot's changed in the last year, including substantial forward progress on countries, regions, states, provinces committing to 0-emission vehicles. And again, hydrogen fuel cell vehicles are the right solution. So for those projects, yes, I understand we don't have a long-term off-taker that we've announced, but we are very excited, for example, about how much focus Europe is placing on hydrogen as part of their energy solution. And the hydrogen from those 2 projects, we'll be able to get to where we need to put it. I'll also -- but again, if we have a transit authority, say, a bus fleet authority in a city, and they're going to convert to hydrogen fuel cell vehicles, I think it's likely that they'll want some security of supply. Now again, we haven't announced anything. We haven't promised or committed. But I think in the balance of time, that's more likely, perhaps maybe it looks a little bit like our merchant business. Maybe it's 5-year contracts, maybe it's a bit longer. We'll see. But I don't think it would be fair for investors to kind of lump all these into a -- like a commodity type approach.

Okay. That's helpful perspective. And you mentioned sort of the improving outlook for hydrogen. And we've seen what REPowerEU has said. They've kind of upped the ante from Fit for 55. And you kind of go around the world, and there's a lot of policy support for hydrogen. But I'm curious, if we look at the equities, the hydrogen equities that sort of reflect the sentiment in the market, they've had a rough run over the past year. And the investor outlook for hydrogen has maybe soured a little bit. What do you see from your seat? Can you speak to RFP activity at Air Products? Or anything boots-on-the-ground view that might have a little bit different flavor than what we're seeing in the equity market?

Yes, Marc, and I'll be the last one to suggest to you some perspective on valuations. But I think, quite frankly, in our mind, what you've seen is who are real companies and who are maybe less real. And I don't mean to be disparaging of anybody else. But look, we're a company that's $2 billion of hydrogen sales today. We've been doing this for decades. You and I both know and everybody on the phone knows, there were some companies that were, let's say, pretty early in their existence as a hydrogen company that had been bestowed valuations that were pretty significant. So I think that kind of had to settle out. There has to be some reality to this. And what we need to focus on is, okay, who are the players out there who can know kitting, again, back to the experience, the expertise, the financial capability, who can really do these projects to drive this forward. So I think it would be a mistake to compare the equity performance of some very young companies who, quite frankly, had pretty high valuations to what's actually happening out in the hydrogen marketplace. We are seeing a substantial amount of inbound inquiries. Some of those are for, let's say, on our pipeline networks that we just talked about. We have some very interesting conversations going on there. But there's a significant amount of inbound discussion about hydrogen for mobility. And again, that's kind of the application that we see most likely to be the solution for NEOM and some of the Louisiana product. And what we're seeing, Marc, is exactly what you would expect to see. We see city bus authorities and trucking fleets. They're not going to convert immediately from their current diesel vehicles to a hydrogen fuel cell vehicle. They need to put in trial programs. They want a dispensing station and they want hydrogen and they're going to buy 2 or 3 or 4 or 5 vehicles, and they're going to try them out for a while. And what's great about this is they can do that and they can do that with gray hydrogen today because they want to kind of get going and understand how this is going to work. Now gray hydrogen has some environmental benefits relative to diesel all by itself, but it's certainly with an eye to transitioning to lower carbon hydrogen when that's available in 2026. So those trial programs are not going to be meaningful from a P&L standpoint for Air Products. But if they weren't happening, we should be worried. And I'm here to tell you today, they absolutely are happening, which again raises our confidence of our ability that there'll be a significant amount of demand for our low carbon hydrogen in the back half of the decade.

Okay. Well, given that market outlook, you recently announced this joint development agreement for a world-scale green hydrogen and ammonia project in Oman. I think this is the first time you're in front of investors in a forum like this since that announcement was made. Maybe you could help us unpack that a little bit more. My first thought when I saw that was this is another NEOM-type project. And I know you haven't announced anything in terms of project size or financing or anything, but I would just think the base case is that it could be just like NEOM, but maybe you want to correct that. I'd just leave it to you to discuss.

Sure. Well, let me try to put the announcement in context. You'll know that we try to be very, very careful with our announcements. I'm very clear about whether this is a real project that we are pushing ahead with. And everything else we've announced, absolutely final investment decisions, spending money, executing the project. I have to acknowledge this one is a little bit different. It's perhaps a little bit earlier on that process, a joint development agreement. So we're incredibly excited about the opportunity, but there is more work to do before this is a final project. When it is a final project, when we are very, very confident it's going to proceed, we'll share more information about it. But the fundamental concept, Marc, is exactly the same as NEOM. So an analogy there is very, very good. It is about making low-cost, low-carbon hydrogen in a part of the world where you have very high-quality sun and, if you will, high-quality wins and what that does is allow you to generate very low-cost electrical power. Now in the NEOM project in this project, we're not actually buying power, we're making the power, but you get significant leverage on the capital. So the idea that make the hydrogen in a place where essentially the sun shines and the wind blows and then convert that to ammonia to move it to the markets that need it, I think from that standpoint, very analogous to NEOM. Whether it's exactly the same size or a little smaller, that will come out in time. But I think thinking of it in a similar vein as NEOM is the right way for investors to think about it. And again, we hope this project goes ahead. We're confident in the project. When the time is right, we'll give a full overview of the project. But I've also -- we've always said to investors that don't think of NEOM as a one-off. Don't think of this as a trial program, and we're going to wait and see how this goes. We are actively working on not only projects in Oman, but in other potential projects around the world as well. So exciting, good indication of our confidence and where the market is going, but perhaps a little bit more to come in the future on that one.

If we assume that, that moves forward and it does look like NEOM, you'd have something like -- by my tally, $13 billion of your committed portion of the capital in blue hydrogen between the North America projects and then 2 projects then in the Middle East. At what point do you -- I could see investors potentially saying, "Oh, my gosh, Air Products has so much capital committed to these sort of clean hydrogen projects, and there's sort of just too much exposure there. Is there a threshold where you think it's too much or your view of this market is just so favorable that you want to be the first mover and as much as you can get at the right return is what you're going to do?

Well, Marc, I think it's an and, and not an or. And what I mean by that is I think we can do both. And I talked a few minutes ago about our tremendous base business and how we're going to continue to focus on that base business. We're going to continue to invest in merchant capacity where it's needed around the world. We're going to continue to invest in the tools and the processes that allow us to be world-class from our pricing approach. And we're going to continue to chase, win and execute $1 billion dollar or almost $1 billion electronics-type projects. So I want to make it clear that we're not starving that business. We are excited about that business. And most of the people at the company by a number of heads are focused on that part of the business. There is a substantial number of people that are focused on pursuing these large projects. But again, we continue to be focused on the base business. Marc, you know our capital availability. We have about another $9 billion or $10 billion on a very conservative basis that we can commit to projects between now and 2027. So we have plenty of capital capacity. And again, I would just unpack those numbers a little bit, right? So okay, let's -- fine put them on in, don't put them on and it's either $9 billion or $10 billion or $13 billion. But again, think about some of that money being ultimately perhaps supported by long-term pipeline take-or-pay agreements. Some of that will indeed be for the transportation market. But Marc, you've heard me say this before, as big as these projects are, the NEOM project, the largest green hydrogen projects in the world by orders of magnitude, it can supply enough hydrogen for about 20,000 city buses. There's 3 million city buses in the world. So we're not terracing about the class. We don't need 50% of the market to convert. We don't need 10% of the market to convert. That's the bus market. And then there's a truck market and then there's the train market and maybe the airplane market sometime. And then we can talk about hydrogen ammonia for power production as well. So our view of this is that we are -- I don't even know quite how to say this. We were highly confident when we announced NEOM almost 2 years ago, I would have to just say we're even more excited about the opportunity today. And so yes, I do think you'll continue to see Air Products be successful winning these projects, and that first-mover advantage, we're already in a strong position because, again, we're 2 years into executing NEOM. So Marc, I think we'll be able to support the base business, support growth in that business, while we continue to leverage our hydrogen expertise.

Okay. Great. I want to switch back to North America and Louisiana project. And you've gotten some questions around this, and I'm just kind of curious if you could help us understand better the permitting process, right? There's this Class 6 license, Investors have heard that it could take several years to get that license. And I think your prior commentary is, yes, we know that, and we're planning for that and don't be surprised or we're not expecting any surprises. But maybe just give investors some more confidence around that, what have you done? What are your partners saying to give you confidence that you can be on time there? And when would you need to have the license delivered to be on track for the 2026 start-up?

Yes, great question. And I think if we just step back for a second, this is a good thing. And when I say it's a good thing, it's a good thing that the EPA has a very tight focus on who do they believe can really do this. because, Marc, you and I know there's a lot of people talking about CO2 and sequestration. Some of them have done this like ourselves, many of them have not. So we actually think this is a good thing because the public has to be confident that the people that get these permits are going to be able to successfully sequester the CO2 a mile below the earth surface and it's going to be safe, reliable and it's going to stay there. So to be clear, we like this. Now currently, those permits are granted by the EPA. The state of Louisiana has asked the government to be allowed to grant those permits themselves. Whether that happens or not, isn't a huge part of this. But to be clear, those are permits specifically around sequestering the CO2. So they actually are unrelated to the construction of the facility itself. So we can and are continue to work on the facility itself. Now we have a whole bunch of what I'd call more conventional permits around wastewater and those sorts of things that we always have around building the facility. But the Class 6 EPA permit is not a critical path for the project. What I mean by that is we don't have to wait for that permit to take the next step on the project. And that's why we do see that this could take as long as a couple of years, but we don't see that as impacting the 2026 schedule. We've done a lot of work on the site. We've secured the agreement with the Mineral Board in Louisiana, the State of Louisiana to have the rights to sequester that, and we have had extensive conversations with the EPA so far. So we are highly confident that, again, this is consistent with where, quite frankly, the U.S. government wants to go, where the Louisiana government wants to go. And again, theoretically, I don't even want to bring this up, but there's no reason why you couldn't build and start up the hydrogen plant, even without your CO2 permit, you just couldn't sequester the CO2. So we don't actually need that permit until really the day before the plant is ready to go.

Okay. And is the thought that -- so you've got the SAF that you announced in California, and that's going to be on gray hydrogen initially. You've got the option to sort of bring in green hydrogen over time. You could maybe get a nice LCFS bump from that. Is it most likely that it comes in over sort of a clean ammonia shipment? Because I look at the pipeline infrastructure, and I don't know where -- you're not going to be sending hydrogen from the Gulf Coast on a pipeline over there. So is that -- is the ammonia the most likely solution there?

Well, I think probably to be determined a little bit, Marc, but I think a very credible potential solution as we land 0 carbon ammonia in the port. We dissociated there as we've talked about. You can appreciate we've mentioned before that California looks to have a pretty robust transportation potential market. So that infrastructure can also be leveraged because we could deliver it into our Southern California pipeline once we crack the ammonia to hydrogen. So again, putting 0 carbon hydrogen into the pipeline. And that pipeline network is connected to the World Energy facility in Paramount, California. So yes, we're building the hydrogen plant today, but there is the potential in the future to leverage that pipeline network and that supply chain to reduce the carbon footprint.

Okay. Well, maybe shifting a bit near term and talking about sort of the business today, there was at the call, quite a bit of concern or maybe quite a bit is a little bit too severe. But there was some concern about China. I think Seifi had mentioned that April was down a little bit from March. How -- just help us square that with what's embedded in guidance? Was that -- are you expecting -- is this guidance reflect some improvement from that April level? Or just set us the baseline so we know what to compare to the market headlines?

Yes, Marc. Well, I have to say that I'm glad we said back on our earnings call that we weren't quite sure what was going to happen in China because I think that's proven to be true. So first of all, I know I don't mean to be simplistic. China is a big place, right? So there's a lot of focus on the lockdowns. The lockdowns have not happened throughout China. They've happened in certain places. Now they've been tremendously severe. The Shanghai lockdown, which I think was supposed to be 4 days when it started, ended up being months in duration. Now the great news is, I think, literally, this week, things have started to open back up. But this is not a comment about Air Products, but there's no way you can fully shut down the city of Shanghai for 6 or 8 weeks and not have an impact on manufacturing demand industry, right? So there's going to -- I mean, everybody is going to have to see some sort of impact there. I think the question is how fast does that recovery happen? How fast does the reopening happen, and we'll have to see. So again, a big part of our business in China is the on-site business, which isn't impacted. But we do have a merchant business in China. And it's hard to imagine that isn't going to be impacted by these shutdowns.

Right. But that was something that was contemplated in the -- when you guys updated the guidance for the second half?

Sure. I guess, well, my point was if you based your guidance on a 4-day Shanghai shutdown, you would have been a little bit off. So again, I'm not making a specific comment about where we are relative to the guidance, just acknowledging, as we said, there's quite a bit of uncertainty hopefully, things continue to improve from here.

Okay. Great. Helium is another topic that comes up from investors right now, right? There was a big project or a couple of projects in Russia that they had fires before even the invasion happened and now with the invasion, it seems unlikely that, that supply is going to come on. So what was previously thought to be maybe a soft period for the helium market now looks like it's going to be pretty tight. The company discusses an $8.7 billion purchase obligations for hydrogen and other rare gases, on your balance sheet. But what -- talk to us about your hydrogen supply. Is that sort of something that's at a fixed price that could enjoy some margin expansion because of the developments that we've seen?

Well, let me just step back for a second and talk about the helium market. I mean Air Products has invested in, if you will -- when I say invested, committed to invested in a pretty robust global supply chain to ensure we have helium for our customers. We have not declared force majeure on helium at this point. I'm not sure anybody else can say that, Marc. So I think we're proving the reliability of our supply chain. You also heard us on the last quarterly earnings call, talk about the cavern. We've -- I'll say, again, invested. It's a little bit more expense rather investment, but invested in the sense of committing to a cavern to further improve the reliability of our supply chain in the U.S. to help keep our customers supplied and that's an example of something that really at this point or up until last quarter was really just cost on our P&L. It wasn't seeing a lot of benefit, and it will absolutely be in the future. So you described the Russia project very well, Marc. They had a 2 major energy releases prior to the invasion. The plant was down, was going to be down for a substantial period of time. We're not close to that facility. We don't know exactly what's going on, but I don't know how you can fix a plant in Russia right now. I don't know. And even if you could, I don't even know if Helium will be allowed to be exported. So I think that plant is out of the situation for a long time. So I think it is likely that Helium will be tighter, of course, than everybody would have expected. And we don't make a lot of comments about future pricing, but obviously, what we see for helium is that it is a very, very small part of the cost stack for our customers, but very, very important. If you're going to go get an MRI, the cost of the helium is a tiny part of that, what you're going to pay the hospital for that MRI. So if the Helium price was to go up, it doesn't mean you're going to stop getting MRI. So again, as we do everywhere, we'll stay focused on pricing.

Okay. Super. Well, we're just about to the time. I just wanted to ask one more question as it relates to clean hydrogen, right? So you spend a lot of time talking about blue and green hydrogen, but another way to make carbon-free hydrogen is from nuclear. What are the company's thoughts on that? And then what are the customers' inquiries about that?

Well, Marc, I'm pretty sure I can tell you one thing. Air Products is not going to build a nuclear plant. So let's take that up, let's say. Look, at the end of the day, that's up to the countries or whatever, right? So yes, we could take electric power from a nuclear facility, and we could make green hydrogen, pink hydrogen, whatever color you want to call it, and we'd be happy to do that. But the question is, do the societies, do those countries, does the political framework want to support nuclear going forward for a long period of time? So I guess I'd say, Marc, that's not up to us. If there is nuclear power available and the markets value that, we'd be happy to make hydrogen out of it. But I think you and I both know that's a very complicated political discussion about nuclear power in different places around the world. So we'll see.

Okay. Well, that's it. We're at time. Simon, thanks so much for the time. Really appreciate all your comments, and we look forward to catching up again soon.

All right. Thanks, Marc. Thanks, Cowen and team. Have a great day, everybody. Bye.

Bye. Take care.