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

Good morning, 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, Cristina, and good morning, everyone. Welcome to Air Products' Sustainability and Action Teleconference. This is Simon Moore, Vice President of Investor Relations, Corporate Relations and Sustainability. I'm pleased to be joined today by Seifi Ghasemi, our Chairman, President and CEO. After our comments, we'll be pleased to take your questions. Our comments and questions will be limited to today's announcement. We look forward to discussing our quarterly results with you on August 4. Our 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 press release and on Slide #2. Now I'm pleased to turn the call over to Seifi.

Thank you, Simon. And good morning to everyone. Thank you for taking time from your very busy schedule to be on our call today. The purpose of this call is to formally announce some new sustainability goals and to reaffirm our commitment to the goals we have already announced. We have mentioned many times before in our calls that our growth strategy is to utilize Air Products' core competencies to significantly grow our participation in the global transition to cleaner energy. To be more specific, we will use our unique technologies and know-how in gasification of hydrocarbons, CO2 capture and extensive 60 years of experience with hydrogen to develop projects, produce cleaner and greener hydrogen as a new energy source of the future. The exciting element about this growth strategy is that by producing lower and lower carbon-intensive hydrogen and other fuels, we will, by default, decrease our carbon footprint and achieve enhanced sustainability performance. This will enable us, in a realistic way, to achieve the goals that we are discussing with you today. So in summary, our growth strategy is our sustainability strategy. Now please turn to Slide #3. At Air Products, we fully understand that as a public commercial company, our task is to create value for our shareholders through superior financial performance. And we are doing that and delivering good results. But in addition to that, we do have a higher purpose. Our higher purpose at Air Products is to bring people together to collaborate and innovate a solution to the world's most significant energy and environmental sustainability challenges. So we take the job of achieving our sustainability targets very seriously and are fully committed to make them happen as we go forward. Now please turn to Slide #4. There we have summarized what we have achieved to date. We have increased by 14% avoided emissions by our customers. That means our products had made it possible for them decrease their carbon emissions by 14%. When we produce our products and our products is used by our customers, it reduces the CO2 emissions that they have. If you look at the total, we are helping the world avoid 82 million metric tons of CO2 emissions every day as a result of products that we produce. That is 3x the amount of CO2 that we put in the air. So in net-net, we are saving the world more than 50 million tons a year of CO2. That is a part that sometimes people don't focus on. And it is important to focus on that, that today, although we generate CO2 when we make our product, but that -- our product helps the world save 3x that amount of CO2 in emissions. We have 56% of our total revenue from sustainable offerings. And you can see the rest of the statistics there. I don't want to repeat every single one of them. But I do also want to mention that in addition to the sustainability goals, our other goals, which is socially related, is that we increased our -- about 18% the participation of minorities in our workforce, we have that, improved by 22% our employee injury rates, and we have obviously donated to the different communities that we operate in. So in summary, our business strategy and track record of execution are enabling us to set increasingly ambitious sustainability goals as you are seeing today. In order to explain those goals in detail, I would like to now turn the call over to Mr. Simon Moore to explain those to you. Simon?

Thank you, Seifi. Please turn to Slide 5. In September 2020, we announced our Third by '30 goal to reduce the intensity of Air Products Scope 1 and Scope 2 CO2 equivalent emissions by 1/3 by 2030 using 2015 as the baseline year. We remain committed to this CO2 intensity reduction target. And in 2021, Air Products achieved Scope 1 and 2 CO2 emissions intensity reductions of 4% towards our Third by '30 goal. The major projects we have coming onstream, along with our increasing use of renewable electricity and our day-to-day focus on operational efficiency, puts us in an excellent position to meet or exceed this goal. As I'm sure you all understand, these real projects won't benefit this metric until they come on stream later in the decade. This foundational goal is important to repeat because it exemplifies the criteria we continue to use as we make more progress and announce additional commitments. First, our goals must be challenging, but realistically achievable. Second, our goals must be credible and able to be measured in a real way. And we are committed to providing regular updates and being held accountable for delivering on our goals. On Slide 6, you can see the additional commitments we have today, further demonstrating our sustainability, strategy and action. First, we have created a new Third by '30 goal for our Scope 3 emissions. Second, we have set a new goal of reaching net-zero emissions from our operations by 2050, in step with society's progress towards achieving net-zero. Third, we will spend or commit at least $4 billion in additional new capital for the transition to clean energy over the next 5 years, bringing our commitment to first-mover projects to $15 billion through 2027. Fourth, consistent with our net-zero commitment, we are engaging with a science-based targets initiative and its expert advisory group to help support development of the sectoral framework that will shape the science-based target methodology for the chemical sector. And the real energy transition projects we are executing will generate climate benefits of over 500 million tons of CO2 equivalent over their lifetime. These new commitments complement and deepen our existing strategy of working alongside our customers and countries on their sustainability journeys. Now please turn to Slide 7. Air Products began reporting our Scope 3 emissions over 15 years ago. As you know, Scope 3 are those emissions generated by sources we do not own or control, including upstream energy consumption, use of sold products and investments. And we are now committed to addressing climate impacts in key areas of our value chain. Air Products is adopting a new goal to reduce the intensity of our Scope 3 emissions by 1/3 by the year 2030 from 37 kilograms of CO2 equivalent per million BTUs, down to 25. To ensure transparency, accountability and uniformity across our Third by '30 goals, we will use 2015 as the baseline year for Scope 3 just as we did for our Scope 1 and Scope 2 Third by '30 goal. By adopting this goal, Air Products will be able to continue meeting the growing customer demand for our solutions while ensuring that the environmental impact per energy equivalent is reduced. Please turn to Slide 8. In step with society's progress towards achieving net-zero, we have set a new goal of reaching net-zero emissions from our operations by 2050. This net-zero ambition builds from our Third by '30 plans as well as our world-leading investments in real low carbon and 0 carbon hydrogen projects, the development and use of new carbon-reducing technologies and our work with customers and countries to help produce cleaner sources of energy. However, achieving this goal will also require strong policy and regulatory support that promotes the adoption of key technologies to address the pace and scale required to support a net-zero future. To help reach net-zero by 2050, we have identified real plans that include new investments and modifications of existing Air Products assets. By 2050, we expect most, if not all, of our hydrogen to be produced by 0 or very low carbon plants. We will continually increase our use of renewable energy and eventually expect to drive all our operations fully to renewable energy. And we are converting our fleet of approximately 2,000 trucks to hydrogen fuel cell zero-emission vehicles. While today, we might not know every exact detail of how we will get to net-zero, Air Products' world-leading public commitments already put us in a very strong position. And consistent with our net-zero commitment, we are engaging with a science-based targets initiative, a leader in mobilizing the private sector on climate action. SBTi does not currently have a methodology for the chemical sector, and they acknowledge that the chemicals industry faces challenges in its path to decarbonization caused in part by the wide variety of products produced by the industry and the use of hydrocarbons as feedstock. We are excited to join several other leading chemical companies in the SBTi Expert Advisory Group by providing the resources to help support development of the sectorial framework that will shape the methodology for the chemical sector. This will allow us to meaningfully contribute to ongoing discussions around the challenges, needs and opportunities for the industry while helping to find best practices for emissions reduction in line with climate science. SBTi also believes, and we agree, that before companies commit to a science-based target, they should have real plans on how they might meet that target. Having the sectorial guidance will support the development of transparent, measurable and realistic transition plans. Participating in these ongoing discussions with SBTi and defining a clear methodology for sector guidance are crucial prerequisites to any potential commitment to a science-based target. Now please turn to Slide 9. The energy and environmental challenges facing the planet need innovation and real investment now. Our greatest sustainability impact in core to our higher purpose is our ability to bring people together to collaborate and innovate critical solutions, including through real landmark investments in first-mover projects. Air Products is proud to announce an industry-leading capital commitment to accelerating the energy transition. More than $15 billion in CapEx will be spent or committed between 2018 and 2027 to these first-mover projects. We have already committed $11 billion to real and announced energy transition projects that will be executed over the next few years, and we expect to commit at least $4 billion more to additional specific energy transition projects in the next 5 years. We are proud of this unique commitment to major investments in real projects that are truly helping to change the world. Let's turn to Slide 10. We have already taken major steps to build the hydrogen economy and have hands-on operating experience around the world. The key now is scaling up to create the clean energy infrastructure that businesses and governments need to make the switch on a major scale, giving users confidence in a secure, reliable and consistent source of hydrogen. And we are doing that. Our aggressive investment and execution time line ensures that the future climate benefits generated by Air Products business come online at a crucial moment in the energy transition, and with enough strength to help propel low and zero-carbon hydrogen as our clean alternative source of energy for decades to come. Our $1 billion net-zero Alberta blue hydrogen facility will come on stream in 2024. Our $2 billion hydrogen and sustainable aviation fuel project in California will come on stream in 2025, our $4.5 billion low-carbon Louisiana blue hydrogen project will be on stream in 2026, and the Zero Carbon NEOM green hydrogen facility, the largest project of its kind in the world, will also come online in 2026. And there's more to come. We have recently talked about potential projects in Oman and the U.K. that are not included here. Increased focus on the energy transition and energy security creates significant new project opportunities now and in the future for hydrogen and carbon capture technologies. We are uniquely positioned to bring together a portfolio of technologies and experience into the right solution for the right situation at the right time. Growing our investment pipeline of real 0 and low-carbon hydrogen projects solidifies Air Products as the industry leader in driving the energy transition. On Slide 11, you can see that as the world leader with more than 60 years of knowledge and experience in hydrogen, we have the expertise necessary to support the transition from high emission internal combustion-powered vehicles to emission-free hydrogen and fuel-cell vehicles and other applications, greatly reducing CO2 emissions. We agree with many experts that hydrogen will make a significant impact on heavy-duty transportation. For example, in the United States, heavy-duty vehicles account for about 1/4 of all fuel consumption and greenhouse gas emissions related to transportation, despite making up only a small fraction of the vehicle fleet in this country and traveling only 10% of the total annual vehicle miles driven. The future climate benefits from our announced hydrogen projects, if all of the hydrogen was used for the heavy-duty truck market, would eliminate more than 20 million tons of CO2 per year. Over their lifetime, these projects would avoid more than 500 million tons of CO2, which is the equivalent to the emissions from about 50 billion gallons or over 220 billion liters of diesel used in heavy-duty trucks. And this does not include benefits brought by future yet to be announced projects, and we are working on many exciting potential projects. Please turn to Slide 12. It's also important to remember, as Seifi mentioned, that our current products are used in hundreds of different applications and are essential to our customers' sustainability performance. Air Products has highly valued technologies, skills and experience that benefit our customers and countries around the world. Many of these uses result in significantly lower carbon emissions compared to the baseline technologies they replace or approve of. For example, hydrogen enables lower sulfur transportation fuels oxygen enables clean combustion and modified atmosphere packaging helps preserve food, and these are just a few of the examples. Again, as Seifi said, in 2021, we enabled 82 million metric tons of CO2 equivalent to be avoided by our customers and their customers, which is about the emissions from almost 18 million cars and more than 3x our own direct and indirect CO2 emissions. Now I'm happy to turn the call back to Seifi.

Thank you, Simon. So if you would be kind enough to turn to Page 13, in summary, what we have presented today is that we are adding a Scope 3 emission target. That is significant. We are adopting a net-zero-by-2050 goal, which is new. We are committing, as Simon mentioned several times, $15 billion of capital expenditure for the energy transition, and I'm very happy to say that we are well on our way in achieving that goal. And we are committing to engage with SBTi to develop the chemical sector framework for measuring all of these goals. And we are providing future climate benefits building on current avoidance emissions. We are very proud of achievements of hair products in this area, and we are making significant commitments to achieve even more as we move forward. We are also excited, as I said at the beginning that our growth strategy and our sustainability strategy are one. With that background, now we will be delighted to answer any questions that you might have. Operator?

[Operator Instructions] And we'll take our first question from Bianchi with Cowen.

I'm curious, just to start, if we could talk about your hydrogen business and how much CO2 equivalent comes from that versus the current levels for the total company? And maybe you could bucket that into Scope 1, 2 and 3.

Well, I'll try to answer your questions and then, Simon, I would appreciate you adding to that. Currently, just about all of the CO2 that we emit into the atmosphere, which is at around 22 million, 23 million ton a year, comes from the production of hydrogen. That is really the main of CO2 emissions that we have currently. And that is basically -- that 23 million, 24 million is all Scope 1, I believe. Simon, would you like to add anything?

Yes. Thanks, Marc. Let me just round out those numbers. So these are the 2021 numbers that we just reported in our recent sustainability report. So we have about 15 million tons a year of Scope 1 emissions. Again, that's almost exclusively from our hydrogen production. We have about another 9 million tons of Scope 2 emissions, primarily associated with the electricity in our ASUs. So that's the roughly 24 million that Seifi had mentioned. And then we reported about 7.5 million tons of Scope 3 emissions.

Is that okay?

Yes. Yes. That's very helpful. And then I guess on the $15 billion of large projects, I presume that there's going to be much more spending required to get to your 2030 targets. So could you help us understand maybe how far the $15 billion will get you? And then what the CapEx requirement would be to fully get to the 2030 targets?

On that one I think the numbers that we have given you, the $15 billion, will get us to our target because that's how we wanted to give you the number. So that -- Simon, can you please just confirm that because that's how we calculated?

Yes, I would say it this way, Marc. First of all, as you know, we've already committed $11 billion of energy transition projects. So those projects, plus the day-to-day work our team is delivering on improving the efficiency of our facilities, increased renewable energy, I think that puts us pretty close. And so I would agree with the additional $4 billion. Certainly, we're optimistic that will get us to our 2030 Third by '30 goal.

We'll take our next question from P.J. Juvekar with Citi.

Yes. So you will be a large consumer of electricity with this massive increase on lower 0-carbon hydrogen. Do you have any rough idea about how much of that electricity could come from solar versus wind versus any plans to use nuclear power as a source? And any -- do you have any thoughts on nuclear? Some people think that, that could come into the mix in the future. Some people are against it. So what are your thoughts there as well?

Well, first of all, the -- with the projects that we are doing, P.J., it would be interesting to get a little bit more into the detail. Number one, the big NEOM project that we are doing, all of the electricity is going to come from renewable sources. It's wind and solar. With the project that we are doing in Canada, we have actually come up with a scheme where we don't use any electricity. That means that we generate our own electricity. That is when -- so the product that we make in Canada is really -- although we are using hydrocarbons, it is basically carbon-free hydrogen because we will use the natural gas, break it down in our -- with our technology in gasifiers, produce syngas, put the syngas through ship change, capture the CO2. And then the hydrogen, we not only use the hydrogen for selling it to our customers for what they need, but we take some of that hydrogen stream and put it in a turbine which uses 100% hydrogen to generate the electricity that we need for the facility. And in addition to that, it generates enough electricity -- green electricity to the grid, that we will send to the grid, to compensate for the 5% of CO2 that we didn't capture at the gasification. So the whole unit is basically net zero. Now we might do that at our project in Louisiana and turn it over to that. So we can -- we have a solution for how much they are producing net-zero hydrogen from hydrocarbons, which is a very innovative thing and we will talk about it more as time goes by. With respect to nuclear, P.J., I've always said when I talk about the energy transition that in the future, if people don't want to use hydrocarbons, the only available sources of energy that we have is wind, solar, hydro or nuclear. The issue with nuclear is: Would the society except that as a clean renewable source in the same category as wind, solar and hydro? Or are people going to have significant objection as they do about the fact that what do you do with the nuclear base. And if that is going to pollute the world in a massive scale, plus all of the risks of making the product, is that really the direction that we want to go. But if you had -- but that is a possibility. And I think it depends. And I'm sure it will be heavily debated by the governments around the world, and at the end of the day by the population about whether they want to include nuclear in the same category as wind, sun -- wind and sun as a new source of energy.

We'll go to our next question from Christopher Parkinson with Mizuho.

Great. On Page 10, it's really not a coincidence that you won a lot of these projects in [ Upper ] to California, Louisiana, just given your existing infrastructure pipeline framework, so on and so forth. When we're thinking about the incremental $4 billion left to be allocated through 2027, can you just offer a little bit more color? I mean, you mentioned some other things which are not included in this. But should we be thinking about things that are leveraging your existing ecosystem and infrastructure or things that are more comparable to NEOM, so on and so forth? Just any color you could give on that will be appreciated.

Thank you very much, Chris. I would like to categorize it as follows: Number one, there are some projects that we have announced that is not included in the $15 billion, and that -- one of them is a project in Oman, and some of the other projects that are working on with respect to green hydrogen, like, for example, NEOM 2 or NEOM 3, and additional blue hydrogen projects in the United States or outside the United States. So there is all of that, but in terms of infrastructure, we are building an infrastructure in terms of taking the hydrogen that comes in form of ammonia for transportation and then cracking that, we have really unique technologies there, and then distributing it for the networks in U.S., Europe, all over the world. So we will be using our existing infrastructure and new infrastructure that we will be building. We will be building new pipeline systems, pretty much and we will be building port facilities to unload the ammonia and crack the ammonia. So it will be a combination of all of that, Chris. Does that make sense?

Yes, it does, Seifi.

We'll go to our next question from John Roberts from Credit Suisse.

Good luck with earnings in a couple of weeks, and I love the NEOM 3 reference. You haven't announced any disassociation projects to convert ammonia back to hydrogen. When do you think we'll hear about that?

I think -- well, we definitely are going to do that because that is the only way that we can take the ammonia and convert it to hydrogen that can be used for fueling trucks and so on in the U.S., if you're bringing it from Saudi Arabia or other locations. In terms of when are the -- I think that within the next 2 years, 2.5 years, we will build some of these units, and we can use it to crack not green ammonia, but gray ammonia, just to test the system and test the technology that we have. So by 2024, 2025, you will have some of these in operation.

Okay. And then secondly, you mentioned most of the hydrogen to be low or no carbon by 2050. How much existing gray SMRs do you expect to be operating by 2050? Do you expect to largely replace SMRs with new autothermal hydrogen units with sequestration? Or do you expect to add sequestration to the older SMRs?

We are going to do both of them. Some of the SMRs by 2050 will be so old that we will shut them down. If there are SMRs that still have life left in them, we have the technologies to capture 95% of the CO2 from those SMRs because we have developed new technologies. We haven't advertised yet that we can not only capture the CO2 from the process at the SMR, but also from the flue gas. So I don't expect that we would have any SMR operating that does not have carbon capture on it.

And we'll go to our next question from Josh Spector with UBS.

Just curious on your Scope 1 and 2 emission reduction -- intensity reduction goals. How should we think about the mix of that between the new projects you have coming online, so the ones you already announced over the next 5 years or so, versus the ongoing improvements at your existing sites? Is it primarily one bucket or the other or what does that split look like?

I'd like to turn it over to Simon to give you more details, but we will have a combination of all of the things that you're talking about. But Simon, you want to be more specific, please?

Sure. Exactly, Seifi. And as you said, Josh, of course, it's a combination. If you remember, when we announced this goal 18 months ago, we really had 5 pillars of driving towards this. And you've seen us announce projects in this area. First of all, most basically, our team are driving to improve the efficiency of our plants every day. They have been doing that for decades. They continue to do that. And when you improve the efficiency of the plant, you actually make a positive move in the direction of this metric. So that's kind of ongoing business. Obviously, as we announce new projects and they have a much, much lower carbon intensity either with 0 CO2 and significant energy, those help it as well. But then certainly, as I said before, out of our 25-or-so million tons of Scope 1 and Scope 2, about 9 million tons of that is Scope 2. That's obviously electricity. And the opportunity there is for us to look at purchasing renewable power. And we have announced a number of those deals, if you will, and we continue to take a look at that. So I think you'll see significant improvements from additional renewable electricity you'll see additional improvement from new projects with a much lower carbon intensity. And actually, as Seifi just mentioned, we do see the opportunity to potentially retrofit some of our existing assets. And obviously, if you take an existing asset and reduce its carbon footprint, that benefits as well. So I guess in summary, we think those are all the key levers to get us there.

We'll take our next question from Jeff Zekauskas with JPMorgan.

I think it was 2 years ago that you signed the NEOM project. And at that time, if I remember correctly, the green ammonia, the hydrogen, was going to be sent to Asia to fuel bus fleets, primarily. Have those plans changed? Or when you think about where the hydrogen from NEOM was going to go 2 years ago, when you think about where it's going to go today, is it different? And where is it going to go?

Jeff, when we announced 2 years ago, the project, we said that we have chosen ammonia as a means of transport, and we are going to take the ammonia to basically decarbonize trucks all over the world. And our primary target was and continues to be Europe because of the location of NEOM. And then we talked 2 years ago that Europe will be ahead of everybody else in terms of wanting green hydrogen, that continues to be the case. So fundamentally, in terms of our thinking about what we were going to do with the product 2 years ago and today, there has been no change. What has happened with the market is that there are other markets have developed for green that we were not counting on. But now people are saying that they might want to use green ammonia itself without breaking it down for some applications like powering ships, which is a new application that we were not counting on 2 years ago. And then in addition to that, obviously, now people are even talking about hydrogen for planes and all of that, obviously, later on in 2030, 2035. But what we are finding, Jeff, is that the demand for green hydrogen is beginning to extend not only for heavy transportation like trucks, or depot trains, ships, planes. And then the other interesting thing is that we are seeing demand when it comes to steelmaking and chemicals.

Okay. And for my follow-up, the project in NEOM in terms of hydrogen production, in theory, is much smaller than the project in Louisiana. Are the returns on capital of those 2 projects very similar? Or is one higher than the other? Which one do you like more?

Well, I like every project that Air Products does, otherwise, I wouldn't approve it. But in terms of the potential return, Jeff, it is a very good question that you're asking because it all depends on how does the market develop and what would be the supply-demand situation. The one thing that I can tell you is that it's a lot easier. It's not easy, but it's a lot easier to develop blue hydrogen projects, making hydrogen from hydrocarbons and capturing the CO2 than it is to develop green hydrogen projects. Green hydrogen projects are unique, and you need so many requirements to come together that there are not going to be that many of them. So if the world does demand green hydrogen in the future, then the profitability of the project in NEOM might be very interesting. But if that doesn't work that way, certainly, in terms of short term, the demand for blue hydrogen will, I think, far exceed the demand for green hydrogen because it's easier to produce, and people will take the significant carbon intensity reduction without having to pay for it. But it all depends a little bit on how the market develops.

And we'll take our next question from David Begleiter with Deutsche Bank.

Seifi, it's been about 2 years since you announced NEOM along other projects. Are you seeing the rate of inbound increase you -- increase as you announce Alberta, Louisiana? Basically, you're now seeing inbound come in as opposed to you going out for these projects?

Well, David, I don't want to brag here, but everybody in the world wants to talk to us because we are the only ones who have the project. There is a lot of projects that are announced, but they are announced as MLUs on paper. Nobody is actually digging the ground and engineering and building something. We are. So people around the world realize that. And as a result, they are talking to us, and we are delighted to be engaged with people.

So given that -- when I look at Slide 10, what's the limiting factor for more projects beyond $15 billion? Is it the balance sheet? Is it people constraints? Is it time constraints? Why couldn't this be a $8 billion or $10 billion of additional projects by 2027?

I hope it will be, and we have the capacity to do that, depending on how we finance some of these projects. The $15 billion was a number that we need to achieve that in order to achieve our goals. That's kind of how we arrived at that. But beyond that, we have the capacity to do a lot more projects. And it is possible that we will do a lot more than that. Surely it is.

And it appears there are no further questions at this time. I'll turn the call back to you, Simon, for any additional or closing remarks.

I'll take that. This is Seifi. I'd just like to thank everybody on the call for your time. I know a lot of people announcing results and some of you are very busy. We very much appreciate that. And we do look forward to talking to you on August 4 about our third quarter results. Have a wonderful day, and thanks again.

And this concludes today's call. Thank you for your participation. You may now disconnect.