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

Well, welcome to our afternoon session. We had a great session this morning, followed by lunch where our commodities strategies was the keynote speaker [ Edwards ]. Now kicking off the afternoon session, we have Air Products. From Air Products, we have Seifi Ghasemi, CEO, Chairman; and Melissa Schaeffer, CFO. So welcome both of you. I also want to thank Simon Moore, who has participated in our conference for many years. I want to wish him good luck in his retirement. We have his replacement, Sidd Manjeshwar and Mun Shieh from Air Products [ crack ] IR team. Good afternoon, Seifi.

Good afternoon.

So for the benefit of everybody, let's just start with the macro. And given all the headwinds that we've seen around the globe, where do you see utilization shaking out? Where do you see -- companies this morning were talking about destocking of inventories, particularly in Europe. How do you see that playing out with your customers?

Well, first of all, it is great to see you. And wonderful to be with all of the investors here and looking forward to answering your questions. In terms of the macro business, Air Products is a very good leading indicator because we don't have any inventory. We make the product and it is used right away. So I can give you a picture of what is -- what was going on when we announced our results. We don't have a lot more data since then. But I'm going to refrain from making projections because projections usually turn out to be wrong. So fundamentally, what we see today, we kind of talked about it at our results announcement is that, if I start from the eastern part of the world, China is still stable. We do have pockets of shutdowns and all of that, but still overall, our business is doing okay there. 0:02:15 We have volume growth, we have pricing power. And that applies to most of the rest of Asian countries. Then Middle East, obviously, we don't have a lot of day-to-day business, but we have a lot of the big projects, and the big projects are going fine. Europe is obviously the $64 million question. Despite the significant hike in energy prices, which I think we have done a good job keeping up in terms of pricing so that our margins are not affected. We have not seen the European economy crash, at least not yet. It is obviously not growing, but we have not seen a precipitous drop in demand, at least not yet. And in the U.S., everybody is very familiar with what is going on. We probably have negative growth or 1% or 0.5% growth. And we live with that we are very fortunate that we are in some sectors that there are still some growth. So we are still seeing some volume growth. And then Latin America is not a big deal for us and not much is happening there. So that's kind of where we see things right now.

Great. All right. So I want to shift to hydrogen, and I do want to come to your specific projects. But before we get into those projects, can you talk about what impact does the IRA has, not just on your projects, but in terms of the inquiries and the incoming calls that you get since the IRA has been passed in the last 3 months?

Well, the IRA, people focus on it at a macro basis. The government of the United States is going to give $400 billion of incentive to do the kind of projects that we live to do, basically. And now that is over 10 years. So it's about $40 billion a year. And the people who can participate are people who actually have projects. I mean, sure, the government is going to give you $85 a ton if you sequester CO2. But you have to have the CO2 to sequester, if you don't have the CO2, you have [ another ]. So even a company who is an expert in injecting CO2 into the ground, I don't want to name them, but you know them, but they're not going to benefit because they don't have any CO2. The good thing is that, we do have the CO2. A few years ago, that was a bad thing. Now, it's actually good thing. So the benefit will go to the people who have done their homework can be fortunately were ahead of the game. So we are going to get significant subsidies for producing hydrogen and for producing blue hydrogen and green light and also sustainable airline fuel. So the numbers are going to be very big, depends on your projects, and I can talk about that. But order of magnitude, you should think about $40 billion a year for 10 years to be distributed among different people. And I think Air Products would probably be the biggest beneficiary.

Great. And some people are saying and we had a consultant talk about hydrogen yesterday, talking about how green hydrogen is now competitive, definitely with blue hydrogen, but also in some cases, like Europe, competitive with gray hydrogen and the subsidies are different. But can you talk about sort of some of the -- where do you see the cost curve in different areas for hydrogen?

Well, in terms of -- when people start comparing gray hydrogen to blue hydrogen and so on, it's kind of comparing apples to oranges because the whole reason that the world wants blue hydrogen or green hydrogen is because they are saying there is an environmental cost to using the hydrocarbon. So if there is an environmental cost, then that should be price -- there should be a price difference. And if you were going to make green hydrogen and sell it at the same price as gray hydrogen, then what's the point of -- I mean, then people might or might not use it. I mean, there has to be a penalty on people who use gray hydrogen or hydrocarbons. I mean, there is a cost. I mean, the environmental cost, the health costs and so on is significant. And so I don't -- that is why we believe very strongly, I certainly believe very strongly that we should have a carbon tax to say that if you're using hydrocarbons, that's not a good thing. You have to pay a penalty for that. And then the economics of all of -- everything will change. But then at the same time, there is some math that you can do in the sense that if you take a passenger car, the efficiency of an internal combustion engine is 20%. But the efficiencies of a fuel cell engine for a passenger car is 40% or more. And a kilogram of hydrogen has more energy -- a little bit more energy than a gallon of gasoline or a gallon of diesel. So if you look at that, if I give you 1 kilogram of hydrogen, you can drive the hydrogen car equivalent of using 2.5 gallons of diesel. So if -- or gasoline. So if gasoline is $4, that means that you can afford to pay $10 a kilogram for green hydrogen without any penalty, without your cost going up. And then now the government is going to give you equivalent of about $5 a kilogram of subsidy for 10 years if you produce green hydrogen. So that means that you're effectively going to be able to sell hydrogen for $15 per kilogram without -- and compete with gasoline. So in that case, people can do the math, $15 a kilogram, take our project in New York that we just announced. And you do the math, you come up with pretty good numbers in terms of profitability. So it is possible to compete. And then the same -- it becomes even better for blue hydrogen. So it is getting there, but I don't think people should expect that we would try to sell our product to compete with hydrocarbons. That's not fair.

And do you expect that the subsidies that the government is giving that you share them with your customers and that increases adoption rates of...

Well, it just does what I was just telling, it makes our product more competitive, but you are not going to invest billions of dollars just to make sure that we become a vehicle for passion to incent it. Maybe you want to keep some of that stuff. Most of it.

Can we talk about your green projects? So you have the NEOM one and the one you announced in New York recently. On the NEOM one, it was announced maybe more than 2 years ago. How is that progressing? And has the worldwide inflation has had an impact on the cost or the timeline of NEOM?

But with NEOM, we have started 6 years ago. We announced it 2 years ago. We were a little bit delayed because of COVID, obviously. But the project is going fine, and we have increased the scope of the project because we have become more confident about what is going on and all of that. But we should be in a position to give you more specific information about that project in a month or so when we hopefully do the financing for the project, and we will be able to talk a lot -- a little bit more about the details, but that project is moving forward, and we are very -- we are probably 7 years ahead of anybody else who wants to do anything similar at least.

And for NEOM, the downstream part, so the back-end part where you will be taking ammonia and then liquefying it, taking it around the world, what kind of contracts or what kind of deals are you working on? And when will we be able to share some of those? And would they be similar to your industrial gas type deals?

NEOM is going to come on a stream at the end of 2026. That's about 4 years from now. We are in no hurry to sell the product from that facility because if you want to sell it today, there is a price. 3 years from now when people find out that all of these hydrogen projects that have been announced is basically by 3 guys and a truck and there is nothing behind it, the value of our product will go up significantly. And people realize that we are the only one who actually can make green hydrogen. So I think we are not in a great hurry to, "Hey, run, run and I know that investors would like to see us sell out the facility." But our business, look, at the end of the day, we do all of these things to make money. And my job is to make sure we make as much money as we possibly can, not just say, "Oh, we're making 30% margin, that's good enough." If we can make 250% margin, that's what we should try to do. And therefore, we are not in a hurry to sell the product from NEOM or [ Dhahran ] or any of these facilities because as you get closer to the time that all of these politicians who have promised the world that by 2030 they will have no intent of combustion engine and all of that kind of stuff, then the value of the product will go up significantly.

Great. And then recently you also announced an import terminal in Hamburg to bring in green energy. Is that sort of where maybe NEOM can plug into?

Yes. The reason that we are -- we are going to build many terminals around the world to bring in the ammonia and then, obviously, you need a storage tank to bring it into any country. And then we will crack the ammonia -- first of all, there are several uses. Number 1, ammonia can be used as it is for a lot of different purposes. Number 2, we can crack the ammonia to hydrogen gas and put that gas in a pipeline and sell it. And then we can also take the gas and make it into liquid and then sell the liquid. So the project that we announced in Hamburg is specifically for bringing the product from anywhere. And obviously, right now, the most logical place would be NEOM to bring it there, we will have a 50,000 ton of storage tank, and from there, we can sell the ammonia as ammonia. We can sell it as hydrogen gas or we can sell it -- liquefied and sell it as additional liquid. The German government was very supportive of that. I'm sure the press, we saw who attended the meeting and all of that, which indicated the importance that they put into that. We are going to do a similar terminal in Rotterdam, and we are going to do a similar terminal in England, in [indiscernible], and we are going to do a similar terminal on that in other places, including the United States.

And then let's talk about some of your blue hydrogen projects. So you have one in Louisiana, which will benefit from IRA and then one in Alberta, which now you got some funding from the Canadian government to help you. Can you just talk about those 2 projects and sort of maybe compare slightly different projects, but kind of compare and give us a little views on those?

Sure. The project that we are doing in Canada, as you noticed, we got 1/3 of the capital cost as a grant. It's not a loan, it's a grant from the Canadian government. The way we were able to do that was that they wanted the ideal situation to use hydrocarbons but make hydrogen that qualifies as 0 emission hydrogen, like green hydrogen. I mean, how do you do that? And our people very smart enough, they figured out that what we do is that, we take natural gas, we put it into a reformer, which is our technologies and so on, and we capture 95% of the CO2 and we sequester that. So now this facility has put in 5% of the CO2 in there. Then when we produce the hydrogen, we take the hydrogen and generate enough power to power the whole facility. So the facility is not going to use any power from the grid. And then also produce additional amount of power from hydrogen, which is green power in order to make up for the pollutions of the 5% of the CO2. So if you draw a circle around the whole thing, it's 0 emission. And that is what got us qualifying to get the $470 million grant. Otherwise, you would -- it's not just that it was blue. It was just because it is an innovative process. And obviously, there are a lot of technologies in there that we are deploying really for the first time. So that project is underway, and I'm very happy to say that there was some concern on that project about what we're going to do with the product in the middle of Alberta. We have already shown half of it to IOL, which is Imperial Oil Limited, which is really Exxon. What are they going to do with it? They are going to use almost 0 carbon intensity hydrogen to make renewable diesel and then ship that renewable diesel all the way to California and [ dealt as ] LCFS credit. So it makes a holistic sense, and that is why the whole thing comes together as a very interesting project. We plan to expand that project at least 2 more, that was part of a 3-phase project, which will be for the future. Then the next group hydrogen project that we have is the one in Louisiana. There, we are going to take natural gas and then break it down in the gasifier, capture 95% of the CO2, sequester that. And then now we are making blue hydrogen, which is very low-carbon intensive. And then we will convert most of that -- all of that, obviously, will be the hydrogen. Then we have 2 options for the hydrogen. Number 1, we have the 700 pipeline where we are connecting all of the refineries in the Gulf Coast of the United States. And they are going to put the blue hydrogen in there, people will pay us a higher price. The second thing -- option that we have, which we are going to exercise is convert some of that hydrogen and then we know how to build their sequestration units, combine it with nitrogen and make ammonia called it blue ammonia, and that is something that people in Asia are really interested in to take that blue ammonia and blow it into coal-fired power plants up to 30% and reduce the carbon emissions from the coal-fired power plants.

Yes. A lot of companies are talking about coal-fired power plants and using ammonia, which I think an easy drop in solution for the utilities. Do you think maritime use of ammonia for oceangoing ships? Would that be feasible and something that you're looking into?

To use ammonia as a fuel for the ships?

Yes, which is what you will do in NEOM, but for more on a massive scale or more on a commercial scale for other independent...

Well, the ammonia that we make, the blue ammonia is, obviously, cheaper than green ammonia. And right now, obviously, the subsidies, it will be the attractive. The blue ammonia can be used directly for going into a power plant to reduce your emission. But blue ammonia can definitely also be used as a fuel for ships, all of the container ships going around for them to decarbonate and there are people who are working on building those ships. I mean, I don't want to name specific companies, but it's on the Internet, you can easily find who is working on it. So we think there will be -- actually, I think in the long term, in terms of volume, there probably will be more demand for blue ammonia than. And there are some people that if you talk to some of the energy companies, they believe in the long term that we would not be shipping LNG around the world. We will be shipping blue ammonia because when you ship LNG, you're sending the carbon with it and now somebody has to figure out what to do with that in Japan or Korea. But if you send blue ammonia, you've already captured this CO2. Therefore, it is clean energy when it gets to...

When do you think that transition could potentially happen between LNG trade versus blue ammonia trade? Is that something this decade or is it probably next decade?

Well, it really depends on how serious governments are enforcing all of these environmental regulations that they have put in place. I mean, if Europe is really serious about the fact that by 2035, they will not have any internal combustion engine. I mean, my God, Air Products will be an interesting company. I mean, it all depends on how fast -- they are going to enforce it. The issue is how fast it's going to happen. But in the long term, I mean, if you are sitting here, 2050, and I hope I am 2050, then the whole thing will be...

And lastly, your CapEx -- your World Energy project and your increased CapEx there. Can you talk a little bit about that project?

Well, the World Energy project is specifically a project where you take a renewable raw material, which is animal fat and things like that and you use a hell of a lot of hydrogen in order to convert that to either renewable diesel or with some further processing to sustainable airline fuel. So when we started the project, it was a mixture of the 2, but now with the demand for sustainable airline fuel, and specifically, after the IRA, where they are going to give you $1.25 per gallon of the sustainable airline fuel, we have expanded the scope of that project to make more sustainable airline fuel. And that is why the number has gone -- we have told people $2 billion. Now it's going to be about $2.5 billion. And that project is being executed. We have done most of the engineering. We did accomplish the most important part, which is getting the permit in California. So -- and we expect that project to be on stream in the middle of 2026.

In this tough macro environment, say, if you've been able to deliver earnings growth. You're guiding for 9% to 12% earnings growth next year. Part of that is really strong pricing that you have. And if volumes begin to weaken, do you think you can sustain that pricing?

Well, I just have to give another credit to the people of Air Products because we keep reminding ourselves every day that we wake up, that talking about NEOM and green hydrogen and blue hydrogen and so on for the future is interesting. It gets people excited. But we need to deliver this quarter and next quarter and next quarter until we get there. So there is significant focus on near-term performance. We are totally committed to that. And now if you want to have near-term performance and the outside world is hostile as it was in 2022, then the options that you have is productivity and pricing. And that is obviously what we are already focused on. And we were fortunate in 2022 that we did get productivity, we did get pricing. And also in some of our product lines, we did get [ volume ] because we make such a special product. But the point that I'm trying to make is that, we at Air Products are not just enamored with what Air Products will look like in 2025. We also are very interested in what results we are going to announce on January 30 when we announce our first quarter results for 2023. And that is absolute focus.

Great. Melissa, maybe you can talk about cash deployment? Obviously, you have that big funnel of $36 billion of projects that you either have started or about to start. And you've been funding a lot of that through your internal cash flow, but as this activity accelerates, what -- how do you see that financing coming together?

Yes. No. Thanks, P.J. So yes, we haven't funded the [indiscernible] projects from our balance sheet, and we have capacity to continue to do so. And so we will be funding the large CapEx that we've announced of $5 billion for next year, largely from our balance sheet. That being said, at some point in time, we will go out to the market. Obviously, now is not the time. And so we want to make sure that we're very thoughtful on when to execute that. So we're continuing to forecast that capital outlay and we'll strike when the time is right.

If I may just add, at the same time, P.J., we did a $12 billion project in Saudi Arabia. We didn't put in $12 billion of cash. We did project finance because some of these projects -- it is possible to project finance. And right now, NEOM, we are going to project finance that. So our actual cash outlay is significantly less than the size of this project. But the great thing is that, Air Products, number 1, we are not leveraged that much anyway. So we have a lot of room. So we can go to the debt market as a corporation and raise money at low interest rates, we can do project finance. And then also, people are very interested in co-investing with us in some of these projects as it becomes obvious that these projects are real and [ worth ].

And there's also the LDP program from the DOE. Potentially have you looked into tapping that?

The DOE grant for infrastructure, that's kind of -- I don't want to say it's not a lot. I mean, it's $8 billion. But the way they want to use that between all of the states and keeping everybody happy, everybody will end up getting $20 million, $30 million. It's not going to move the needle for us at all. We are participating. We obviously want to support what the government is doing and all of that. But that is -- there is no comparison between that and the IRA in terms of real value. So that's no big deal.

Great. I can sit here and keep asking questions, but let me stop here and take questions from the audience.

We answered all the questions already.

We answered all the questions already. You have asked all of the good questions. It's preempted everybody.

Seifi, how do you see the hydrogen market evolving in terms of globally traded versus producing on-site or shipping through pipeline?

In terms of the overall hydrogen market?

Overall hydrogen.

Yes. Well, as I said before, I think it depends in terms of the growth rate, it depends on how serious and how fast the regulators are going to enforce what they are saying they're going to do. They need to be specific. In the U.S., if in the next year, you have the state of Oregon and the state of Washington and New York state adopt the same kind of low-carbon fuel standards that California has. Their rate of growth for green will go significantly high. If they don't, it will be a different. For us, as Air Products, at the rate that we are building these facilities, that doesn't matter because there is going to be enough growth to significantly use the product. I just like to be very specific, right? People say, "Okay, we're building the plant in New York 35-ton a day, which is nothing. We are going to build much bigger projects in the U.S. But a 35-ton a day, that's 35,000 kilograms a day of hydrogen. If you convert one heavy-duty truck, it should use 50 to 60 kilograms a day. So you need 500 trucks to use the total capacity of that plant. We as Air Products have more than 800 trucks that we are converting to hydrogen. Maybe we use it ourselves. I mean, the numbers, you don't need to move the needle. I mean, if all of the energy that is being used for transportation, 0.00001% changes to hydrogen, we are going to have a huge need, even NEOM, NEOM 650-ton a day, sounds like a lot, 650,000 kilograms, divided by 60 or 50 you need 10,000 trucks. 10,000 trucks in the whole world. I mean, there are 650,000 trucks running around in Germany. I mean, this is a discussion I had with the minister, he was talking about when we announced the import terminal and he was talking about, well, this is going to serve our needs. I said, look, you have 657,000 trucks. If you want to convert all of them by 2035 to use green hydrogen, you're going to need 200 of these terminals, not one. So the numbers are -- the energy space is so huge that you need to convert just a little bit. Look at another practical example of that, today, as much as I hate talk about Tesla is you are talking about the guy who is making less than 1% of cars in the world, and he has created a company which is worth $600 billion, $700 billion. It's only less than 1%. He didn't need to convert all the cars into electric cars to make a difference. So for us, the pace that it goes compared to what we are doing and the scale that we are doing it right now, I'm not worried about how fast it goes because there will be a need for the product. But if the people actually seriously try to enforce some of the things they have said and they want to be carbon-neutral by 2050 and all of that, then you're going to have serious issues in terms of where is the money going to come from, where are the plants going to be built, where is the energy going to come. And then this thing will take off, [ of course ]. And I think the inflection point on that, when you will see whether it's going to go like this or it's going to go like this, it's going to be around 2030. 2030, 2031, that is when the whole thing will become a lot more obvious. Okay?

So you mentioned that for Louisiana, you would have the pipeline opportunities to refineries and you'd also have the opportunity to use ASUs to convert it to ammonia. If we were to take like a worst-case scenario, and we thought that instead of having any of the hydrogen being taken off by refiners that rather just have everything converted to ammonia. Is there an incremental CapEx that you would have to spend in order to have enough ASUs convert everything to ammonia? Or is that already laid out in your capital allocation of those projects?

So she's asking, do we need additional capital for the ammonia loop and the answer is yes.

The additional capital for -- in our project in Louisiana, the ammonia loop by itself doesn't cost so much. If you are building -- we are doing that right now, we are building one for Gulf Coast ammonia. And the ammonia loop itself is $350 million, out of the $5 billion we are going to invest in that facility. So the -- you are asking a very good question. This thing that if you are producing the hydrogen, we obviously want to sell most of the hydrogen putting it into the pipeline. But it makes a lot of sense to go the extra mile and spend the capital and then be able to convert it to ammonia and I wish we had a plant running today because the price of ammonia these days. But for the long term, it does make to -- as long as the biggest cost and the biggest investment is in the gasification and the production and also cleaning up the CO2 and the sequestration. The ammonia loop itself is not that...

It's already within the $5 billion, yes.

The REPower EU papers came out earlier in the year. So you've talked a lot about the IRA and the benefits on the -- has there been a real shift in narrative or the willingness of governments to talk to companies like yourself and move forward the agenda? And is that still a very much a discussion level or are you seeing decisions behind that and the impetus to move the reliance away from fossil fuels within Europe? I just wanted to get a feel if there's any even anecdotal evidence of the way that the government is speeding up the process for that transition.

In terms of doing something like the IRA?

Exactly.

I think -- sorry, I didn't hear your question very well. But you see, this is a very, very good question. Why did the government of Canada was in such a hurry to give us the incentive because I think the whole world, including a lot of people in the U.S., were totally caught by surprise with the IRA legislation because nobody thought that the U.S. would be the first country that we would actually do something really gigantic for the environment. Everybody expected that that would be in Germany or Scandinavia or countries like that. And obviously, as you know, in the U.S., until the very last minute, nobody thought that the IRA legislation passed. So now that it has, it has totally got these people by surprise, and they are very concerned. When I was there, it is becoming very obvious that right now, if people want to invest in making green hydrogen, well, they are going to take a look at the U.S., for sure, in terms of now what they're going to find out is that, in addition to the IRA and in addition to the health, you need wind and sun at the right time and all that, there is a lot more to it than just the incentive. But they certainly has created a significant incentive for people to come to the U.S. That's why I think the IRA legislation was very smart that it not only helps the environment, but it is a fantastic program to get investment in the U.S. rather than other places. How the other governments are going to deal with that is going to be a very good question because none of them has the financial capacity to dedicate $400 billion to a project like this. So they are in a -- my recommendation to them is that, don't spend a lot of your money in promoting production because people can't produce in Europe anyway because you don't have energy and you don't have sun. Why don't you try to incentivize the consumer so that they can go and buy the trucks and so on, and that is how you decarbonize, let somebody else make it if they can make it cheaper. But that is a significant issue right now in Europe, especially in Europe.

And when you talk about your -- the NEOM project was quite special in the case that you're all the way from upstream all the way to downstream to rebuilding stations. Is that where Air Products belongs throughout the whole of the value chain? Or as time goes by the market matures, you'll start focusing backwards on what your core skill set is, which is big plants, complex CapEx projects and let the downstream be somewhere else? Or is that downstream piece needed to hit your hurdle rates?

Well, that is an excellent question. Right now, the kind of volumes that we see and the kind of projects that we are doing, we are thinking all the way from wind and sun all the way to the production terminals, trucks, fueling stations, who want to control the whole supply chain. But if instead of 30,000 trucks around the world or 50,000 trucks, you're going to talk about 5 million trucks converting to hydrogen. Then they have to rethink about how do we do that supply chain. And over there, then it becomes a different game because then we are going to be in a serious way getting into some other people's business. And that interaction needs to be managed. But right now, for 1 NEOM or 2 NEOMs or even 5 NEOMs and the project in Louisiana or see more of that, that we can handle the whole supply chain and all. But if the volumes by 2030, 2035, start going like that, then you have to think about a different model in terms of what we do, and that is where maybe we would need some partners to do that.

Well, we're almost out of time. This was interesting conversation with you when it comes to hydrogen.

Thank you very much for all of the good questions.

Well, thank you.

Delighted to be here and look forward to coming next year.

Thank you.

Thank you.