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

Good morning, and welcome to Air Products' First Quarter Earnings Release 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. Sid Manjeshwar. Please go ahead.

Thank you, Kalie. Good morning, everyone. Welcome to Air Products' First Quarter 2023 Earnings Results Teleconference. This is Sid Manjeshwar, Vice President of Investor Relations and Corporate Treasurer. I am pleased to be joined today by Seifi Ghasemi, our Chairman, President and CEO; Dr. Samir Serhan, our Chief Operating Officer; Melissa Schaeffer, our Senior Vice President and Chief Financial Officer; Sean Major, our Executive Vice President, General Counsel and Secretary; and Simon Moore, our Vice President of Investor Relations, Corporate Relations and Sustainability who, as previously announced, will be retired at the end of March. After our comments, we will be pleased to take your questions. Our earnings release and 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 earnings release and on Slide #2. In addition, throughout today's discussion, we will refer to various financial measures. Unless we specifically state otherwise, when we refer to earnings per share, operating income, operating margin, EBITDA, EBITDA margin, the effective tax rate and ROCE, both on a total company and segment basis, we are referring to our adjusted non-GAAP financial measures. Adjusted earnings per share, adjusted operating income, adjusted operating margin, adjusted EBITDA, adjusted EBITDA margin, adjusted effective tax rate and adjusted return on capital employed. Reconciliations of these measures to our most directly comparable GAAP financial measures can be found on our website in the relevant Earnings Release section. Now I'm pleased to turn the call over to Seifi.

Thank you, Sid, and good day to everyone. Thank you for taking time from your very busy schedule to be on our call today. I am proud to say that the people at Air Products delivered great results this quarter despite the significant macroeconomic headwinds. I would like to thank each of our talented, dedicated and motivated employees for their hard work. Now please turn to Slide #3, our safety performance, which is always our highest priority. As you can see, we have made significant progress since 2014, but we always work hard to do better. Our goal is to achieve 0 incidents and 0 accidents. Now please turn to Slide #4. For the first quarter of our fiscal year 2023, our earnings per share was $2.64, an improvement of $0.16 per share or 6% versus last year. But our underlying performance versus last year was much better than that. The items that you need to consider to make a fair comparison versus last year are a $0.15 negative impact from currency and a one-time gain of $0.20 in the first quarter of last year from the finalization of the Jazan ASU joint venture. I would like to point out also that our guidance for the first quarter was to deliver earnings per share of $2.60 to $2.80. Our actual EPS is $2.64, which is within our guidance, but at the lower end. The principal reason is that the Chinese and European economies were weaker than our expectation in early November when we gave you the forecast. Now please turn to Slide #5. We are committed to reporting our shareholders while pursuing our long-term growth strategy. I am pleased to say that we have again raised our quarterly dividend this time by 8% to $1.75 per share per quarter or $7 a share on an annual basis, extending our record of more than 40 consecutive years of dividend increase. We expect to pay out more than $1.5 billion to our shareholders in 2023, reflecting our commitment at -- to return cash to our shareholders. Now please go to Slide #6. [indiscernible] which shows our EBITDA margins. While energy costs remain high, our margin improved this quarter. Our team has worked hard on increasing prices to offset the higher energy costs in our merchant business, and we continue to work on productivity. I would also like to point out that 3 quarters of the margin decline since the peak margin of around 42% is due to higher energy cost pass-through in our on-site business, which increases our sales but does not impact our profit. Now please turn to Slide #7. In addition to delivering strong results, we also achieved several significant project milestones during the quarter. In December 2022, we were very excited to announce our $4 billion green hydrogen project in the United States. This project will be located in Northern Texas and is our latest megascale 0 carbon, which means green hydrogen project since the announcement of our revolutionary NEOM green hydrogen project in 2020, and it is the by far the largest green hydrogen project in the United States. The information about this project and the recording of our December 8 webcast is on the -- for this project are available on our website. Now please turn to Slide #8. We were pleased to announce on January 19 the completion of the second phase of the $12 billion Jazan gasification and power project, which is 51% majority owned by Air Products, and it is 60% project finance. During the first quarter -- with the first phase of this project, which was completed in October of 2021, Air Products contributed [indiscernible] for the purchase of $7.1 billion of assets from Saudi Aramco. In the second phase, which was just completed, Air Products contributed an additional $900 million for the purchase of $4.2 [ billion ] of additional assets. Our total cash contribution for this project is $2.5 billion. As expected, the first phase of the project at end was $0.80 to $0.85 per share on an annual basis, which significantly contributed to our results in fiscal year 2022. With the completion of the second phase, we now expect about a total of [indiscernible] per share of earning contribution on an annual basis. This is fully in line with what we announced to investors more than 3 years ago. Now please turn to Slide #9. Today, I wanted to provide you with an update on our great NEOM green hydrogen project, which is appropriate to give you an update since we are very close to completing a major milestone, which is signing the definitive project financing agreements for this project. And therefore, we wanted to give you an update before you read about that in the next few weeks. We have been making excellent progress on this world-scale project to bring energy to the world. The engineering is now about 30% complete. All major subcontracts for the project have been awarded, including the electrolyzers and the power plant and all that. Land preparation is completed and construction has started, and the joint venture team is in place and executing the projects. Now please turn to Slide #10. As you know, Air Products has a [ one-time ] ownership position of the NEOM production joint ventures. But importantly -- and this is very important, we remain the sole off-taker of 100% of the green hydrogen produced in the form of green ammonia produced at this facility under an exclusive 30-year contract. We continue to see significant opportunities to use this green ammonia to bring green hydrogen to consumers around the world. And as I said, we are the sole off-taker and distributor of this product. Then I want to emphasize that the offtake price for this green ammonia remains the same as when we negotiated the original project in the summer of 2020 when we announced the project. This is a very key point that the fact that now you're project -- financing this project, and as a result, we are absorbing all of the financing charges and so on. That has not changed the offtake price. Then, now please turn to Slide 11. Initially the 3 partners plan -- which are Air Products, NEOM, which is owned by PIF and ACWA Power, we intended to use our own cash to fund the project -- the total project. Over the past 2 years, we have seen significant interest from the global financial institutions who see tremendous value proposition on this project. Therefore, we got tempted and reconsidered, and we decided that the best course of action to minimize our cash contribution and maximize the return on the cash is to do nonrecourse project financing on this project. The partners will contribute 25% cash and the remaining 75% in the nonrecourse project financing. And obviously, if you are doing nonrecourse project financing, you want to maximize the amount of money that you can borrow. Therefore, you put a lot of your ongoing cost and you bring it forward to the real present value and borrow against that. I would explain this a little bit more when we get to the detailed chart. This means that Air Products -- this project financing means that now our cash contribution to this project will be $800 million -- less than $800 million, which is significantly less than the $1.7 billion that we originally expected. That is what you would expect us to do -- that is the whole point of project financing. Now please turn to Slide #12. I am pleased to say that the non-recourse financing is well underway and we are more than 2x oversubscribed from what we want to borrow. We have received commitments from over 20 global financial institutions, demonstrating their confidence in this project. Later this month, we expect to complete what we call the dry close, which is the signing of the definitive financing agreements, and we expect the full financial close to be completed a few months later. We will obviously let you know as we make progress on the project financing. Now please turn to Slide #13 so that I can provide you with an overview of the total project capital needs. First, the original $5 billion that we have mentioned before, for the capital required to build the facility, we have increased that, it has increased by about $0.5 billion due to inflationary pressure that everybody expects. Then in addition, we have further increased the project investment by $1.2 billion to include items that we were going to provide service from other people. But now we want to provide those services ourselves in order to make the project totally self-contained, and we wouldn't be dependent on others. These include power transmission [indiscernible] and other infrastructure that was needed for the project. This increases the capital cost or it decreases the operating cost, and we decided that was a better trade-off. But the key point was to make sure that the project is not dependent on other people doing servicing and people will have control over the whole thing so that when we come on [indiscernible] we have everything that we need for the project to be operated. Now the other item that I'm sure will be a subject of questions from people is the $1.8 billion for project financing costs. That is a big number. But it is well explained why that is. Again, as I said, if you have project financing, you want to put and borrow as much money as you can. First of all, about $1 billion of that $1.8 billion is the interest during construction. So we are spending money. We want to borrow that money. There is an interest to that borrowing. Therefore, that adds up for the net total length of the project to about $1 billion. We want to finance that and borrow against that. Then we are using the land instead of leasing the land for 50 years, we decided to pay for the land upfront that reduces our ongoing cost, and we can project finance that. That is a [ few ] hundred million dollars, spares for the project. Usually you buy the spares as you go forward, we decided to buy all the spares upfront and finance it. So those are the kind of costs that comprise the $1.8 billion. It makes a lot of sense, and that is the beauty of project finance that you can -- you have the flexibility of bringing forward a lot of your costs that will save you operating costs in the future. So all together, the total funding needed for the product is $8.5 billion. Now please turn to Slide 14, which is the overview of the funding. As I described before, the $8.5 billion is made up $6.2 billion of nonrecourse debt, which we wanted to maximize and $2.3 billion of cash from the 3 partners. Therefore, obviously, the Air Products cash contributions is [indiscernible] which is less than $800 million. And this is as compared to the $1.7 billion that we originally expected. So overall, we are very pleased with where we are. We are very pleased with the fact that we are project financing this thing, minimizing our cash flow, and we are very pleased that the price that we are paying for the ammonia has stayed the same as it was in 2020. We are very optimistic about projects and the prospects for a good return for the total supply chain as we go forward. Now please turn to Slide #15. I would like to summarize the discussion by sharing thoughts about our strategy. As I have mentioned before, there are 2 pillars for growth strategy of Air Products and sustainability is the foundation for both of them. Through our core industrial gas business, we supply customers in dozens of industries with critical products and services that lower emissions and increase efficiency and productivity. Through our Blue and Green hydrogen megaproject of the future, we will commit more than $15 billion by 2027 to deliver clean hydrogen at a scale helping to drive the energy transition and moving humanity forward. These 2 pillars, which support each other for success put us in the heart of solving the Board's needs for -- the Board's needs for sustainable energy and environmental solutions. I'm proud to say that the people of Air Products have continued to drive results in the near term and make excellent progress in executing our growth project as we move forward. The Slide #16 summarizes our management principles, which I reiterate every quarter. These principles are critical to Air Products' success and will continue to guide us in the future. Now I'm pleased to turn the call over to Melissa, our Chief Financial Officer. Melissa?

Thank you, Seifi. As Seifi mentioned earlier, we've delivered another set of impressive results this quarter even with significant macroeconomic headwinds. Our commercial teams across the region continue to execute price actions and their efforts paid off. Price drove the 25% operating income improvement despite a significant negative currency impact, and operating margin was also 300 basis points higher compared to last year. I also would like to thank the team at Air Product for their continued outstanding efforts. Now please turn to Slide 17 for a review of our first quarter results. In comparison to last year, sales, volume and price were up nearly 10%. The 7% gain in price for the total company equaled a nearly 20% improvement in merchant price compared to last year, the fifth quarter in a row of double-digit increase. Volumes were up 2% higher, driven by better on-site in merchants, but partially offset by lower sales of equipment activities. Volumes were strong in America and Asia, but weaker in Europe. Currency translation from the strengthening U.S. dollar reduced sales by about 6% and lower operating income by 8%. Despite this headwind, operating income is up 25% and operating margin was 300 basis points higher, primarily driven by strong pricing. Operating income was higher across the region and particularly strong in America and Europe. Improvements in EBITDA and EBITDA margins were not as significant as operating income and operating margins due to the prior year onetime items primarily related to the Jazan ASU joint venture finalization. ROCE has climbed steadily over the last 6 quarters, reaching 11.3%, which is 120 basis points higher than last year. We expect ROCE to further improve as we bring new projects on stream and continue to put our cash on the balance sheet to work. Adjusting for cash, our ROCE would have been 13.3% this quarter. Sequentially, volume was weaker following a strong prior quarter, which also benefited from cost sales and a favorable contract [ addendum ]. Price continues to gain strength across the region. Merchant price improved 3% versus last quarter. EBITDA was down 5%, primarily due to weaker volumes, while EBITDA margin was up 200 basis points as positive price and energy cost pass-through more than offset the lower volume. Now please turn to Slide 18 for a discussion of our earnings per share results. Our first quarter adjusted EPS was $2.64 per share this year, up $0.60 or 6% compared to last year. Strong price drove the improved results. Price, net of variable costs contributed over $0.70 this quarter as our price actions more than offset the higher variable cost increases. Cost was $0.11 unfavorable primarily due to inflation and higher maintenance. Price, volume and cost together added $0.63 or a 25% increase compared to last year. However, the negative $0.15 from currency and a roughly $0.20 of prior year onetime benefit associated with the finalization of the Jazan ASU joint venture moderates a strong underlying result. The Jazan item accounted for much of the $0.14 decline in equity affiliates' income and an unfavorable $0.10 in noncontrolling interest. The effective tax rate of 19.1% was 210 basis points unfavorable due to less tax benefit this year. We expect an effective tax rate of 19% to 20% in FY 2023. For the quarter, a non-service component of our defined benefit plans were favorable $0.04 last year and unfavorable $0.07 this year. As I shared with you last quarter, we now exclude the component from our adjusted results. Now please turn to Slide 19. Our distributable cash flow continued to climb, driven by improving EBITDA. While cash expenses included interest, cash tax and maintenance CapEx remains relatively stable over the last 3 years. Over the last 12 months, we generated close to $3.1 billion of distributable cash flow or almost $14 per share. From our distributable cash flow, we paid over 45% or over $1.4 billion as dividends to our shareholders while still having almost $1.7 billion to invest for growth. Our ability to grow distributable cash flow, especially in challenging conditions demonstrates the strength and stability of our business. It enabled us to continue to create shareholder value by increasing dividend and deploying capital for high-return projects. Slide 20 provides an update of our capital deployment. As you can see, we have over $36 billion of capital deployment potential through fiscal 2027. The $36 billion includes over $8 billion of cash, additional debt capacity available today, about $17 billion, we expect to be available by 2027 and almost $12 billion already spent. We still believe this capacity is conservative given the potential for additional EBITDA growth, which would generate additional cash flow and additional borrowing capacity. As always, we continue to focus on managing our debt balance to maintain our current targeted A/A2 rating. So you can see our backlog of nearly $20 billion will provide a substantial amount of growth in the future. However, please note this figure still includes the second phase of Jazan project that was completed in January as well as the capital required for NEOM at its original higher value as we work through the finalization of project financing. Moreover, we will include the $4 billion Texas green hydrogen project when the project reaches final investment decision. We have already spent over 30% and committed 74% of the updated capacity we show on this slide. We have made great progress and still have substantial investment capacity remaining to invest in high-return projects. We believe that investing in these high-return projects is the best way to create shareholder value for the long run. We continue to evaluate our capital deployment options and determine the best way to use available cash and trusted to us by our shareholders. Now to begin the review of our business segment results, I'll turn the call back over to Seifi.

Thank you, Melissa. Now please turn to Slide #21 for our Asia first quarter results. Our businesses were able to deliver positive volume and price despite the negative COVID impact in certain parts of China. Volume improved 7% supported by new assets. This quarter, we benefited from more than 25 new small to midsized traditional industrial gas plants which came on stream across the region over the last years. Price was up 1% in total, which is -- which translates to 3% in our merchant business. Although underlying sales grew 8% versus last year and energy pass-through was a positive 2%. Overall, sales [indiscernible] offset by a 10% weaker currency, which is obviously translation. Negative currency also reduced operating income and EBITDA each by about 10%. Operating income and EBITDA both improved versus prior year as better volume and price more than offset the negative COVID impact. Higher price and volume also drove margin improvement. Although China's government has relaxed its rules related to COVID, their subsequent high infection rates have impacted business activity. We expect economic recovery in China to take time. We anticipate power cost across the region to continue to rise, and we are taking action, which I mean pricing action, to mitigate the impact. Sequentially results compared unfavorably to last quarter, which benefited from some specific spot sales. At this point, I would like to turn the call over to Sid to discuss our European results. Sid?

Thank you, Seifi. Now please turn to Slide 22. As the chart shows, power costs for Europe moderated sequentially this quarter, but are still at a historically elevated level. Our commercial team has executed significant price actions to compensate to these costs in our merchant business and their hard work has paid off. Although we have fully recovered the higher power costs for the quarter, we are keeping a close eye on the dynamic power market in this region. As a reminder, power costs in our merchant business is the primary focus when managing the escalating energy costs in Europe. Our on-site business has contractual pass-through, which enables us to pass energy cost to our customers and almost all our national gas usage is for on-site hydrogen production. Now please turn to Slide 23 for a review of our Europe results. Successful price actions, we have worked hard to implement the last few quarters, drove the significant improvement in Europe's results. Compared to prior year, price increased 14% for the regions corresponding to a 24% improvement in merchant pricing. Volume declined 6%, reflecting challenging conditions in the region. Demand for our hydrogen was weaker as customers continued to optimize their own hydrogen operations. Our merchant business was lower, partly due to the divestment of our business in Russia. Energy cost pass-through was up 9% due to higher natural gas costs although it had no impact in profit. Operating income jumped nearly 50%, while EBITDA was up almost 30%, primarily due to strong price. Although unfavorable currencies reduced operating income and EBITDA, each by more than 10%. Price primarily drove more than 400 basis point, EBITDA margin increase. This was net of the higher energy cost pass-through, which lowered the margin by about 200 basis points. Compared to the prior quarter, volume was unfavorable due to weaker merchant this quarter and a favorable contract amendment in the prior quarter. Now I would like to turn the call over to Dr. Serhan for a discussion of our other segments.

Thank you, Sid. Now please turn to Slide 24 for a review of our Americas results. Underlying sales increased 15% despite the adverse effect of severe weather in December. Price improved further by 9%. This is equivalent to a 26% increase in the merchant business. Our team in the Americas has successfully raised the prices to cover the higher energy cost. Volume grew 6% due to better merchant and on-site, volume also benefited from a new short-term agreement, which will benefit Americas results for the next few quarters. Operating income was up to almost 30% over last year. And operating margin improved 300 basis points, driven primarily by the strong price. Volume also contributed to profits, but costs were unfavorable. EBITDA improved less than operating income because of our lower equity affiliate income due to unfavorable onetime items and lower medical oxygen volume in Mexico as the COVID impact subsided. Sequentially, the price continued to gain strength. Merchant price was up 7%, but volume was down 3%, following a strong previous quarter. EBITDA margin improved by around 400 basis points, primarily due to lower energy cost pass-through which accounted for three-quarters of that. We expect our planned maintenance activity to increase next quarter in parallel with our customers' plan turnaround. Please now turn to Slide 26 for our corporate segment. This segment includes our -- I'm sorry.

Samir, you need to describe [indiscernible] Slide #25, please?

I'm sorry, review the Middle East results and India before going to that. So please -- lets go to Slide 25 first for review of our Middle East and India segment. Sales and operating income in this segment are modest since our Middle East and India wholly owned operations are smaller in size. However, the segment's EBITDA is significant, it includes the equity affiliate income related to the Jazan gasification and power joint venture, our India joint venture, [indiscernible] Air Products and other joint ventures. For the quarter, an acquisition benefited sales and operating income versus last year but was partially offset by land maintenance activities. Although our share of the ongoing Jazan gasification and power joint venture net profit added to the region's results, the equity affiliate income declined by $28 million primarily due to the onetime benefit associated with the Jazan ASU joint venture finalization in the first quarter of last year. As Seifi mentioned before, we have successfully completed the second phase of the Jazan gasification and power project, and we have begun to receive additional income in the second quarter. Now please turn to Slide 26 for our Corporate segment. This segment includes our sales of equipment businesses as well as our centrally managed functions and corporate costs. For our sale of equipment activities, our LNG business historically has been the anchor, but our non-LNG related project activities have also grown in recent years to become major contributors to this segment. The cadence of project activities and timing of sales and profit recognition can vary the segment results. Our ongoing effort to support our growth strategy has also increased the centrally managed functions and corporate costs. For the quarter, the segment sales and profits were lower than last year, primarily due to lower sale of equipment project activities. We also continue to add resources to support our growth strategy. As mentioned before, inquiries for potential LNG projects have picked up recently. However, these projects take time to develop. We're excited, however, that we have signed 1 new agreement in the quarter and working hard to sign additional new projects. At this point, I would like to return the call back over to Seifi to provide his closing [ comment. ] Seifi?

Thank you, Dr. Serhan. Now please turn to Slide #27. The outlook for the global economy remains uncertain. However, we remain confident in Air Products and the prospects that we have in the future and the stability of our business which is supported by our robust capital deployment strategy as you have seen. Therefore, for fiscal year 2023, we have left our guidance unchanged despite the significant uncertainties that exists in the world. For the second quarter of fiscal year '23, which is usually our weakest quarter. Our earnings per share guidance is $2.50 to $2.70, up 7% to 15% over last year. We still see our CapEx at $5 billion to $5.5 billion for the year, including the approximately $1 billion for the completion of the Jazan project that we just talked about. Now please turn to Slide #28. We include this slide in all our earnings call presentations. It describes very clearly my view that an enterprise can only be successful for the long term when the people in the enterprise are motivated and committed to emission. And Air Products are higher pipes. Our mission as a company is to bring people together so that they can collaborate and innovate solutions to the world's most significant energy, environmental and sustainability challenges. We continue to build a diverse and inclusive culture. There are more than 21,000 people, feel they belong and matter and are motivated to achieve our goals. I believe Air Products is uniquely positioned to help the Board transition to a cleaner and better future, and we are putting our efforts toward that each and every day. Now we are very pleased to answer your questions. Operator, we are ready for questions.

[Operator Instructions] We'll go first to Christopher Parkinson with Mizuho.

Great. Seifi, just given all the macro uncertainty that's prevailing across the globe, can you just give us your current assessments of where you think you stand as well as the operating rates for the regional merchant businesses?

Thank you very much, Chris. Right now, obviously, it's very difficult under the current circumstances to predict what is going to happen in the next few quarters. But we feel very confident about our own operations and about our ability to keep our plants running and service our customers. And as I look around the world, we obviously saw the Chinese economy a little bit weaker in the first quarter than we expected. Right now, my view on the Chinese economy is we have to wait and see how it comes out after the Chinese New Year. We don't expect any kind of disaster or any bad news, but it's just a question of the rate of improvement, how would that be? We are very well positioned there. We have taken action to increase prices. And most important, as I said, we are benefiting from the fact that we have 20, 25 smaller projects that we usually don't announce, but they are standard industrial gas projects, they are coming on stream, and they are contributing. So we feel that we will be able to deliver on Asia in general. In Europe, the economy, again, was weaker than we expected in the first quarter. But right now, energy prices seem to have a stabilized -- power prices have stabilized. Natural gas prices have not yet. But overall, we think that we should be okay in Europe. And in the U.S., you saw our actions in respect to pricing. Last quarter, we got overall 7% -- overall for the whole company, we got 7%. But in the U.S., we got almost 14% price increase, which translates to almost 19% -- 20% price increase on the merchant side. Latin America is always very big, so we don't talk about it too much. So overall, we feel pretty confident that we should be able to deliver forecast that we have given you for the year.

That's helpful. And just as a quick follow-up, just given now that investors and your team has had an opportunity to digest the IRA, is there any key opportunity that's, let's say, specific to Air Products that you believe investors are missing? Is there something on the HyCO facility retrofits? Is there just anything else in terms of that materialization over the next several years that we all should be paying attention to?

Chris, that's a very, very good question. I don't want to comment too much about the IRA benefits because the law is that everybody can read that. But the opportunities for Air Products that we will definitely follow through is, number one, we did put carbon capture on our existing facilities. There is 2 benefits on that: Number one, we reduced our CO2 emissions; and number two, that gives us an opportunity to have a lower carbon hydrogen that we can sell at higher prices. We will definitely do that. Then we are benefiting from the IRA on a [ project ] that we had announced before the IRA, which was the project in Louisiana. We did that project with the economic space on -- no IRA benefit on $85 for CO2 capture. We were counting on about $50. So that additional $35 enhances the returns on that project. And then we will do significant amount of green projects in the United States. We did announce a project in Northern Texas and the -- definitely are working on other mega projects to produce green hydrogen in the United States. The IRA credits for $3 for green hydrogen production. Plus, the fact that if you make an integrated facility, you also get credit for the renewable power that you generate makes it very attractive to make these investments in the U.S. We are extremely well positioned with our pipeline in the Gulf Coast and with our know-how and with our distribution capabilities to do things that other people cannot do because anybody can already take advantage of the credit if you can do something with the hydrogen. I mean people can run around and say, okay, I'm going to build a plant to produce green electricity and produce hydrogen. But then what do you do with the hydrogen? Air Products is one of the very few companies who knows what to do with the hydrogen. We are a hydrogen company. Therefore, we are in a very unique position to take full advantage of the IRA registration. We are very pleased with that. That was a very significant step forward in the United States. And then the very good news for us is that, that has prompted other countries to take action. And I think yesterday or the day before that, you saw an announcement from the European Union that they are going to have a program of about EUR 280 billion to promote the same kind of things, which would, obviously, be very good for us because we are a global company. Okay, Chris?

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

This is Anthony Mercandetti on for David. Seifi, you mentioned in your slides your new capital structure and the changes on the capital costs and contributions to NEOM. What is the return on this project versus what you were expecting when you first announced the project in July of 2020?

Well, the thing is that I have 3 partners, and I don't want to speak for them and disclose the return on the project. But the thing that you have to take a look at is that we don't look at the return on the project because we are going to take the offtake and sell that and make money on that, and that is how we take a look at the return on the total investment. So on that front, the return on that is going to be in accordance with what they have given you a guidance, which is for every dollar that we invest, you should expect about $0.10 of operating income. So you have to look at total supply chain from Air Products' point of view. In terms of the specific return on the project, that is up to my partners to decide whether they want to disclose that or not. I don't want to disclose that because for us, that doesn't mean anything. It's the total supply chain. The important thing that you need to focus on is the fact that we are offtaking the ammonia at the same price that it was negotiated in 2020. Okay?

Yes. Understood. And as a follow-up on the green ammonia, if you did not lock in this price to purchase, how much higher do you think it would be today versus when the project comes on stream?

Well, it depends on what you would have negotiated with our partners. I don't expect it to have been significantly different. But -- because -- I mean you talked about additional capital cost, but as I said, a lot of the operating costs is being capitalized. So that necessarily doesn't affect the return on the project. But again, I just don't -- I have 2 other partners, and I respect them. And I don't want to disclose their financials. But as I said, please, from an Air Products' point of view, you need to look at the total supply chain.

We'll take our next question from John McNulty with BMO Capital Markets.

Seifi, you seem excited about the price of the offtake for NEOM basically remaining flat. So I guess why is that? Are you seeing interest from buyers right now that are higher than what you thought they would be at the time that you originally signed into this contract? I guess how should we be thinking about that?

Well, I think that's one way of putting it. The thing that we see is significant interest in the product. And obviously, as a businessman, we would like to offtake anything that we buy at the most favorable price that we can get. But I'm particularly interested -- the reason I keep mentioning that, because I just want to make sure that people don't think that, well, these guys said $5 billion, now it's $8.5 billion. Therefore, this -- the price of ammonia must have gone up. It did not. And it just -- look, one other thing, John. You know this better than I do. We are project financing this thing with some of the biggest banks in the world giving us money. They have looked at this project. They have looked at the return of the project, and they are willing to finance it. So I guess they all think this is a good project and a good prospect, and they were going to get their money back. You know what I mean?

Yes. No, for sure. I guess maybe looking at it from a slightly different angle. So when you think about -- like when I think about project financing, the benefit of it is it tends to juice the returns a little bit more, but it does take out some of the EPS on the -- tied to the equity that's being put to work because there's less equity involved. I guess when you think about the total capital of the project overall, the distribution side as well as the actual production side and the economics around that. I guess how has that changed relative to what you thought originally with the project financing now in place?

John, it has obviously improved because I'm putting less cash on the production side. So we are better off. And as long as the price of ammonia is the same. So we have made an improvement. We have another $1 billion that we were going to invest to do other things.

We'll go next to John Roberts with Credit Suisse.

ExxonMobil recently announced a blue hydrogen project in the Gulf Coast that includes ammonia as well. And it looks like it has merchant ambitions here. Since refiners are a large customer for Air Products, help us understand, would you have bid for that project as well? Or how do we think about how your customers might play in the hydrogen and potentially ammonia market?

Well, I mean I can't comment on the strategy of Exxon and what they're going to do. But this is a competitive Board. If Exxon decides that they want to get into the merchant ammonia business and make blue ammonia to sell, then we will have an extra -- an additional competitor. Hydrogen that they are going to produce a significant amount of that, from what I understand, is going to be used to replace the natural gas that they are using because the whole purpose of the project is to reduce their carbon emissions. So if they do that, now are they going to make so much hydrogen that they have extra amount to do merchant? I don't know. I don't have any visibility on that and all of that. That's up to them to do what they want to do. We would have [indiscernible]. You know what we are doing. And as I said, I'm sure other people will get attracted to these projects. But it's one thing talking about these things [indiscernible] actually doing the details. They just announced they're doing a fee. They have to wait until they do the fee, then they add the costs, and then they find out what the total cost is and all of that. But it's entirely up to them. [indiscernible] they decided to do it themselves, which is fine.

Okay. And then since the Alberta blue hydrogen plant will be the first really big project up online, do you think you'll get a premium on all of the hydrogen out of that plant? Or do you think some of the hydrogen is going to be sold with the existing gray hydrogen market.

The interesting thing that you mentioned with Exxon are projects in Canada. The customer for that project is Exxon. We are, right now, almost sold out of that project, and we are getting a significant premium, yes. Because Exxon, through their subsidiary, which we have announced this publicly, so I'm not putting anything new out, through their subsidiary, which is the [ Inferior Chemicon Limited ], they are going to use the blue hydrogen we give them to produce renewable diesel that they're going to sell in California at premium prices. And as a result, they are giving us a significant premium for the blue hydrogen that they are buying from us in Canada.

We'll take our next question from Steve Byrne with Bank of America.

Yes. You had some pretty hefty merchant price increases in Europe and Americas. My question for you is, how much of that had a surcharge in it given gas costs have dropped in both regions? Could you see some sequential decline in pricing in those regions?

Well, the question that you're asking, Steve, is very relevant. We obviously have increased the prices in order to recover the power cost. Obviously, at some point in time, if the power costs go down, then some of the customers would expect us to decrease those prices. And we listen to that and we will make a decision based on supply-demand situation as we always do. So it is possible. But if the price declines in the future, then that would be -- as a result of power price declining, therefore, theoretically, there shouldn't be an impact on our bottom line.

Okay. And just a follow-up on NEOM. Has the design of it changed? Is it still a couple of gigawatts of electrolyzer capacity? Or has this changed? Could you produce more than the 1.2 million tons of ammonia? It seems like you could for battery backup. Is that also enabling you to lead -- to have an unchanged ammonia price from this project?

Steve, you're asking a very good question, which is subjective in general discussion quite a bit. We are -- this is the first significant project that we are doing for green. We are obviously installing a significant amount of wind and solar capacity, and we are installing a significant amount of electrolyzer capacity. What these electrolyzers and the wind and the solar will do actually might end up giving us the capability of making a lot more than the $1.2 billion. But I don't want to get ahead of ourselves. I don't want to promise that. But you are on the right track that there might be an upside in that side. And I personally think there could be an upside, but we have to wait and see.

We'll take our next question from Mike Leithead with Barclays.

First question on NEOM. On the new $8.5 billion kind of all-in CapEx number, can you just give us some comfort or framework around how locked in that number is? Obviously, there's still about 70% or so of the engineering work left. Just any comfort around kind of what you're doing to make sure that number is not going to move again, say, in the next 3 years.

At this point, I can say that we have enough contingency there, and we have done enough work that I think that's a pretty good number. But nothing is 100%, but I feel pretty good about that number at this stage. I have Dr. Serhan on the line who is in charge of our -- all of our engineering and all of that. But I think [indiscernible] pretty comfortable that, that is a good number. We spend a lot of time making sure that when we are doing project financing, that we don't have to go back for additional financing. But we feel pretty good about the number at this stage.

Beside the engineering, we haven't made the major orders on the project. So basically, that's also back then for like [indiscernible] and even for the construction for the green element that's also being placed.

Yes. And just as a quick follow-on. With the new capital structure, that obviously can sometimes come with some level of covenants or restrictions around distribution. So just how should we think about the cash dividends from the project? Should they generally match income? Or are there some constraints or restrictions around the cash you can get back to Air Products?