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

Dr. Samir Serhan is my guest up here along with Sidd Manjeshwar. So Sidd's got a couple of decades of experience in marketing and treasury and finance and so forth, and glad to have him up here with us. Dr. Serhan has got a long time history in the industrial gases industry. He was with legacy Linde for a long time, was part of the legacy -- or the Linde Engineering Group. Then he spent a few years at Praxair. And he's been with Air Products, what, 6 or 7 years, and he's Chief Operating Officer. So it's a real treat for me to have these guys up here. A lot going on in the gases world, and these guys are front and center on the shift towards decarbonization.

So -- but maybe I'll start with kind of a high-level question, particularly Dr. Serhan, with your background in the not quite all, but most of the big industrial gases companies. And you were part of Linde Engineering. Air Products doesn't have an engineering group that size. You're clearly building some really big projects. And I guess my question for you is, how do you view the strength and the expertise of Air Products relative to the competing industrial gases companies? Where would you see Air Products as being most differentiated?

Thanks, Steve. It's a pleasure to be with you here today. Definitely, 3 distinguished companies, a very good track record, very, very different, which really proves the point there are -- you can get to the finish line in so many different ways. What really distinguish Air Products, in my opinion, from the others is really the hydrogen. I mean, 60 years of experience in hydrogen. Air Products started the sale of gas business for hydrogen where people at that time were questioning, is this really viable? Does it make sense? And now many people are doing it. We have the largest production right now of gray hydrogen, around 9,000 tons per day, and also a significant amount of syngas in addition to the hydrogen, the largest pipeline network of hydrogen also in the world, hundreds of patents. We have really set the standard about how to operate hydrogen plants from reliability, availability, efficiency. So many things really that distinguish Air Products, and it's really hydrogen is part of the Air Products' DNA. And this is really part of why Air Product was the first mover in the energy transition to go to blue hydrogen, green hydrogen, very well positioned for that, and that's really why we're here acting as a first mover with around $15 billion investments in low-carbon hydrogen as we speak. When it comes to capabilities, definitely, these mega projects, they are not risk-free. They definitely come with risk. I mean -- and we need to manage them. But we've been preparing the organization now for 6 years to really prepare for these projects. We started 6 years ago with the 3 execution centers worldwide. Now we have 8 execution centers where we really do engineering, project management and procurement. We can shift the procurement from one continent to another because of the currency, because of the inflation, because of many factors. We have built in our headquarters in Allentown, state-of-the-art R&D labs. I mean, very, very impressive to see about what we're really doing there in regard to energy transition. We have hired around 3,000 people in the last 3 years to position us, some of the top talent really from competition in industrial gas, EPC companies. We evaluated, revamped all of our processes, tools to make them more efficient, well connected. Again, because to get to the finish line, you need to act -- work hard and also act smart. But if you do it smarter, you have a lot better chance of making it to the finish line. And we really try to adjust all of our tools and the processes to manage this so we can really consistently deliver. And we managed to do this, the $2 billion project that we did in Saudi Arabia on Jazan ASU. That was one of a kind. We delivered on that, 27 million hours without a lost time incident from a safety -- on schedule, on -- I mean, significantly below budget. Then we really converted that to the Jazan transaction, which is $12 billion. We finished Group 1 assets October 2021. I mean, not many people talking about it. Many people at that time were questioning, are we going to be able to close this one-of-a-kind, $12 billion sale of gas type of a project? We did finish it. I mean we got to Group 1 assets back in October 2021, and we had 800 people since then commissioning this one-of-a-kind facility. It's one of the most complex processing plant on earth, and we've successfully managed to commission the first Group 1 assets. And now we took over in January of this year, Group 2 assets to really conclude this transaction. So again, lots of a track record of really delivering. We announced back in 2020, the largest single ammonia train in the world for Gulf Coast Ammonia where we supply them hydrogen and nitrogen. I mean, again, between our sale of gas part and also including the project execution of the ammonia plant, that's like around $1 billion. This project is going to come on stream this summer. I mean, it's doing good on budget, schedule, safety. Again, so we do walk the talk when it comes to really these capabilities to deliver on these mega projects. But again don't want to fool anybody and say these are risk-free. They are not. But we are focused and we're making them happen.

And these 3,000 headcount increase, how would you allocate that within expertise? Did you build out an engineering capability to build these mega projects?

It's really these people are a like more engineers across all disciplines, several structural, mechanical, electrical, project managers, project controllers and procurement people worldwide. I mean, very, very solid capability. This is when everybody was impacted with the COVID, letting people go, lots of insecurities. We brought 3,000 people incredibly competent to really deliver on these projects and we are delivering.

You highlighted that Air Products' focus on hydrogen is differentiated, and I clearly agree with that and I would say, in particular, your willingness to go down the path of green. My question for you on that is, what do you see as the primary end market for the green hydrogen projects? And what gives you that conviction?

I mean we do see the world growing. And the world is going to need more energy, and the world also wants more clean energy. So we really do see for a significant amount of time that we're going to need to produce significant amount of gray hydrogen, blue hydrogen and green hydrogen. The switch just from a gray to green, it's unrealistic. You cannot flip a switch and you change. I mean, from a cost -- from many, many different factors -- manufacturing capacity, availability of renewable energy, it just doesn't happen. So this has to transition over long term. We do see significant demand for low-carbon hydrogen, whether this is blue or green. Some of it is for mobility but we also see for industrial. And again, the way our customers see it is really more about carbon intensity versus what the color of the hydrogen. And of course, if it's a green, you have a much lower carbon intensity than the blue and the different versions of the blue. So again, like our project in Canada, Edmonton, I mean, that's as green as it can get. We're using natural gas hydrocarbon to produce the blue hydrogen, but we're basically capturing equivalent of around 100% of that CO2 and sequester it. But we do see the demand. The -- our Edmonton project, when we announced it, we didn't have offtakes. But we did see the market is there. We've been negotiating with customers and we managed to close one with IOL in Canada, where they're taking more than 50% of that volume and with a premium for that low carbon intensity. And we really do see the demand also for hydrogen. We could have sold the NEOM product a long time ago and also with a margin, with a profit, meeting our target. But we're really looking for the proper timing. Because it's a specialty product, it's not a commodity, and you really need to wait for the time. I mean you saw Europe is talking about 10 million tons of green hydrogen by 2030 to produce in Europe and 10 million to be imported to Europe. I mean, you're going to need a couple of hundreds of NEOM by 2030 to meet that demand in Europe. What are those plans? So we do really see, I mean, and we're talking to so many of the customers about formability and also for industrial use.

And in mobility, where do you see the most probable demand? Is it autos? Is it buses? Is it trucks? And maybe that varies by where in the world.

Yes. It's heavy duty. I mean, heavy-duty transportation, so really more buses and trucks. So like the product of NEOM, you only need 14,000 trucks, heavy-duty trucks to take it. If you go to Germany, you have a lot more than 600,000 trucks. So you're really talking about a very small proportion that [ NEOM ] -- what really the capacity today, I mean, what NEOM is really supplying. It's just a drop in the ocean.

And speaking of NEOM, you mentioned on your call that you had secured some financing or you were about to get some. Can you give us an update on the financing for NEOM?

Yes. Well, really, I mean, celebrating. I guess, yesterday, we did dry close for the NEOM. I mean, with the 20 lenders, I mean, it was very, very successful. And I'll let actually Sidd to speak more about this. I mean, it's a huge milestone for our NEOM operation.

Sure. Thank you, Dr.Serhan. Thanks for the question, Steve. At our early Feb earnings call, you heard Seifi mention we've made good progress with these global financial lenders. So yesterday, we signed all our financing arrangements with over 2 dozen large global sophisticated project finance lenders who are giving us close to 30 years' worth of maturity in terms of paper as well as paper probably in the 5% to 5.5% interest rate. But it's another reaffirmation and validation of our energy transition story and seeing money -- smart money from global financial institutions putting their heft like we're seeing with public policy globally as well behind our strategy. So we're pretty delighted with the outcome.

Let's continue on NEOM. And you made a rightful comment earlier that these big projects are not risk-free. Talk a little bit about the scope of NEOM going from $5 billion to $8.5 billion. That's not just cost overruns, it was -- some of it was a change of scope. Can you elaborate on that? That's a big, big change.

Yes. To go from the $5 billion to the $8.5 billion, there is $1.8 billion is really related to the project financing -- again, additional joint venture cost when it comes to the cost of borrowing money, paying interest on the money that we need during the construction period. So it's really more like what we also did with the Jazan transaction. So this is a pretty standard project finances cost that you have to deal with and add to the cost, but it does improve your return on equity at the end of the day. Then there is $1.7 billion related to 2 items. One of them is inflation. It was around $0.5 billion. And again, the NEOM project was announced in 2020. So it's really right in the middle of COVID, and it really saw the whole wave of the inflation of what happened the last couple of years. And again, that's like around 10% where we saw inflation. We tried to manage it. I mean, we saw a lot more headwinds and inflation, but we really managed it properly. We reengineered some of the process units that need to try to reduce the cost. We evaluated some of the like the big reactors, some of the units where you have exotic materials. We reengineered also to contain that cost. So again, it's really not bad for that duration where you had heavy, heavy inflation, basically really only to be dealing with like 10% on the project. We have placed orders now for the majority of the items. So this is really we're more certain about the cost, including even the construction. We are [ far ] stages in the engineering of the plant, the whole complex. Then there is $1.2 billion related really to scope shift. And that scope shift really is basically like related to -- again, NEOM is a big city or it's a big country with the ambitions what they are really trying to build. And we just really wanted to -- us and our partners, we want it to be as much independent as possible from the rest of NEOM. And that's why we really shift lots of the scope to really be within the production joint venture just so can be self-sufficient. And that's really drive lots of the cost. And we also moved some of the costs that's really that you can carry annual expense. We moved that really upfront and capitalized it. So that's where this $1.2 billion is coming from. So...

So we've made our own estimates of your cost for this green ammonia that you're the sole off-taker from the JV on our own estimates, we're trying to -- what is that going to cost you. A big chunk of that is the return on invested capital of this what was $5 billion now, $8.5 billion. But on your last call, Seifi was very clear that your price for that offtake isn't changing. And it seems like the only way that happens is if the ROIC to the joint venture goes down. Is that fair? And why would your partners agree to that?

I mean, let's just start with the Air Products side. There is no doubt that the combined return for Air Products, part of the production joint venture, taking the offtake at a certain cost and selling it to the market, we feel very confident, we're going to be above the 10% IRR, the combined total return. What really -- again, we cannot reveal too much details about the production joint venture because of our partners. But again, keep in mind, ACWA Power is significantly owned by PIF, which is really Saudi government. NEOM is owned by the Saudi government. Green hydrogen is very important for Saudi Arabia that need to produce green fuels and to be associated with because they're also heavy producer of the hydrocarbons. So from the government perspective, I mean, this is well calculated. They wanted to get into this. And it's a first mover advantage. Today, based on the work we're doing and people are questioning, should we do a green hydrogen project or not? If I do a second NEOM today, my cost is going to be around 18% less. This is the magic about this industrial gas model. It's the 360 learning. So you cannot just keep talking and debating. You need to get going and adjust as you go and you learn as you go and now you get lot of efficient. So while people are still doing visibility and a pre-FEED and a FEED and all of this, we're way ahead of that. That means when it comes to really optimizing this plan from capital, from O&M, from efficiency and also competitiveness of the product at the end of the day.

And you highlighted that you announced this project in mid-2020. I mean, we've had 5 hydrogen conferences and that was before any of those. It's just a pretty long time ago. At that time, you had a $1.5 billion capital budget to then take that offtake of ammonia and distribute it. How has your thinking changed since then on what you're going to do with that green ammonia? And is that $1.5 billion of CapEx still fair?

$2 billion.

$2 billion.

Yes.

Sorry.

Yes. It's -- we're definitely committed to that. I mean we have announced recently that we have in the process of engineering and building 3 green energy import terminals in Europe: 1 in Hamburg, Germany with a big support from the German government, 1 in Rotterdam, in Netherlands and 1 in the U.K., Immingham. And these are basically going to be terminals where we're going to be importing green energy, green hydrogen, green ammonia from NEOM and other parts of the world. And basically, you're going to have there tanks, you're going to have ammonia crackers to crack it to hydrogen, to basically you might liquefy it and distribute it to customers for mobility and for industrial use. So we're really fully following it through to what we really started with, and we're going to see more of that in other continents of the world.

I would have said that 2.5 years ago, what you're more than likely going to target for that would have been Asia. It sounds like it's more Europe given the changes that have occurred. Is that fair?

I would say that's fair. I mean, we are talking to Asian customers about also they're interested in the green ammonia and the blue ammonia. So there is interest. But I would say Europe is really leading the pack right now when it comes to the product.

And will some of the ammonia storage and dissociation capability and all that, that would be required at those 3 terminals, would those be Air Products investments?

Correct. And that's really part of our core capability that also distinguish us. Others do execute this project like custom-made. They hire ABC company. They spend lots of time doing this FEED and doing this calculation, and they start from scratch. What we do, we create the products. Like a few years ago, we wanted to build a liquid hydrogen plant in La Porte, Texas to basically liquefy natural gas -- hydrogen gas to make it liquid and sell it to our customers by trailers. We haven't done a liquid hydrogen plant for 25-some years. So -- but an A team on it, brainstormed it, developed a product, and we basically managed to deliver that in a couple of years. And now this plant is running. And now actually, we need for all of these terminals and all of these locations for green and blue hydrogen, we need these liquefiers. So we're going to be building 10 or 12 of these all over the world. And that's the product concept. That's really the 360 learning. The same thing. 2 years ago, we said, okay, we need to crack -- we had -- we want hydrogen from NEOM. But to ship hydrogen was difficult, energy-intensive. So we had to convert it to ammonia. So now when we ship it as liquid ammonia, when it gets to destination, we need to crack it back to hydrogen. We looked in the world about where are those ammonia crackers. We find many, but their efficiency are incredibly not good. So we said, get our experts on this. Let's put our A team on this, and we did manage to do in our product. And now we have a product that's a fraction [ loss ] of efficiency compared to what's really available in the market. That can really distinguish us from others. And now we're going to need to build 10, 15 of those worldwide. And that's really the power of learning and creating those products that we managed to do at Air Products.

You're building this big blue hydrogen plants in Louisiana and tied to your pipeline. And we toured some plants in the last 2 days that receive hydrogen from Air Products. Do you view that incremental demand -- or incremental supply of blue hydrogen is primarily going to your existing customers that are currently getting gray, so it's a shift from gray to blue? Or do you see the outlook for increased demand such as for renewable fuel?

I think it's going to be, Steve, all of the above. I mean, some of our customers because of their carbon intensity goals, they need to switch from a gray to blue or green. So we can supply them. So we're going to be putting in that pipeline, which is 1,000 kilometer long between Texas and Louisiana, we're going to be putting all kind of hydrogen. The gray hydrogen that exists right now, blue hydrogen from Darrow and maybe green hydrogen from our Texas facility or from NEOM. And now we have this hydrogen with different low carbon intensity and [ it's spoken claim ]. We basically give you a certificate for what you really want to pay for, for a carbon intensity, for whatever application. Some of it is going to be for mobility, some of it for refining, some of it for renewable diesel. I mean, they're looking for that because there is LCFS credits in California that would definitely reward you for this low carbon intensity. Some of it could be also a blue ammonia that can go on the ammonia pipeline. I mean, that goes from Louisiana all the way to the Midwest. I mean, if somebody wants to buy low-carbon ammonia, I mean, so...

And then maybe another one on hydrogen, and that is this Texas project that you recently announced with AES. The question I have on that one is your -- there seems to be some level of uncertainty as to how the IRS is going to force compliance with the renewable energy that you would use to make the green hydrogen, whether that's hourly compliance or annual compliance. Is it fair to say your 200 ton per day target is assuming the most stringent scenario? Could it go meaningfully higher than that given the 1.4 gigawatts of renewable power that project is going to have? It seems like you could generate more than 200 tons a day.

Yes. I mean, we're in the process of doing this as we speak, Steve. I mean that project is not FID. It's not in final investment decision, but we feel very good about that project. We are now finalizing some permits, some approvals. We're doing some in engineering to try to define the scope, the sizing of the different units. But at the end of the day, we're going to do the capital optimization. I mean, we need to make sure that the cost of the renewable energy, wind and solar is going to be as most competitive as possible. We need to make sure that the products that we're going to be making and we're going to get the most incentives out of the IRA. We're going to make sure that all of the electrolyzers that they're going to be highly utilized. So this is all part of this optimization we're doing and some of the learning we've done from NEOM basically really to try to optimize the configuration to give us the most competitive product.

Okay. Let's deviate from hydrogen here for just a couple of more minutes. The merchant price increases in Europe in the last year have been incredible. In your experience, have you ever seen merchant pricing that strong? And does it surprise you? And do you have any concern that you're going to have to give some of it back?

It is definitely incredible. I mean -- and this is something I just want to take the opportunity. We spend lots of energy to talk about these mega energy transition projects and not talking about our core traditional business. But you can really see that -- I mean, just looking at the last quarter results, the $2.64 earnings per share. I mean, that's 6% above last year and 20% if you really take the currency issue and also the onetime are related to the Jazan ASU. When you really look at Europe, equivalent of a 24% price increase on merchant. I mean, that's incredible. That's really amazing. When you look at Asia, 7% volume growth. 25 plants we started in the last 12 months in Asia. When you look at America, 26% merchant price increase. And when you look at the volume, 6% volume increase. I mean, these are very, very solid numbers besides the plans we're building in Asia with our joint venture that we own in INOX AP in India. We're building 18 plants for them, small to midsize, you don't really hear about. This is all going behind the scene. We're really delivering on this -- expanding our core business because it is important. We have more than $1 billion of electronics projects you don't hear a lot about. But this is all happening behind the scene. So we're definitely still very much focused on keeping market share and our competitiveness when it comes to our core business while we're growing those mega projects to achieve our double digit earnings per share growth.

Anybody want to jump in here with a question?

So obviously, you have this massive amount of spend over the next few years on these projects. You guys have a single A rating. Any concerns about losing that single A rating, a willingness to lose that single A rating? And if not, can you just kind of describe why there's such an importance in your industry of that high rating?

I think Sidd, as our Treasurer, I mean, you will be the best qualified to answer this, Sidd.

Thanks for the question and a great question. I think we've got a very strong commitment to the A/A2 rating, not only to the rating agencies but also to our customers. As you heard Dr. Serhan mention, we're the largest player on the on-site business model, right, where you've got assets sitting alongside your customers for multi-decade periods. So I think they appreciate the strong rating because it gives them comfort in doing business with us as well. And in our conversations with the rating agencies, we made that commitment very clear. They appreciate that A/A2 rating. Dr. Serhan also just mentioned, we put close to $1 billion in the Jazan Group 2 transaction in January this year, right? I think the agencies again appreciate the nonrecourse nature of that. And in our earnings, we have a capital allocation scorecard that we give investors visibility into how much capital capacity we have as well as how much project backlog we have, right? And candidly, that leverage number for us as a company for an A/A2 balance sheet, we've been very underlevered for several years. So now we're surgically putting that balance sheet to work. We've got a lot of capital discipline, like you mentioned, and we are good stewards of capital. But that commitment to the rating of A/A2 is very strong from our perspective. And we have no issues with that from a rating agency perspective either.

Any others? I have one more. Maybe 6 or 7 years ago, I toured a nitrogen plant in China that had old gasifiers, and 15% of the coal was going out the stack. And then on the other side of the facility, there was a big Air Products' ASU and there was nothing coming out of that stack. It's coal gasification using oxygen instead of air. Do you see more opportunities like Lu'An?

I mean, today, in addition to the projects that we have under execution, we have around more than $100 billion of opportunities we're evaluating worldwide. So it's a pretty heavy pipeline we have of opportunities that we're evaluating. We're definitely not desperate for project. We're being very, very selective. Where it is in the focus today, to be honest with you, that means it's the Americas, it's IRA. That's where we really see more certainty. I think in China, I mean, they're evaluating many things, including CO2 footprint, what they're going to do about it. So the many question marks, geopolitical situation there. So really, again, our focus Americas, IRA, green, blue hydrogen, Europe, Middle East. China is somewhat wait and see now what's going on. And really, when it comes to coal gasification, we would be interested in that. We have some of the best technologies in the world. It's really with the CO2 capture and sequestration.

Okay. And then any thoughts on helium. Is your outlook for helium to remain tight? And what are you doing about it?

We're doing good. I mean, many of our competitors claimed force majeure last year. Air Products did not. We have a very diverse supply base for helium. We're very fortunate in that. That gives us high reliability for our suppliers, our customers. And on the top of that, we basically invested in building a cavern in Texas. That's now operational where we basically store helium on an as-needed basis. So we have a very robust supply scheme for helium, and we're fortunate to have that while others are claiming force majeure. And we also managed to get spot volume opportunities because of that, which is -- with nice margins that would definitely also help.

We are out of time. Please join me in thanking these fellows for their presentation.

Thank you.