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

Good morning, everybody. We'll go ahead and get started. The first thing I need to do is just to read our disclosure here. So we are required to make certain disclosures in public appearances about Goldman Sachs relationships with companies that we discuss. Disclosures relate to investment banking relationships, compensation received or 1% or more ownership. We're prepared to read allow disclosure any issuer upon request. However, these disclosures are available in our most recent reports available to you, our clients on the portal. So with that, listen, we'd love to welcome to the stage the Air Products team, Seifi Ghasemi, the CEO, who I was looking today. It's been almost 10 years, 9 years, which it went fast. I'll tell you that. It seems like it's 4 or 5 years ago that Seifi came in and really started to change the culture of Air Products, took out a lot of cost. And his favorite slide on the slide deck, the margin started to go up pretty strongly. Melissa Schaeffer, the CFO. She's been with Air Products for 7 years. And so, again, very happy to have both of those 2. Air Products is a $60 billion industrial gas company, a $60 billion market cap. Revenue is about $13 billion, 40% comes from the Americas, about 1/4 each in Asia and Europe, and they're in the midst of a very exciting and emerging kind of blue green hydrogen transition with over $15 billion of capital that's been committed to that. So I think Seifi, if it's okay with you, maybe we'll start there because I think that's certainly where we get the most questions.

So maybe just the first 1 is, in general, the inflation Reduction Act has done a lot for the industry. I think it's done a lot for Air Products. What specifically has that changed for the way you look at the business, the way you look at the strategy of Air Products going forward? And where will we see it the most?

Well, first of all, Duffy, it's great to be here. I have had the good fortune of knowing you for a long time, even before my Air Product is and so it's always good to be on stage with you. I think you're asking an excellent question. The IRA inflation reduction act, is obviously addressing the issue of climate change not through a carbon tax, but through incentivizing the reduction of the price of green energy in such a way that it generates demand. So fundamentally, IRA is going to make it cheaper for us to make the same product that we would have made otherwise, or we might not have even made it, and therefore, then a chemical company or a steel company or a trucking company uses the green energy, then it is cheaper than it would have otherwise been, and therefore, it makes it. So it is really is stimulating demand. Therefore, what it does is that it creates an opportunity for us that if it is stimulating demand, and we see the demand, therefore, we will build more facilities, and we will build more facilities in the United States of America. The particular thing about the IRA that I think is excellent is that it addresses the real question, which is it is promoting hydrogen because both blue and green hydrogen, because hydrogen is the energy of the future for hard-to-decarbonize sectors like steel, like heavy trucks, like chemicals. And therefore, by designing the program to incentivize production of blue and green hydrogen, and the fact that it is balanced that it is both blue and green so that the transition can go -- move forward smoothly, I think it's a brilliant piece of legislation, and it is going to significantly motivate companies like us and other companies in order to produce the product. Now we are very fortunate because we have been in the business of hydrogen for 60 years. We know hydrogen -- we have the infrastructure and all of that so that we can immediately act and respond to that. There's other people who are running around aspiring to the hydrogen companies, but they are going to find that it's not that easy. So from our specific point of view, being a world leader in hydrogen, this is a very good incentive for us to significantly invest in the U.S., which is what we will do. And we have already announced the project.

Yes. And so I'm going to ask a number of questions. One, there's some talk now with the budget that maybe they would go back and make some alterations to the IRA as part of whatever negotiations happen between the White House and the Congress. Do you worry -- I mean, obviously, you would have a good view for where all the different legislatures are on the hydrogen piece of the IRA. Do you worry that there's any chance that somehow that level of subsidy would come down in some kind of negotiation around the budget?

Well, the thing is that, from my point of view, first of all, we made the announcement about some of the projects that we were doing even before IRA existed. Because if there is no incentive, then the price of the product that we are making is higher, which means that the demand is lower. So instead of 5 plants, we will end up building 1 plant. So it is not as if our strategy with distribute. We announced the project $8.5 billion project in Saudi Arabia in 2020. At that time, nobody even thought about IRA. We announced our $5 billion project in Louisiana before the IRA. So the good thing about the IRA is that it will increase the opportunity, but it's not going to negate some of the things that we are doing.

Okay. Fair enough. And then when you analyze the benefits you get in the IRA for both blue and green, do you think it advantages one significantly more than the other, where it would actually drive more capital into one versus the other versus a natural base?

No, I think it's a very -- the $85 for sequestration is going to make it possible to make blue hydrogen and blue ammonia very competitively. And then the [ $3 ] for green hydrogen is going to, again, make it competitive so that people can use the product at the reasonable price. I think it's very well balanced. And what I foresee, at least from our vantage point, is that we will do both kinds of projects.

Okay. And is there a way to quantify maybe how much that accelerates your ability to put capital to work? I mean, before the IRA, and -- I mean, is it an extra $10 billion over 10 years? Is it $20 billion? Is there a way to kind of quantify how much help that will give you or how much more likely it will make you to spend capital to get that return?

For us, in the next 10 years, it could be $100 billion.

Okay.

It is -- because the IRA is the beginning, right? Now that we have the IRA, the next step is all other states in the United States going to adopt the low carbon pure standards that California has. If that comes, which is on top of the IRA, then the opportunities -- so I think that with the federal government taking the initiative, that is a very positive step, and it is going to move everything. So the opportunity in the energy transition, I mean, you know the numbers. When you look at the energy that we use, all you need is 1% of that energy to be turned into green and it will create hundreds of billions of dollars of opportunities. So we are not -- I don't foresee us being constrained by opportunities. We are going to be constrained finally by the size of our balance sheet and the fact that we want to have an A rating. But one trend that we have seen, which is a very positive trend, and you have actually seen it, is that we are able to project finance some of these projects. So instead of our own cash, then we lever that. So now we can use to do 4 projects instead of 1 project because of that. That is a very good development, it's obviously a positive. So it is going to make it possible to do a lot.

And you brought that up on the call yesterday, if you start project financing kind of on a larger scale, obviously, you did it with NEOM or [ announce with them ], how does that change the economics of the actual project itself? Do you bid away, I guess, some of the advantage you get from project financing into the project yourself? Or is the unlevered return the same. So you're just getting a much higher kind of equity return back to Air Products. What would be the strategy around the financing role?

No. I think you said it very nicely. What it does is that it creates an opportunity to make a higher return on the equity that you are putting in return on equity goes. But overall, you see Air Products, if we do project finance, to take NEOM, and let's say that we project finance it and we get a 5.5% interest, we could have gone to the bond market as we did and raise the money at 4.5%. So the project financing, from an interest rate point of view, it doesn't change things. What it does is that it gives you more room of using your own cash, and it gives you the opportunity to make more money on return on equity calculation.

Okay. And 1 of the changes in building out particularly blue in the U.S., we're going much more to the ATR from the historic SMR -- and there's not a lot of those globally. Is there any risk that those plants will have start-up issues or meaningful start-up issues? Or do you think you've got enough exposure to the couple that you've had -- you know that, that's not a big issue as we start constructing ATRs?

But the technologies that we are using, ATR, we are using it in only 1 location, which is the plant that we are building in Edmonton. And there is a very good reason for it because, in that plant, not only we produce hydrogen ourselves, but we are processing the hydrogen that our customers, that is not fuel. So that kind of requires a different process design and so. But beating the best technology for converting natural gas to syngas is actually partial oxidation. And that is a technology that is our own technology, and it is [indiscernible] technology and all that. So -- and that has been tried many, many times before. This is one of the things that sometimes people say, they'll say, you were talking a lot about gasification, we haven't seen any gasification projects. Well, what you are doing with -- we are gasifying -- [indiscernible] coal, we are gasifying natural gas. But -- so I do not have any concern about the so-called technologies that we are using for producing blue ammonia or blue hydrogen or blue hydrogen.

Okay. Fair enough. And maybe to move off the IRA to what may be a European equivalent, obviously, I think the Europeans kind of woke up a couple of weeks after the IRA and said, "Wait, this impairs our industry quite a lot on a relative basis." So there's been talk in Europe of a counter project. How do you think that plays out? Will it be country by country? Will they figure out a way to do it kind of across all the EU? What will be their response? And will it be more of a carrot or a stick do you think at the end of the day, as they try to transition and help out the hydrogen industry there?

I obviously don't know exactly what they are going to do, but if I had to make a prediction in terms of what they're going to do, Europe is not going to do an equivalent of an IRA because, in the U.S., you can incentivize the producer. Well, there is no producer in Europe. They don't have natural gas and they don't have a lot of sun and wind. So it doesn't make sense to incentivize somebody. If you put -- so whatever -- if they put an equivalent of IRA, we are not going to go build the plant there because there is nothing to do. So they are going to focus rightly on incentivizing the consumer. That is, they are going to go to the steel company, right, and saying that you are putting in 2 tons of CO2 for every 1 ton of steel you're making, if you use green hydrogen to do that, I'm going to give you x dollars per incentive to compensate for the cost. So it is the same thing at the end of the day, but they are -- that is I think what we will have. But they are going toward the stick that is they are definitely going towards carbon tax. And for our practical purposes, they do have a carbon tax. So they are going to not go into the steelmaker and saying, "Look, it's going to be painful. I'll help you. But by the way, if you don't do it, then you have to pay the tax." Which is the direction that Canada is going to.

Okay. Okay. And then maybe just kind of 1 last group of geographies. Folks like Japan and Korea had actually been kind of early movers on hydrogen in some way, at least in the press. Now they've been surpassed by the U.S. and the IRA, it's gotten all of us. Where do you think Japan and Korea and some of the Asian nations are with their hydrogen strategy? And as the IRA changed their view at all where they feel like they have to do more to kind of compete for resources in hydrogen to move where they want to go?

Countries like Japan and Korea are in a very tough place because they have no possibility of making this stuff. They have to import a lot. Therefore, IRA, and therefore, their issue is supply. And that is why they are going and talking to everybody under the sun and trying to promote projects, and they are talking about some projects that doesn't make sense. But, fundamentally, their issue is, how do I get an investment in a blue ammonia facility in the United States so that when I need it, I can get it. That is their biggest concern is access to the energy. So they are going to be totally dependent on 2 locations in the world, right? It's the same way that they are with oil. They are going to be dependent on the Middle East, and they're going to be dependent on the United States or to especially blue ammonia. And this is why I think most of the imported energy will be in terms of blue ammonia. And when you look at the future, I mean, I don't know how long in the future, they might start thinking that, why am I buying LNG? Why don't I just buy blue ammonia because it's decarbonized. And then I don't have a carbon problem, and I get it. But fundamentally, their issue is supply. So they will be after companies like us that make it for us. But the issue -- the fundamental issue is going to be they want equity in some of these projects and not everybody is too excited about giving them another equity.

And then maybe from the demand side on blue and green hydrogen, how do you see that market developing over the next 3, 4, 5 years? Will it be kind of a public market where there will be a known price what people are paying for? Will it be a lot of kind of negotiated deals with, I'll make it up you and the Frankfurt government may be doing something on their bus system? Just how do you see, I guess, the demand side developing? And how much of that will we be able to see as far as price discovery, volume discovery, that type of stuff?

At the beginning, Duffy, it's going to be private negotiations with different people because there's not going to be a lot of supply. There's probably going to be more demand than all that. But then, 10, 15 years from now, I can see that being like there is some kind of an index for blue hydrogen and some kind of an index for green hydrogen that people will look at and that would fluctuate based on supply and demand. Because if it's going to become a source of energy, then it is going to behave like the source of energy that we have.

But in the beginning, you think it will be mostly just.

Yes.