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

Good morning, and welcome. My name is Dave Begleiter of Deutsche Bank's U.S. [ chemicals ] team. And I'd like to welcome you to the second day of our Global Industrials, Materials and Building Products Conference. Leading us off today is the team from Air Products, led by CEO, Seifi Ghasemi; and the Treasurer, Sidd Manjeshwar. So with that we'll go right into the Q&A portion of the presentation. Seifi and Sidd, welcome.

Thank you.

Thank you. Great to be here.

Seifi, Air Products has been leading the way on the energy transition. On that note, what has the Inflation Reduction Act meant for clean energy development in the U.S.?

Well, what the IRA, Inflation Reduction Act, does is that it basically creates an incentive to reduce the cost of renewable energy. Now some countries give that incentive to the consumer. In the U.S., the incentive has been given to [ client ], so it makes it cheaper for us to produce clean energy. And that is obviously an incentive for [Technical Difficulty]. I think the IRA is a very, very excellent [ incentive ] system. It's a great piece of legislation. And the reason that I like it a lot is because it really addresses the key issue of climate change, which is the decarbonization of heavy industry, heavy trucks, steel making, chemicals, and all that, which requires [ hydrogen ]. So the people who have designed it, they're very intelligent. And I congratulate them that they said, "Look, we need to incentivize [Technical Difficulty]. The solution from the cars is fine, we can go electric, but that is not the biggest source of carbon dioxide going into there. It is the heavy industry. And for every industry, you cannot electrify [ tips ] or steelmaking or chemical. So the only solution is hydrogen. Therefore, the IRA is heavily tilted towards hydrogen, which obviously [Technical Difficulty].

Since last August, when the IRA was signed into law, what have you seen in terms of clean energy development picking up in the U.S.?

So what we have seen is 2 dimensions. One is that a lot of people are a lot more interested in purchasing or buying between [Technical Difficulty] hydrogen or [ through ] hydrogen and all of that because they know that it will be more cost competitive. But the other thing, which is as important as anyone, is that we are seeing people wanting now to invest in the United States because if they need hydrogen, they are sitting in Germany. The only way to get hydrogen to them is to make it in the U.S., then convert it to ammonia, shift to ammonia, break it back to hydrogen and give it to them. But if the same plant was built in the state of Texas, one can give them hydrogen right from the pipeline, significant cost savings. So there is a significant amount of serious talk about people building their chemical plant, their steel plant, and those kind of industries in the U.S. and just use the hydrogen right here than having to transport the hydrogen.

Are you seeing more competition in the U.S. for these projects amongst your competitors?

Well, definitely, David. I'm going to say something which [ I believe ] is self-serving. And it’s when you say competitors, there is no competitors in the sense that we are so far ahead of everybody else that we don't feel somebody's going to eat our lunch. We've already eaten our lunch and the [indiscernible] dinner.

Very good. So in contrast, Europe has tried to replicate some way the IRA. How is their Green Industrial Plan progressing today?

Well, in Europe, what they are focused on is on incentivizing the consumers, which I fully supported because in Europe, they can't make this stuff. So yesterday, you saw the German government making the announcement that they are -- if you convert to green hydrogen, they give you $4 a kilogram. So they are incentivizing the customer that, "Okay, if you sign a contract and you buy the stuff, I give you $4," which is significant. Japan is announcing. So I think they are going in the right direction by incentivizing the customers. And there is, as a result, significantly more interest in green hydrogen.

How long will take over there to see that same store development we've seen in the U.S.? How long will it take to see these projects come to fruition in Europe, do you think?

In Europe, it is a question of developing the demand. And I think the demand will develop based on the legislation that is already in place about decarbonization and so. The demand in Europe is going to take off '25, '26, '27. By 2030, you would require [ 50 times ] the capacity of what we are building to the demand.

And on the IRA, is there any risk to the IRA if there would be a change in administration or Congress?

Well, the only risk for IRA is that the Congress will legislate something different. Because the President cannot nullify the IRA because this is not a treaty. This is law. And therefore, the only way that that can happen is that if the composition of the -- both houses and the Senate changes in such a way that people would start denying what is happening outside. It's in our face. Global warming is not the joke. It's right here in the [ U.S. ].

Very true. If we look over to Asia, how do you see blue and green hydrogen developing in Japan, Korea and even China?

Well, I think that in -- when you take Japan, Japan has no choice but to import energy. Because they don't have sun, they don't have wind, they don't have natural gas. The only thing that they could have had was nuclear, but now that is off. Therefore, they have to import energy, low carbon energy. And the most practical way of doing that is to import blue ammonia or green ammonia so that then they can convert it to hydrogen. They just announced again today before yesterday, $107 billion incentive program for doing that. So I think the development of the energy transition in Japan would be -- the first step would be importing of blue ammonia, where the CO2 is taking off, for going directly into .the power plants. So that you don't have to break down the ammonia back to hydrogen. That would be the first phase. And then the second phase would be converting the blue ammonia to hydrogen and then using the hydrogen for steelmaking. They are very focused on developing technologies where you can use the ammonia directly, which would be interesting. There, obviously, converting hydrogen, one of the biggest users could be using ammonia directly in ships, which would significantly help decarbonization of the marine transportation.

In Korea and China, the same question.

Korea is kind of in the same place. We try – and I don't want to get ahead of myself in terms of what they want to do, but at the end of the day, energy is just like oil. Every country in the world doesn't want to import oil, but they have to because they don't have it. So China, they are going to get to the stage where they have to the same way that they are importing oil today to import the energy. And that would be practically the only way it would be, to import to bring in ammonia and then crack it into hydrogen. We are not that focused on China right now.

And lastly, in terms of our carbon tax, do you think we’d actually get one in the U.S., in the West? And do we need one in the U.S., in the West?

Well, the thing is that when you talk about the carbon tax, obviously, politically, it's very difficult to do with carbon tax in the United States. Europe is already there. Canada is there. And in the U.S., the state of California is already there with the Low Carbon Fuel Standard. So do we get to that? No, but they did the IRA because IRA is basically giving us a tax break to make this stuff. So it’s kind of the government helping the industry go toward the transition. So I think the U.S. is doing its part. And the IRA is really big and meaningful, more than $300 billion. It's going to make a difference.

Very good. Moving on to some of your projects. You recently announced plans to acquire, for $1 billion, project in Uzbekistan. How does that project come together? And can we see further opportunities in that region for Air Products?

Sure. The reason that we got interested in Uzbekistan was in 2017, they had the change of government. They had a new President. And there was an encouragement by the government of the United States and so on that this is a country that might be different than the other places. So I went there in 2017, we developed a relationship with [ TiVo ]. So it has taken us about 6 years to get to where we are, for good reason, because you want to do your due diligence and all of that. But what we bought there is at the heart of what we do. It's about gas to liquid. It is about gasification. It is about hydrogen. And the good thing about what we did is that there is no risk to capital because we know what we are paying. And there is no risk to the return because we know what you charge them. And Uzbekistan has rather natural gas. And we think the government is very progressive. Our Secretary of State was there and all of that. So it's a strategic part of the world, and we are very happy to be there.

Very good. Back in May, on your earnings call, you announced a 2-quarter delay in the Jiutai coal to syngas projects. That raised some concerns amongst investors on the timing and cost potential for overrunning on your $16 billion project backlog. My question is, why should investors not be worried about the backlog in terms of timing cost overruns? And what are you doing to protect against those things from happening?

Well, the thing is that it's kind of within 2 and 2 and coming up at 9, but Jiutai is a project investment of about $600 million for Air Products. We have built that plan during COVID in China, and the capital cost is below what we expect. So that's not an issue at all. In terms of when we are commissioning it -- when you're commissioning a plant of that size, you need people. China COVID restrictions, we couldn't find the right amount of people to commission that. So on our announcement, usually, we are conservative. We said 2 weeks -- 2 quarters, but it's quite possible that when we announced our results in August, we’ll have a different answer for you in terms of -- it just depends on how we can get the people and so. But there is -- it isn't as if something has gone wrong there. As far as the rest of our projects, we just executed a project in Texas, Gulf Coast Ammonia. That's more than a $1 billion project. We [ do ] budget and on time. So everybody likes to kind of sometimes exaggerate these things, but we are not concerned about that. And beside that, some of these projects that we are doing, we are hoping to be running them for 50 years. So 1 quarter or 2 quarters, in the overall scheme of things, it doesn't make much of a difference.

Very good. I'm going to walk through some of the current projects you have underway. Maybe we can get updates on those. Firstly is the Alberta net-zero hydrogen project, how is that progressing?

That is progressing very well. We were able to get the support of the Canadian government. The Canadian government is giving us a cash grant of CAD 470 million toward that facility, which is about 30% of the cost of the plan. So we are very happy about that. That is progressing, and we are building it, and we are very excited about that. And when we announced that project, we said we don't have any sales for that, to be on the safe side. But right now, that plant is basically sold out on long-term contracts. And one of our long-term contracts, the people that they have a contract with is actually Exxon that operates under the name IOL, Imperial Oil Limited, in Canada. So we are very happy with that project. We will do more projects like that in Canada. What we did was the first phase. I wouldn't be surprised if they double or triple the size of that investment. So that one is [ next ].

And how is the pricing on that project? Is there a premium to traditional hydrogen you might sell?

Of course, it's blue hydrogen. So it's significant premium to ordinary hydrogen, yes.

Very good. On to NEOM. There was some news over the last few quarters -- the last few weeks. So maybe give us update on that project.

With NEOM, when we started the project and announced it in 2020, we said that we are going to finance the project ourselves. Because, quite frankly, I didn't think that it is possible to go and finance a project, this is in Saudi Arabia. It's making green hydrogen, and we don't have any contracts that we can show people that people are going to buy this stuff. But then once we announced it, once we made progress, once we got the engineering done, people saw that we are doing, then [indiscernible] we got approached by the banks that, look, this is a great project. And we would like to finance it, which we obviously said you’re more than welcome. So we are -- that's $8.5 billion. We are at 25% equity which is about $2.5 billion. Our share is 1/3 of that. So we are going to invest about $700 million of our own cash. And then we got $6.1 billion from 23 international banks, which, quite honestly, is an endorsement of the fact that this is a real project. Otherwise, people won't give you money. So I don't care what a lot of people say if they don't have sales. The banks who did their due diligence think that we are okay. So that's a significant step forward for us because not only now we have the money to pursue bid the plant, but we also have a lot of funding power to do other projects. So that plant will come on stream at the end of '26. So in '27, Air Products will be the only company who has green hydrogen of any [ scale ] . But the other thing about NEOM that people, I hope, have focused on that although we are partners with people in building the facility, Air Products is the sole offtaker of the product. All of the production goes to us. So we are totally in charge of where we take it, what we sell it for and what we do with it. We are not competing with anybody.

What are the plans for this product, where are you going to sell it and in what form?

The product is in form of green ammonia. So we can ship it at very reasonable cost to anywhere in the world. So the market for that is anywhere. We can take it to Europe, we can take it to California, we can take it to Japan. We can take it to anywhere. And obviously, we'll take it to the place where we can make most amount of money. But in terms of -- to just put a little bit of a dimension to that is that we are going to make 650 tons a day of hydrogen 650,000 kilograms a day. If you convert on heavy-duty truck, just one heavy-duty truck, that heavy-duty truck will use at least 50 kilograms per day. So for us, to sell the entire production, we need to convert only 12,000 trucks around the world. And there are more than 2 million trucks. So that's the dimension. Or if you use that for making green steel, the [ world ] makes 1.5 million ton of steel. If you convert the plant to 2.5 million tons, it uses all of production of a mill. So the demand -- we just need a tiny, tiny, tiny bit of people converting and it will consume everything that we are making at NEOM. So that is why people get excited about what are you doing with the product. Well, what we want to do with the product is wait until we get the highest price. We can go sell the product today. But today, we will be competing with what I call 3 guys in a truck who claim they can make hydrogen for X price. So our position with the customer is [ go buy from them ]. But then when it comes to 2027, and nobody else has the product and people have committed to convert, then we can sell it for a lot higher price. We are business people. That is what you are paying me to do. I mean, if we were just robotic saying, "It costs us this, we sell at this," then why do they have to pay me $15 million a year? I mean we can have an [ easier client ]. Some of the people who are running other companies.

Very good. Switching to the U.S. How is the Louisiana blue hydrogen project progressing?

Very well. We have the land, we have the -- cleared land, we are doing the engineering. We have spent about $1 billion on that project preordering the material and all of that, and that is working out very well. We're very excited about that. And that is a different product. It is going to be making blue hydrogen. And we made the announcement of that project before the IRA. With the IRA we are going to be sequestering 5 million tons a year of CO2. And the government is going to give us $85 per ton. So it was a $425 million a year for 12 years boost to that project. So it looks a lot better than when we announced it.

In that project, you're drilling your own well. Why is that not a risk for Air Products, given your lack of experience drilling a well and actually sequestering the carbon?

Well, first of all, that is the narrative in the outside world that we are going to drill our own well. Yes. We have the [ porter ] space, and we are planning to do sequestration ourselves. But one of the reasons that we're advertising that -- at the same time, we are talking to other people doing that, so we want to have leverage when we're negotiating it. Because otherwise, if we don't have any other option, people would charge a lot different. So we are very open. I mean if somebody else wants to come and sequester the CO2 at a lower price and guarantee that they will take the risk, we'll be happy to talk. And we are talking to them. This is not a secret. So we do not consider sequestration of carbon dioxide as a core competence. If other people can do it, fine. This is not like hydrogen. Hydrogen is our core competence. But for me, somebody says, "I'm going to charge you x dollars a ton, and I can take the CO2 from there or from any other one of our facilities and sequester it for you," we look at the economics. If it's cheaper than what we can do it, we have no problem doing it. That's not a proprietary technology for us and so on. It would derisk what we're trying to do. The only thing that you have to be careful is that what are you derisking? Because if you're going to get a subcontractor or somebody else to come and say, "Okay, you give me the CO2, I'll build the well and put it into the ground. But then if there is any problem with the well or it comes out, the liability is yours," then you haven't done anything. It has to be that somebody says, "I'll take the CO2, and then you don't have to worry about anything. I'm responsible, if I put it in the ground. If it ever comes out or any other issues, I'll take the liability for that," then it is worth talking.

Very clear. How is your LA SAF project progressing for aviation fuel?

We are -- we have basically done the engineering for that. We are in the middle of the -- we have gotten all of the critical permits, and we are in the middle of building that. And we hope that, that plant comes under stream in end of '25, beginning of '26. And it is going to be a great facility, making sustainable [ aviation ] fuel and a unique kind of sustainable aviation fuel because we have added some special units to make the quality even better. And it will be 25,000 barrels a day, which is 320,000 gallons a year of -- 340,000 gallons a year of sustainable aviation fuel. The facility that we have is connected directly by a pipeline to Los Angeles Airport. So we are pretty excited about that project.

You don't lack for projects, that's for sure. How is the New York green hydrogen project progressing?

That is under construction. We obviously have the power allocation because it's the most important thing. And we are building that. That's not a huge plant. That's about 35 ton a year -- 35 ton a day. But we think that, that plant will be a very good position to provide green hydrogen fuel for fuel cell trucks in the New York and Massachusetts -- I mean, the northeastern part of the United States. Because with hydrogen in that plant, we are going to not only make the green hydrogen, but we are going to liquefy it. Once you liquefy the hydrogen, then you can transport it at low cost anywhere. Today, we make liquid hydrogen in Canada and [ spread ] it in California and make a lot of money. So that plant will have a lot of flexibility.

A bigger project, your Texas green hydrogen plant, more recently announced, how is that progressing, the Texas green hydrogen plant?

The Texas green hydrogen plant is about a $4 billion investment to produce green hydrogen in Northern Texas near Oklahoma. That plant will be an integrated plant, where we will have wind, solar, about 1,500 megawatts, and we convert that to about 200 ton a day of hydrogen that we will liquefy and use it for -- again, it is centrally located in the U.S., and that can go everywhere for basically fueling trucks. And that one, we are in a joint venture with AES, the power company. But again, on that one, we are joint venturing the production because they have expertise in the power production. But Air Products is the sole offtaker of the product, so we are not creating a [ competition ].

And how is now the U.S. pipeline for new projects post these we've discussed?

Huge, the potential is just absolutely astronomical in terms of the amount of things that can be -- I mean you just -- all you need to do is just take the state of California and go through the regulations that they are putting in place in terms of zero-emission vehicles, and add up -- I mean, there will be a lot of product required. So I'm very happy that we have -- we have been working on this energy transition, as you know, from the day I joined company in 2014. So right now, if somebody tries to do what we are doing, they are about 10 years behind or 8 years behind. And we think that's worth a lot.

How do you manage this entire transition, these projects, you allocate resources and how you prioritize the projects? What's the organizational structure that's realizing these projects coming to fruition?

Well, that's an excellent question. We have significantly, obviously, increased our workforce. We have hired close to 4,000 new people in the last 3 years, even during COVID. A fortunate thing about Air Products is that not only we have good people. But the fortunate thing is because of what we are doing and because of the way we have defined the purpose of the company that we have a higher purpose, which is more than just making a [ buck ]. And we are trying to do something about climate change that especially the younger generation is very focused on. It is -- we have no problem whatsoever in hiring people and hiring very good people. And we are very fortunate on that, and we are fortunate to have all of it. So as a result, we have the resources. And then, we have been operating all over the world. We have focused our operations from an engineering point of view. In U.S., we have engineering center in Atlanta with a lot of people in it. We have built a significant engineering center in Houston. We have an engineering center in -- near London. We have developed a pretty good sized engineering center in Netherlands now. We have a huge engineering center in India, close to 1,500 people. And we have almost 1,500-people engineering center in Shanghai. So when you look at these things, there are 6 centers. With all of the digital capabilities, we really can work on a project 24 hours a day [ on a different ] office. That makes it a lot more efficient. And then in terms of execution, we obviously have hired a lot of very experienced people. But as I said, we don't have any issue acquiring talent, which we are very fortunate on that. And we try to have a -- but you know as well [indiscernible] we try to have a collegial, forward-looking, and diverse organization. Everybody is welcome. We're trying to make our work environment such that people like to come to work, not because they have to come to work to get their salary. And we are doing something positive. Quite honestly, can you imagine in the past few days, some of our people looking outside and saying, "Look, the last 6 months, I'm going to be working on a project that is going to do something about this?" And that's pretty exciting.

Yes, it is. And thank you for that, being so forward looking. I want to ask about Jazan. It is not clean energy, but it's your largest project to date. One, how is it operating? And two, are there any lessons you can learn from that successful execution and apply it to the rest of your backlog?

But with Jazan, it is -- thank God, it's operating very successfully. And quite frankly, now that we have disclosed the numbers, you can calculate the return. That project is a lot better than what we say, for every dollar we invest, we get instant operating profit. It's a lot better than that. So we are very excited about that. The lessons that we have learned, why did [ leave ] in Jazan? Why would Saudi Aramco -- with all of its might, they don't need our cash. Why would they give such a big project to Air Product? The reason is, number one, we had the technology nobody else has. I mean that is, in a space, gasification. And it is the technology that we bought from Shell and GE. That has distinguished us. Most of the refineries in the world are going to do what Jazan is doing. That is going to create a huge opportunity for us. So sometimes people say, "What have you done with gasification?" Jazan is gasification, $12 billion of gasification project. This -- so we had the technology. And the second thing is we have the track record of demonstrating to Saudi Aramco that we built the air suppression unit, which was a big project, $2 billion project. We built that ahead of everybody else in that refinery. We had that plant operating to produce hydrogen -- to oxygen and nitrogen 3 years before they finished the refinery. So they see that we can perform, we have the technology, and we had the commitment. And we had built the relationship. So it all goes together. We have -- I'm very proud to say, we have a relationship from the CEO of Saudi Aramco, all the way down with the person who is running the facility and the operator. It's on. So that is what it takes. It takes a long time to do that. We started working on Jazan in April of -- in October of 2014, about 3 months after I started. And then it took us a long time to develop the relationship, to develop the track record, and so on, and end up with that kind of a project. So it's doing very well. And obviously, it is contributing to our bottom line. We are very open. That is now contributing. Next year, it will contribute $1.45 per share to our bottom line. That is kind of 220 million shares, that's a lot of money.

Last question, broadly speaking, how are demand trends by region, by business right now?

We are very -- we run the business in – the way we run the business is that we have the so-called day-to-day operation, very decentralized. We have a business unit president for Americas, for Europe, for Middle East, and for Asia. These business unit presidents, who are very experienced people, are responsible for running what they have in the most productive way, keep the plants running, serve the customers, and all that. Then, we have what is called project development, which is people who go and look for and develop these big projects. Those people, we have about 50 of them, very experienced -- more than very experienced people. They report to me directly because I'm involved in all of these big projects. So I run that part of the business directly. Then, we have our engineering and project execution, which is really the responsibility of Dr. Serhan, who is the -- what we call our Chief Operating Officer.

We'll stop there. Seifi, Sidd, thank you very much.

Thanks for the [indiscernible].

Thank you. Appreciate it.