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

Good morning, and welcome to the Air Products Update 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 Megan Britt. Please go ahead.

Hello, and welcome to our update call. On the call today, our Chief Executive Officer, Eduardo Menezes will provide a short business update, followed by a Q&A session. Melissa Schaeffer, our Chief Financial Officer, will join Eduardo for the Q&A session. During this call, we'll make forward-looking statements, which are our expectations about the future. These statements are based on current expectations and assumptions that are subject to various risks and uncertainties. Our actual results could materially differ from these statements due to these risks and uncertainties, including, but not limited to those discussed on this call and in the forward-looking statements and Risk Factors sections of our reports filed with the SEC. We do not undertake any duty to update any forward-looking statements. It's now my pleasure to turn the call over to Eduardo.

Thank you, Megan. Hello, and thank you for joining our call. Earlier today, Air Products issued a joint press release with Yara International, announcing that we are working to establish a long-term partnership for low-emission ammonia projects in the U.S. and Saudi Arabia. We have 2 primary goals for the proposed partnership. For the U.S. project in Louisiana, our goal is to have a traditional industrial gas project scope and return for Air Products. To that end, we are in advanced negotiations with Yara to sell the ammonia production and distribution assets from our Louisiana project and execute a 25-year contract for the supply of hydrogen and nitrogen from our industrial gas facility. Separately, in Saudi Arabia, we are in advanced negotiations with Yara on a marketing and distribution agreement where Yara would be responsible for transportation and commercialization of all the renewable ammonia that will be acquired by Air Products from our NEOM joint venture that is not used by Air Products to produce green hydrogen in Europe. The agreements for both projects are being developed in parallel. The final investment decisions of our FID for Louisiana is targeted by mid-2026, with project completion by 2030. The total cost of the Louisiana project is estimated to be between $8 billion and $9 billion. Approximately 75% of the capital is related to the industrial gases portion of the project that will be owned and operated by Air Products. And approximately 25% of the capital is related to the ammonia production and shipping facilities that will be owned and operated by Yara. Air Products as a project developer will use the next few months to solidify the construction costs with qualified contractors. We are committed to disciplined capital allocation and we only move to FID for the Louisiana project if we are highly confident that the project can be executed within the estimated CapEx. The marketing and distribution agreement for Saudi Arabia is targeted to be completed during the first half of 2026 with first supply expected for 2027. Air Products is honored to work with Yara, a leading global crop nutrition and ammonia company. Overall, we look to reshape the Louisiana project into a traditional industrial gas project for Air Products with a, a core industrial gas scope; b, an offtake agreement with a trusted partner; c, a de-risked execution once EPC arrangements are finalized and d, an attractive return. Additionally, this partnership connects the largest green and blue ammonia projects worldwide with the largest global ammonia supply network with 12 ammonia vessels and 18 ammonia import terminals, maximizing the project value for Louisiana and NEOM by utilizing both organizations extensive experience and core competencies. Before I turn to your questions, let me reiterate that our announcement today has no impact on the adjusted earnings per share and capital guidance for 2026 that we provided on our fourth quarter earnings call. With that, I'll turn the call over to Megan.

Thanks, Eduardo. Operator, please provide the Q&A instructions to participants in the queue.

[Operator Instructions] We will take our first question from Jeff Zekauskas with JPMorgan.

Is the -- does the carbon capture stream in the end belong to Yara? Or is that a separate profit stream that would belong to Air Products?

The carbon -- the CO2 stream will, let's say, belong to our products. It's basically the credit comes to the emitter of the CO2 in this case, Air Products.

And is the poor space capability, 5 million tons? Or in theory, can the poor space hold, I don't know, 10 million tons. Is there a size of that capability?

The poor space that Air Product is developing can hold -- we expect that it can hold 10 million tons a year of CO2. But we're still finalizing the arrangements for the CO2 sequestration that can be -- we can use our pore space, we can use someone else's pore space or we can have a combination of both. So this is in final phase as well, and this will be finalized during the next few months before we get to FID on the project.

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

Eduardo, it sounds like you still have at least a little bit of wood to chop before you get to kind of mid-26%. I guess what do you see as the biggest hurdles in getting to FID at this point? Is it more on the construction cost? Is it some of the air permits? I would think the air permits are just a matter of time. But I guess, can you help us to think about maybe what you see as some of the bigger hurdles?

Yes, John, good question. We have been working with Yara for several months now. So I think we understand exactly where we are in these areas. The air permit, as you said, is more a question of time. It's really the construction cost that, as I said in my prepared remarks that we are trying to make sure we are highly confident that we can reach the CapEx number that we have as a target, right? The situation in the U.S. for projects is a little bit difficult right now. A lot of competition from data centers. Some of that being more expectations than anything else. And frankly, one of the main objectives we have with this announcement today is to make sure our potential partners and suppliers, they understand how real, how critical this project is. And we fully expect to have a firm construction costs by mid next year that allow us to move to FID.

Okay. Got it. No, that's helpful. And then I guess, just as the follow-up, for the NEOM side, it sounds like the production part of the project is largely kind of in stone at this point. I guess, can you help us to think about the capital that Air Products may need to put to work on the distribution arm, whether it's or your side of it or even anything to help with Yara bringing their production or distribution side of it -- excuse me, bringing their distribution side to the market?

Yes. I would say that we are very excited about this development with Yara regarding NEOM. I think if you think about -- whatever you think about green hydrogen and green ammonia, there is no question this is a new product. And as every new product, it has this issue of this chicken and the egg situation. You have no supply because you don't have demand, you have no demand because you don't have supply. Our project is the first real step to fix that for that product, right? So we are the first world-scale ammonia production, green ammonia production. And in the first step, this product will be available or in a tank in Saudi Arabia. This alliance with Yara, as we said, really working together with someone that has its own fleet of ammonia ships and it has several -- I think the number is 18 terminals in Europe, really will make this product available in many locations. And we hope that this will completely change the expectations on how this product will develop. That said, on your specific question about investments by our products. The facility in NEOM, as you know, is a JV. So we own 1/3 of that facility, and we are responsible for 1/3 of that investment, which is also project finance, about 70%. Anything beyond that, we're only going to be executed if we have firm agreements with customers. So we announced several months ago an agreement with Total for producing green hydrogen starting with green ammonia. That agreement is still in place. Part of that agreement expects that we will better mine together with Total, where the facility will be built depending on the legislation in Europe. And as soon as we have that definition, we'll make that decision of moving forward with that investment. That's the only investment we have so far in our products. And we're only going to move forward if we have other customers that are willing to take green hydrogen that we'll need in our dissociation of green ammonia. So the agreement with Yara basically moves the sale of green ammonia for every other application straight to Yara. And we hope that, that will allow us to rapidly increase the percentage of ammonia that is sold as green versus gray.

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

Eduardo, back on the carbon sequestration, do you expect to manage that portion of the project yourself? And if not, how much of the $85 per ton credit do you expect to realize?

No, we don't expect to manage that part of the project by ourselves. We have several counterparts that are interested in investing in and taking care of the CO2 sequestration. Our scope will basically stop at the compressor and they will take the CO2 from there and do the sequestration using our pore space or using their pore space.

And again...

I missed the second part of your question.

Yes. How much of the $85 per ton credit would you expect to realize? Is it a...

Yes. The credit of the 45Q comes to, in this case, to a product, right? What you have is a commercial agreement with someone that will do the sequestration of the CO2 and we are in negotiations with this with several providers for that. And I cannot give you an exact number on that, but it is a fraction of the $85.

Got it. And just to be clear, how many tons of CO2 is this -- will this project produce?

I think the official number is 5.5 million tons.

We will take our next question from Duffy Fischer with Goldman Sachs.

Question just on the economics. If you do go forward with Louisiana, and let's just say it's at the midpoint, $8.5 billion, that makes your cut about $6.4 billion, should we think about the traditional 10% EBIT return for every dollar of capital, so that would be $600 million to $650 million of EBIT accretion when the plant is completed. Is that kind of the right ballpark?

I know you guys love to answer these questions. And as you know, it's very difficult for us to give exact information on that. I would say that what we said is that we expect a normal industrial gas return for these projects, and I will stick to that comment. I would just tell you that because of the CO2 credits, the 45Q, this project will tend to be skewed for the first 12 years of the life because that's the time that you have to receive the 45Q credits. So the EBIT for the first 12 years should be higher than the normal EBIT we would have in industrial gas project.

And then on the NEOM offtake agreement, do you guys bear all the risk of price and Yara will basically just take a fee on selling it? Or what's their incentive to try to grow that market themselves? And will they take any of the risk on pricing or margin?

Yes. We -- as you know, Yara is the largest ammonia trader in the world. They have a very keen interest in developing renewable ammonia, both blue and green. This is an opportunity for them to commercialize that product from Air Products. As we said in the announcement, it will be based on a commission. And of course, as you can imagine, the commission increases as the prices go up. So it is a deal that I believe it's a good deal for Yara, but it's also a very good deal for Air Products as we would not need to have sales force and marketing -- development marketing structure and so forth. The other point that I think it's important for people to realize is that our products today has both the price and the volume risk, right? So we have to lift every ton from our joint venture. And differently from other ammonia producers, our joint venture doesn't have any incentive to reduce production in case the market is long or the prices are low, whatever, right? So the joint venture has an incentive of producing 100% of the volume. And having a partner like Yara with this infrastructure that they have with the ships, the terminals really eliminates this volume risk that we have today. So that's a big incentive for Air Products on this deal.

We will take our next question from Patrick Cunningham with Citi.

And maybe first, just on Louisiana on -- I guess for the performance level requirements to secure investment in ammonia production, what does this mean for the timing of when you would receive the cash investment from Yara?

Yes. The sound is not very good traffic. But if I understood correctly, I think you're asking about the ammonia assets that will be acquired by Yara. So this is a transaction that we'll close only when the plant starts because we started the engineering for the project. But we will have progress payments exactly like we would have in any project like that with the difference that the final payment at the end will be little larger than what would normally be in a normal transaction of a sale of a project. So this is something that we are still finalizing with Yara. But I can tell you that, that will be a progress payments during the execution of the ammonia project.

Understood. And then just in terms of getting green ammonia landed in Europe and eventually converted to hydrogen later in the decade, if you do land further agreements that justify moving forward, does Yara have right of first refusal on distribution, shipping of that ammonia overseas? Or was any of that covered in this agreement?

No. We cannot disclose these issues, Patrick. We are -- we negotiated all these items with Yara. Again, the conversion of ammonia back to hydrogen is not a simple process. It requires a lot of capital. I would say that from a products point of view, unless we can get a very good return in this ammonia to hydrogen dissociators, we would be perfectly fine selling the ammonia as green ammonia with Yara taking care of that part of the project.

We will take our next question from Chris Parkinson with Wolfe Research.

Eduardo, if you mind me asking, were you regionally hopeful that you would have partnerships announced on the CCUS side this morning, and therefore, kind of getting -- projecting your total CapEx, including what's already been spent below the $5 billion marker? Or are we thinking about that the wrong way?

I -- can you repeat the question, please, the first part of the question?

Yes. I think I heard it. So Chris, I think you're asking about the sequestration scope. So just to be clear, the sequestration scope is not included in that CapEx number. So that is contemplating a partnership. We are in current discussions with a number of key partners to be able to progress that scope, but it will be very much a service type fee that we will pay along the course of the project, but no additional CapEx would be needed from Air Products side if we outsource that.

Got it. Helpful. And then just a rent question. One of a competing project was recently, let's say, delayed indefinitely, which had a -- what I'll refer to as the plethora of MOUs on the ammonia side, specifically for Japanese energy transition. Is that announcement essentially too little too late? Is that something that you could consider with your partner for kind of further assessing the overall market for blue ammonia over the next few years? Or is this just you have an agreement that's progressing well over the next 6 months, and that's basically the only item that you're currently focusing on?

Thank you, Chris. Yes, it's -- as you know, that project that you mentioned is very different from our project. It's larger in total hydrogen production, but it had smaller ammonia component was only, I believe, 1.1 million tons a year of ammonia versus the 2.8 million tons we have in our project. So it's a very different project. We are following up what happened there. But we -- as you know, today, the first day we're disclosing our agreement here. I don't expect that the people involved in these other projects, they had any knowledge of that. So I don't know what they would like to do or what they may come and propose. But at this point, between us and Yara, we have 100% of the volume committed, right? So 80% of the volume going to Yara to make ammonia and 20% of the volume coming to Air Products to be injected in our pipeline, and we sold as hydrogen to our refinery and chemical customers.

We will take our next question from John Roberts with Mizuho.

Is Yara precluded from moving green ammonia to Europe if a customer wants to build their own cracker or do a JV cracker?

Yes. In principle, Yara will -- Yara is -- they are the experts on commercializing ammonia, right? So they know the customers, they know the market, and we can see that kind of operation happening.

We will take our next question from Josh Spector with UBS.

It's Chris Perrella on for Josh. Just a follow-up on the Darrow project for the 20% of the ammonia that you're taking, when you guys do the math in the economics, are you expecting any premium for that being blue carbon hydrogen in the project returns? Or are you basing the base return on gray hydrogen?

Yes. The 20% we will take as hydrogen, right? So no ammonia on that point. Yes, we expect some premium on that. We have, as you know, our pipeline in that area goes from Louisiana to Texas. We move over 1.5 billion cubic feet a day of hydrogen. So this will be equivalent to 12% of our total volume today. And we have a few customers that ask for blue, and we are in negotiations for that volume. Remembering that Air Products today, we have a site in Port Arthur where we capture the CO2. So we already commercialized some blue hydrogen in our pipeline.

All right. And just a quick follow-up. How much of the Darrow CapEx out of that $8 billion to $9 billion have you already spent for that?

Have I expensed?

Has spent?

Okay. Yes, yes. I think we already said that, that's about $2 billion being between spent and committed because we basically have engineering close to 90% done at this point. We have a lot of the main equipment, the critical equipment like compressors, cold boxes, they are already in hand. So we have a lot of things that we started 2, 3 years ago. So we have a lot of that CapEx that was already spent.

Is any of that eligible for -- or you would get CapEx from Yara for any of that to reimburse what you bought? Or does that come later in the process?

I think the way to think about this, as we said, around 80% of the CapEx will be there by Air Products, 20% by Yara of the total project. And I'm sorry, 25% by Yara, 70% by Air Products. And that includes whatever capital we had spent for the ammonia project. So we're going to need to sit down and make the adjustments. And in whatever way that is spent that is related to the ammonia projects, we expect that to be paid by Yara.

We will take our next question from Vincent Andrews with Morgan Stanley.

First, I just want to clarify the $8 billion to $9 billion, if I heard the answer correctly. That would not include any CapEx for sequestration, but your point was in the incremental CapEx for sequestration would be incurred by a third party. Are both of those statements correct?

Correct.

Okay. And then secondarily, the press release indicates that Yara will pay approximately 25%. So is there any meaning behind that approximate? Is there a ceiling on the amount of CapEx that they would be responsible for in the event that there's a material CapEx overrun? And secondarily, will there be any limitations on Yara in terms of what they can do with capital between now in the time that they would owe you payment in terms of the minimum balance sheet leverage level or maximum balance sheet leverage levels or anything like any security that's going to be provided to you?

Well, I would say, Vince, that this is an agreement between 2 very sophisticated parties, right? So Yara is the largest ammonia producer in the world. They know exactly the value of the product. They know exactly how much they can pay for hydrogen and nitrogen to make their project feasible. We are the largest hydrogen producer in the world. We understand exactly how much we need to charge for our hydrogen and nitrogen to make our project feasible. So we have been working together for several months. We reached the point that we understand exactly what the conditions will be. The only point spending now, I would say, is the construction cost is to validate the CapEx is within this $8 billion to $9 billion that we mentioned in our press release. Exactly the reason why we have this approximately is because there are things in flux like construction costs, like tariffs, things that we need to adapt during this -- the next few months. And that's the reason why we use the word approximately there. Regarding the other part of your question about guarantees and so forth, we are very comfortable working with Yara. Personally, I have been working with Yara for 20 years. I was a Board of JVs with them. I negotiated M&A transactions and even similar agreements to this one with them. It's really a first-class organization, majority owned by the -- directly or indirectly by the government of Norway. So I can imagine a better partner for a long-term project like this one. And it's really not strong concern for us in terms of payments for the project, the ammonia booked.

We will take our next question from James Hooper with Bernstein.

Congratulations for the announcement. First question, what happens if this project doesn't make it past FID and construction cost comes in too high? Are you still progressing on the license that you mentioned at the last set of results about potentially gray hydrogen? Or is there plan B in your project?

No. In principle, if we cannot get to a CapEx number that we can both live with, we're not going to have an FID. It's -- we're going to remain disciplined on our capital. I would say that we are making this announcement today because we believe that we have a path to get there, but things can happen. And until we get these agreements with construction companies done, and we have a final CapEx picture that we can rely, we still need to make a decision about the FID if we're going to go forward or not.

Yes. And just on the -- so is it still -- if it doesn't go forward, is still gray an option based around what the permit you're applying for...

Yes. The project is designed in a way to produce blue. So the capital is higher than the capital that you will have for a gray project. And what makes the project feasible is the 45Q credits, right? So the 45Q credits, I think even during this call, someone asked about the volume, I said 5.5 million tons, someone mentioned the value of the credit being $85 a ton. So you can make the math, it's a lot of money that is involved on the credits, and that's what it makes the project feasible. And that's -- frankly, that's what made the project attractive to Yara to move this product through Europe and be able to be competitive with blue ammonia in Europe versus locally produce gray ammonia. So this project needs to be developed as a blue ammonia project.

And that concludes today's question-and-answer session. Ms. Britt, I will turn the conference back to you for any additional or closing remarks.

That will conclude today's call. We thank you for joining and for your interest in Air Products, and we hope you have a safe and wonderful day.

Once again, this will conclude today's conference call. We do thank you for your participation, and you may now disconnect.