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

I'm Patrick Cunningham. I cover chemicals here at Citi. So for our first fireside chat today, we have Air Products. Air Products is a global industrial gases company with an 85-year history and advantaged supply positions operating in approximately 50 countries. The company supplies essential industrial gases, related equipment and applications expertise to customers in industries like refining, chemicals, metals, electronics, manufacturing, medical and food. As the leading global supplier of hydrogen, Air Products also develops, engineers, builds, owns and operates some of the world's largest clean hydrogen projects, supporting the transition to low and zero carbon energy in the industrial and heavy-duty transportation sectors. Joining me today from Air Products will be Eduardo Menezes, Chief Executive Officer; and Melissa Schaeffer, Executive Vice President and Chief Financial Officer. Eduardo joined Air Products in February 2025, bringing 30-plus years of industry experience. Since then, he has continued to refocus on the core industrial gas business strengths while optimizing Air Products project portfolio. Melissa Schaeffer has been with Air Products since 2016 and leads the company's global finance organization. Both have articulated the strategic road map Air Products is following, targeting further margin expansion and earnings growth and aiming for industry-leading adjusted operating margins.

So look, I think a natural place to start would be your 2 largest outstanding projects, Louisiana and NEOM. Maybe first on Louisiana. It seems like you have several options on the table and only a few weeks left in the year. Any update on the direction that project is heading? How some of your commercial conversations are progressing there?

Patrick, thank you for having us here. Yes, as I said, since the day I came to Air Products, this is a very large project that probably didn't start the way I would start that project. So we started that without having a customer. But the fundamentals of the project are sound, right? So if you look at the infrastructure you have in the Gulf Coast, the price of natural gas, the ability that we have to move hydrogen long distances in our pipeline and you look at the 45Q incentives in the U.S., the project makes sense as designed, right? So our project is a little different from other projects in the same space. It's very large. We're going to make 750 million cubic feet a day of hydrogen, but 80% of that hydrogen was supposed to be converted into ammonia and only 20% would stay as hydrogen and be moved into our pipeline. So the fundamentals of the project makes sense. We have been working very hard to identify and to work in agreements with ammonia producers that would take over the ammonia loop and operate the ammonia facility, produce ammonia, handle the storage and handle the shipment of ammonia, and we would concentrate ourselves in the separation and the hydrogen producing equipment. So not very different from a similar project that you have in the Gulf Coast was with OCI and now Woodside. So same kind of structure. The difference is our project is 2.5x the size. So it takes a little time to find the right place to get this done. I self-imposed myself a deadline at the end of the year. I fully expect by -- in the next 2 weeks to have a communication and explain where we are in the project. We made significant improvement -- significant developments on that, but I cannot say more than that at this time.

Yes. And maybe I just have to wait a couple of weeks here for the news, but what sort of -- you talked about OCI, Woodside, that being sort of similar project. Obviously, that has more sort of conventional returns for the industrial gas producers operating there. So how do you think about the return hurdle you need to make a go/no-go decision to justify executing that project with whatever the remaining capital outlay may be?

Yes. It's the kind of return you expect in industrial gases. Our industry, we always try to have certainty on return in exchange of more reduced number than a producer will expect by itself. But we expect the project to have the similar returns of our hydrogen pipe. So this will be exactly a hydrogen and nitrogen project for Air Products, not more, not less. So that's all we're going to do is to produce hydrogen and nitrogen and supply to our customers.

Understood. And then maybe just on NEOM. It seems like construction is progressing well, on track for 2027. I think you mentioned on the last earnings call, you would likely sell some ammonia from that asset as your offtake for green hydrogen is later in the decade. So conceptually, I guess my question is, does this make your downstream marketing of NEOM offtake an underperforming project similar to how you maybe classified some other parts of the portfolio? And then I have some follow-ups there as well.

No, I wouldn't say that. I would say that the project was conceived that way, right, that all that ammonia would be produced in Saudi Arabia, exported to Europe and then converted back to hydrogen. Of course, you can generate clean or green hydrogen in Europe without having that. So you can have electrolysis, you can have a process in Europe using power there to produce green hydrogen. The play here is really an arbitrage on power costs and capital costs between Saudi Arabia and Europe. And I think from that perspective, the project -- the fundamentals of the project are still okay. So in other words, we will be able to -- we are able to produce green hydrogen in Europe using this ammonia at a price that is competitive against someone producing green hydrogen in Europe from electrolysis from wind or solar power in Europe. That says only that we can run faster than the other guys, right? We still need to run faster than the or the line or whatever you want. So how much market will be developed in Europe, that's a question of regulation in Europe and how that will become a reality. We try to follow that as close as we can. The EU has some regulations that ask all the member states to use at least 1% of their fuel as renewable fuel. And most places, they -- or all the places so far, they accept that what they call the refinery routes. In other words, that if you use green hydrogen in your refining process to produce your regular oil products, that counts against your RF MDO targets of 1%. Now this regulation has to be what they call transposed to every country in the EU, and they are in different stages. I think only Denmark approved that so far. In other countries, they are in different stages in the parliament. Most countries, they -- the large countries, they are even proposing higher percent than 1%. So I think Spain is 4%, Germany is 2.5%. So there is several proposals in parliament on these different countries. But we're going to need to wait and see, hopefully, by the summer of '26, they will make that definition, and that will be appliable in Europe -- applicable in Europe, I would say, in 2030. So that's the perspective from the green hydrogen point of view. Our plant is expected to start in 2027. So between 2027 and 2030, I'm 100% sure we're not going to have a significant market in Europe, right, for green hydrogen. So we are trying to develop other ways to commercialize ammonia because at the end of the day, Air Products has the accountability to lift every ton of ammonia produced by that plant. So I have to find a market for that, and we're working on that as well. And we expect to have something to inform how we're going to do that by first half of next year, if not earlier than that.

I mean, how is that market developing? And I guess, how can investors get comfortable with what the returns may look like from 2027 to 2030 as you sell green ammonia? Like do you expect to get a premium? Is this more of just a cash return on that downstream marketing?

Yes. It's -- ammonia is a commodity, right? So we can't control the price exactly on the marketplace. So I can tell you that today, the price is very good, but there's no guarantee that it's going to be the same 6 months from now or 2 years from now. So I would say that our project, the big advantage we have because we are back integrated into power, right? So we generate our own solar and wind power. Basically, we have no variable costs. The price we have in the beginning of this agreement will basically be the same price 5 years from now, 20 years from now. The only cost increase we'll have is for local labor, and that's very small compared to the overall cost. So it's -- I think in the long term, it's a very good bet on that project. In the short term, we're going to need to see what happens there. And that's part of the work we are trying to do in the beginning is to try to see how we can insulate ourselves from these variations in the market. But it's -- there is a lot of work to be done to get there.

Understood. And somewhat related, I think you have a commitment to be free cash flow neutral to positive in 2026. You talked about this $4 billion CapEx number as that you have out there for 2026. Is that number a best case scenario if you ultimately decide to pursue some additional investment in NEOM and Louisiana in 2026, what's the sensitivity around that number for the project?

I'll let Melissa talk more about that, but you need to remember that our fiscal year ends in September, right? So for 2026, this number includes all the investments we have in these projects. I think we already made that point that for Louisiana, we are -- we received a minor air source permit for the project. We applied for a major air source permit because our potential customers ask for that, and that will take until probably mid-2026. So the capital cost -- the CapEx that we have forecasted for Louisiana, it's already -- it's things that we already committed a year or 2 years ago. There is really no field activity at this point for that project. So long story short here, the CapEx includes all the scenarios that we have. But Melissa, you can add.

Sure. No, you're spot on. So yes, we have talked about cash flow neutrality through '28. And in fact, we have a line of sight of cash flow neutrality to slightly positive in '26. Now obviously, some other nonstrategic assets like our old headquarters land that we'll be selling in downtown. So certain one-offs that are going to get us to cash flow neutrality in '26 through '28. As Eduardo mentioned, absolutely, the forecast that we provided does include Darrow moving forward. And so we've taken that into consideration, but there will need to be certain financing actions that we take to be able to get there. One thing I do want to remind everybody, and we've talked about this, but I think often people don't utilize this within the models is NEOM will be deconsolidated in '27. So right now, the NEOM debt sits on our financials. In '27, when we deconsolidate that, that will come off. So we will be very quickly back into the metrics that we need to be and our balance sheet will be largely delevered at that point in time. So that's something that I just want to remind everybody as they're forecasting the free cash flow as well as the leverage metrics, and that's something to take into consideration.

Got it. So I mean just putting all of that together from the first few questions, it doesn't sound like there's a scenario where CapEx meaningfully steps up again because you decide maybe the returns justify economics like in terms of reinvesting it.

Not for 2026. For 2027, depending on how Darrow will move forward, we'll need to see what the numbers will be. And again, we are working on that. This is a massive project, right? So a little bit of change can change a lot in the overall numbers, but we'll give guidance at the right time regarding 2027.

Understood. And I just wanted to go back to NEOM just briefly. I think one of the links in the chain for getting green hydrogen landed in Europe would be building ammonia cracking capacity. I think one of your competitors recently started a pilot scale ammonia cracker. Can you just remind us the journey that Air Products has been on there, what you would need to see to make that investment and what it might look like?

Yes. We have been developing our own solutions as well in this area. The agreement that we disclosed, I think, 1.5 years ago with Total to give an idea, that agreement is for something like 200 tons a day of hydrogen. That plant that you saw the announcement, I think they talk about 30 tons, but it's not 30 tons of hydrogen, 30 tons of ammonia that will be cracked. So that will be probably 5, 6 tons of hydrogen. So the scale is very different. We have been working on our own solutions and pilot scale and so forth. But the real challenge here is to come with a solution for larger amounts and trying to be efficient and try to reduce the cost of converting the ammonia back to hydrogen. So we have our own programs on that. And it's always a challenge to find room in your budget for this large pilot projects and that we're working on and find a solution for that. But we may go in a different direction on building our first facility that it's not halfway, but it's more like a commercial scale facility than a pilot.

Understood. And then maybe just pivoting to some of your other projects. Can you speak to some of the improvements you're hoping to deliver for Rotterdam and Edmonton, whether it's from a capital cost or commercial execution standpoint? And just in the context of making go-forward investments, can you just remind us how much volume commitment do you have there already?

Well, it's -- I think I've talked a little bit about these projects, right? The first thing I tried to do was to -- what is a joke, the first thing you need to do when you are in the hole is to stop digging, right? So you need to stop digging. So we try to put the project under control and make sure we understand the schedule and the cost of these projects. So we -- I think we did that. We are satisfied now that we're executing the project, and we're going to be able to deliver the project in the numbers that we informed our shareholders and our Board and so forth. So that's the first thing we did. Then now we need to try to see how we can improve that. I would say that on the capital side, it will be difficult to make a change because we already made a big effort to put the project back in control. So I don't see a significant improvement that we can make in the CapEx cost. I would say the volumes are the challenge here. The Edmonton project, we have around 40% to 50% of the volume contracted. Right now, we are working to -- we have a pipeline. We are connected to several refineries there with gray hydrogen. We're working to try to find more customers for this plant. The situation in Canada, if you don't follow, it's very fluid right now. You think about Europe. Canada is even more complex today in terms of regulations and that kind of stuff from the U.S. And they just announced like a new MOU between the federal government and the provincial government of Alberta for CO2 minimum prices, which is a good thing for us, but they still need to go into the details and talk about free allowances. It's a very complicated regulatory environment there. It's way more complicated than the U.S., much more similar to Europe, and I would say even more complicated than Europe right now. So we are trying to understand exactly how this will -- how the market will end in Canada, what the incentives will be. I would say that if you want to do biofuels in Canada today, it's probably the best place in the world today because of the incentives they have and the objectives that the government has to commercialize canola oil, but we need to see who else is going to invest there and try to make that jump. But I think there is no question that we have the right infrastructure in place with the pipeline and we have the right connections there, but the regulations will be important there. In Rotterdam, we have -- in fact, we have 3 projects in Rotterdam. The largest one is a new -- completely new SMR with CO2 capture. We call that HyCO5. This one has like 40%, 50% of the volume contracted with one biofuel customer that is always building expansion. That is moving ahead. Same situation, we need to find additional customers for the additional volume. So we're working on that. That's one project. The second project is a CO2 capture of an existing reformer that we have there that we call HyCO4. That one is basically fully contracted between product from our reformer and product from a refinery that is close by that is sending the CO2 to us. So this one is fully contracted. And we have a third project in Rotterdam that was supposed to be the first ammonia import terminal with ammonia crackers and liquefiers. We're definitely moving forward with the liquefier, but we are -- at this point, we paused the rest of the investments to see how that market will develop because at the end, we -- until the regulation in Europe is there from 2030, there is not a lot of incentive for people to pay premium prices for that product. So the liquefier is connected to our existing infrastructure, so we can produce the product in gray or blue or green, whatever the hydrogen we have, and that will go forward. But there are 3 different projects. The liquefier is a merchant project, so we need to develop that market. We have an existing liquefier there that we are replacing. But -- so 3 different situations. One, we have 50% volume contracted. The other one is fully contracted and the other one is a merchant project that we're going to need to develop when the project is -- the plant is ready.

And maybe just wrapping up just with core industrial gas business and how you view that broadly. I mean I think there's been this perception that the Air Products has taken its eye off the ball on core growth areas, whether it's electronics or decaps or maybe even lost out on some more capital-efficient energy transition projects. So like do you feel like you can win your fair share of projects in attractive growth areas during this transition time?

Yes, I believe so. I don't completely disagree about the assumption that we took the eye out of the ball. It's natural, right? If you're executing a project like NEOM, it's $8 billion, $9 billion project and then you have a $30 million exploration plan, it's not very hard to think about where you're going to send your [indiscernible], right? And that's part of the issue we had at Air Products. And I have been working on fixing that. So we basically now have kind of we split our engineering organization. One will be focused only on the exploration side, the other one hydrogen side. So we are trying to make sure that we are competitive on the traditional projects. I don't think -- when I say took the eye off the ball, it's not every day, not that we've completely lost our capability. So we're still very strong on that side. We are executing a lot of projects in Korea and Taiwan on electronics. And we expect to see more projects coming out of that. But we definitely feel the need to be more focused on these projects to be more competitive, and that's why we made the changes we made in the engines.

Understood. And look, we've gone this far in our chat without talking about quarter-to-date trends. How do you see the core industrial end markets and regions shaping up to end the calendar year and maybe exiting into 2026 at this point?

Yes. It's not a great environment, but industrial gas is a very resilient business. As we said in the beginning, we go from CO2 for carbonation of soft drinks all the way to chip manufacturing for semiconductors. So every place in between. So it's a very resilient industry. We expect to see an environment that will not going to help us a lot in 2026. But we include that in our forecast in our numbers that we gave a guidance for EPS. And we're going to need to work on that. It's -- I think in just quickly, the U.S., low growth, a little bit of -- it's a difficult market now for new customers making investments. I would say that the tariffs, the labor situation is not very helpful at this point in the U.S. We talk about all these data centers and it's true, there's a lot being done on that. But basically, we're bringing new competitors for the engineering and construction market, right? When Google or Meta will talk about building a data center, if the building costs x or 1.5x, really doesn't make a big change for them compared to the amount of money on GPUs and chips they have inside the build, right? So they have been inflating the market a little bit in that side. So we have to be very careful and our customers as well, right? They're thinking about twice, 3x before they authorize a new investment in U.S. So that's the challenge that we have right now here. But the basic market, it's working well and normal customers in steel and chemicals, we don't see a decline there. Asia, again, booming in Korea and South Korea and Taiwan because of electronics. China, hypercompetitive market, not a lot of growth, but we still see the market whoever has an asset is operating the asset at full capacity. But it is a little difficult, not now, but I say, for the last 4, 5 years in China with deflation and the CPI declining and that [indiscernible]. And Europe is probably the most affected area. We see a lot of the product from China that cannot move to the U.S. right now moving to China and moving to Europe, and that is affecting local manufacturers in Europe. Europe is the place where our product is more diversified. So we have a packaged gas business different from the U.S. or Asia. So -- and we really -- I don't know if it's -- we're being fortunate on that side. We didn't -- we were not affected in large facilities that closures of customers affecting us. But of course, we -- you read about that every day. There is a rationalization of steel, rationalization of chemicals, and it's something that we keep our eye on. But it's not something you can control, but it's more about what customers you have to begin with.

Got it. That's helpful. And maybe your $13 guidance for fiscal year anticipates some continued sort of tough environment from the helium market, and that's been a fairly tough market for you. I guess, first, can you unpack how much of that has been and will continue to be price versus volume? And then if you could just remind us how much of your volume is contracted for the year versus what may be susceptible to additional changes in the market dynamics?

Yes. Our guidance already includes what we expect that will happen this year, right? And now helium is a product that you can go all the way from very -- we can commercialize in the form of full [indiscernible] of container, very large quantities all the way to for people doing filling balloons for [indiscernible]. Air Products, most of our volume is on the large side. We don't -- as you know, we don't have a very large packaged gas footprint other than Europe. So we -- and these agreements, they tend to be for large customers, they tend to be 3 to 5 years. So we know very well what will happen during the fiscal year 2026 at this point. So that is included in our base. It's still a product that it's very profitable for us. It's above our average profitability. It's just -- it was a product that we're making a lot of money in '23, '24. And I would say Air Products is a little more exposed because if you look at the percentage of our sales is larger than our competitors because we -- I would say, until 5 years ago, we were the #1 helium supplier globally and maybe 3, 4 years ago. And we use that to -- in our advantage when the market was short. And now that the market is long, I think we took the right approach of developing this can that we can store helium. And now we see our competitors doing the same. So hopefully, the market will become a little more rational in the near future, but we still have these issues that we have new sources coming from Russia and other places and that they're making their way to the market.

Understood. And we have a few minutes left. So I just want to open it up for any questions from the audience. Otherwise, I'm happy to crack on. Just on the cost side, you've committed to pretty healthy rightsizing, 60% of the actions already completed. How should we think about the timing to realize cash cost to deliver on the remaining 40%?

Melissa?

Sure. Yes, absolutely. So we have -- you're spot on, 6% of the actions have been completed to date. We saw about a $100 million cumulative cost savings in FY '25 from the actions that we had previously. We're looking for about that run rate into FY '26. So as we continue to complete the majority of the remaining actions in '26 and a little bit in '27, we are looking for about $100 million cost savings. Now of course, wage inflation does eat away on that, right? So we do need to continue to look for additional productivity, not just in headcount, but across the organization with efficiencies and other productivity actions. But that is in our forecast about $100 million of additional cost savings.

Understood. And just related to those cost actions, I guess, if there are further changes to the project landscape like potential write-downs, like is there a potential to be more aggressive on the cost actions? Or maybe said differently, how much of the cost structure that remains after these actions is devoted to some of these outstanding mega projects?

Yes. The projects, we may have that situation. But at the end of the day, the cost for the people working on the projects is normally capitalized and does not affect the ongoing costs.

And you mentioned some of the portfolio optimization, some of the assets held for sale there, right? Is there more to go there beyond just gas station assets, what may or may not happen with energy transition? Like how do you think about the rest of the portfolio?

Yes, there is other stuff we're working on. We need to get that done to be able to communicate that. But as you know, Air Products has some very important positions in joint ventures. And we are very satisfied with our joint ventures. We believe that there is no there is no desire from our side to exit any of these joint ventures. But there is opportunities for consolidation for optimization, and we're working on that. And that's part of the gap closure that for the financial side that Melissa mentioned for 2026. But we understand exactly what we said when we talked about being cash neutral for 2026. She used 2 examples of the projects in China and the land sales that we have of the old headquarters. But we have 2 or 3 other actions we're working on, and that gives us the confidence to generate the cash we need to be the cash neutral.

Understood. And maybe I'll just close with this one. I think there's obviously a lot baked in, in terms of cost takeout and rightsizing, but I think it doesn't include additional opportunities for efficiency and productivity. So maybe what might you hope to bring to the table from an efficiency productivity standpoint, areas where you can potentially leverage AI or other new technology?

Yes. We are trying to -- like everybody else, are trying to understand exactly how to use AI in the company. So we took an approach to approach this issue from both sides, from the top and from the bottom. So from the top, we have some institutional projects, if you want, with data scientists and sometimes external consultants and so forth to working on things that are very large and important for us. So power management, for example, is an area that is very important for industrial gases. we can fluctuate our demand using liquid storage and other methods. And that's very helpful for potential suppliers of power. So we're trying to optimize that to minimize our overall power cost. But that's a corporate program that we are using AI. At the same time, we make the -- we decide to give access to AI tools, the genetic models and so forth to the vast majority of our [indiscernible]. So we basically let them have the tool and let's see what they can develop. I would say Air Products is well prepared for that. We work in a lot in the industry. I've seen a lot in terms of industrial gas companies. We are probably in a position that we may be the only one that uses the same ERP and have the same instances in every location in the products, right? So we have that in place, and that is very helpful because with that base, you can put the right guardrails, you can build the connectors and then you can go to your organization and say, okay, now you have the AI tool and you have this base, you feel free to develop new applications and new agents and so forth. And we are doing a lot of fun things and having internal competitions, agent of the month and who develop the most interesting things. So there is a lot going on, on that side. And we are using -- we have a robust productivity program in Air Products that has been in place for many years. And we have now identified every project that we have in productivity that use AI or can use AI, and we are trying to revisit them and see what else we can squeeze out in terms of productivity. But at the end of the day, it's a balance here. If you go to people and say, use this tool, they're always going to be concerned about themselves. Are they going to be affected by that. So you need to do this leap of faith from giving them the tool and say, use it and let's see what we can get and do not talk about headcount and stuff like that at this point. We just need to see what we can get out there.

That's great. Well, I wish we had another half an hour, but we'll have to leave it there. So please join me in thanking Eduardo and Melissa.