Air Products and Chemicals Q4 2023 Earnings Call Transcript

AlphaStreet
Provided by AlphaStreet
November 7, 2023
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Operator

Good morning, and welcome to the Air Products' Fourth Quarter Earnings Release Conference 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 Mr. Sidd Manjeshwar. Please go ahead, sir.

Sidd Manjeshwar
Vice President of Investor Relations and Corporate Treasurer at Air Products and Chemicals

Thank you, Annette. Good morning, everyone. Welcome to Air Products fourth quarter 2023 earnings results teleconference. This is Sidd Manjeshwar, Vice President of Investor Relations, and Corporate Treasurer. I'm pleased to be joined today by Seifi Ghasemi, our Chairman, President and CEO; Dr. Samir Serhan, our Chief Operating Officer; Melissa Schaeffer, our Chief Financial Officer; and Sean Major, our Executive Vice President, General Counsel, and Secretary.

After our comments, we will be pleased to take your questions. Our earnings release and the slides for this call are available on our website at airproducts.com. Today's discussion contains forward-looking statements, including those about earnings and capital expenditure guidance, business outlook and investment opportunities. Please refer to the cautionary note regarding forward-looking statements, that is provided in our earnings release and on slide number two. Additionally, throughout today's discussion, we will refer to various financial measures, including earnings per share, operating income, operating margin, EBITDA, EBITDA margin, the effective tax rate, and ROCE, both on a total company and segment basis. Unless we specifically state otherwise, statements regarding these measures are referring to our adjusted non-GAAP financial measures. Reconciliation of these measures to our most directly comparable GAAP financial measures can be found on our website in the relevant earnings release section.

Now with that, I'm pleased to turn the call over to Seifi.

Seifi Ghasemi
Chairman, President and Chief Executive Officer at Air Products and Chemicals

Thank you, Sidd, and good day to everyone. Thank you for taking time from your very busy schedule, to be on our call today. I would like to begin with the slide number three, our safety performance, which is our number one priority at Air Products. I'm pleased to share that our safety record has improved compared to last year, continuing the significant progress we have made since 2014. Our ultimate goal will always be zero incidents and zero accidents.

Now, please turn to slide number four, which summarizes our management philosophy. We reiterate these principles every quarter because they are fundamental to how we manage the company, and continue to profitably grow our earnings per share. Now, please turn to slide number five. Air Products has a very strong business model, and a long-term strategy to deliver consistent earning growth for the short and the long term, and I stress, the long term.

Projects in our on-site business, where we have long-term take or pay contracts with our customers, drove our volume growth this year, despite economic weakness across the regions. Our on-site business generates stable cash flow, and consistency contributes about half of our total sales. Also noteworthy, is that the strong pricing action in our merchant business, as well as our ability to contractually pass-through energy costs in our on-site business, helped us mitigate inflation as well as higher power, and energy costs, which we experienced last year. We also continue to successfully execute our long-term strategy to be the leader in blue and green hydrogen for the future, with a significant number of green hydrogen mega projects and their execution. Nobody in the world is matching what we are doing.

Finally, our backlog of over $19 billion spreads out [Phonetic] in a multi-year framework for double-digit earnings per share growth, which has been our goal since 2014, and remains our goal for the future.

Now, please turn to slide number six. Our fourth quarter adjusted earnings of $3.15 per share exceeded the top end of our guidance for the quarter, and improved $0.30 or 11% versus last year. For the full-year fiscal 2023, our adjusted earnings per share of $11.51 improved a $1.26 or 12% over prior year, continuing our strong track record of consistently delivering double-digit average earning growth per share since 2014. We are very proud of the accomplishment in 2013, despite the unfavorable economic conditions. In addition to the strong results, we also made significant progress in our critical deployment -- in our capital deployment strategy this year. Jazan Phase II was completed, both Gulf Coast Ammonia and Jiutai are operational. NEOM project financing was more than two times oversubscribed, and closed successfully.

We also added our four significant LNG sale of equipment projects, and I'm very pleased to announce that the natural gas to syngas facility in Uzbekistan is operational and contributing to our earnings. Before I go any further, I want to take time to thank all of our employees around the world, every one of the 23,000 of them, for their dedication and hard work, which has made it possible for us to deliver these impressive results, despite significant economic and geopolitical headwinds.

Now, please turn to slide number seven. We are continuing to deliver on what we promised to our shareholders in 2014. Executing to deliver an average of at least 10% growth in earning per share each year, as we move forward. We believe our two-pillar strategy of focusing on our base business, while extending our leadership in the growing demand for green hydrogen, would enable us to continue to deliver double-digit growth in our EPS as we go forward.

Now, please turn to slide number eight. We are proud again of our accomplishment of more than 40 consecutive years of dividend increases. As you can see on this slide, since 2014, we have increased our dividend at an average of 10% every year. Slide number nine shows our EBITDA margin trend, continuing to be my favorite slide. Our margins have increased to nearly 40% in the second half of fiscal year 2023, confirming the strength of our business model, and the significant cash flow that we generate.

Now, please turn to slide number 10 for our fiscal year 2024 outlook and guidance. Although there will continue to be challenging economic conditions in the near term, I remain very optimistic about Air Products' future. Our capital deployment strategy, and strong business model, will sustain our double-digit average earning growth rate. Therefore, for fiscal year 2024, we expect adjusted earning per share in the range of $12.80 to $13.10 per share, up 13% at the midpoint over last year.

We expect new projects, many of which are already on stream, to drive our earning per share growth next year. Additionally, we also expect improved LNG sale of equipment activities to add to our favorable results in 2024. And for the first quarter of 2024, our adjusted earnings per share guidance is $2.90 to $3.05, up 10% to 16% over last year. We also see our capex for next year somewhere between $5 billion to $5.5 billion.

Now, please turn to slide number 11. I know that some of our investors refer to our major project commitments slide to track our projects. However, the size and scale of these projects, which all have multi-year execution timeframes, certainly now, warrant more than time and attention than we can give them in a single line on a single Slide. Therefore, we remain committed to providing investors visibility, and meaningful update to schedule capital and off-take status, as we continue to progress our major projects. So, from time to time, we will give you a more depth look into our projects. Today, we have decided to give you an update on our blue hydrogen, and blue ammonia clean energy complex in Louisiana, which is one of the largest projects that we are executing.

Please turn to slide number 12. We announced our intent to build this world-scale facility in Louisiana in October 2021. As we moved forward with detailed planning to execute this project, a significant positive event happened in August 2022 when the United States Congress passed the IRA legislation, which created tax incentives for the production of blue and green hydrogen. In addition, by 2022, it was becoming more and more evident that the future demand for blue hydrogen and blue ammonia is improving significantly, supported by positive developments in other regions of the world, particularly in Europe and Japan.

Not only is the growing need to decarbonize the heavy transportation and industrial sector such see, but also other growing applications including using low-carbon intensity blue ammonia to fuel ships, reduce emissions from power plants and more. These events, especially the passage of the IRA legislation, led us to consider that now, rather than later, is the best time to build the infrastructure for this project, to accommodate future expansion. It is important that we are -- that we pre-invest in the infrastructure needed for future expansion now, so that when the demand increases rapidly, as we expect it to, we will be able to bring the next phase of this on stream, as fast as possible.

In addition to the increased cost to build the infrastructure, obviously, the project cost has gone up due to inflation, that we are seeing in the past two years since we announced the project, and anticipate in the future to build this facility. In addition to all of this, we have included in the $7 billion, funds to cover the interest on capital that we will be using as we build this plant. This facility is a huge facility. We are very excited about its future. We remain totally committed to this project and its profitability. It is a unique, one of a kind project that will put us significantly ahead of anybody else in the world, in the production of this product.

We see significant demand for the product that this plant will produce. As a result, I am very pleased to announce today that our Board of Directors has given us final investment approval to proceed with the project at the new capital estimate of $7 billion. We expect this project will deliver double-digit returns to our investors when it is fully on stream. As you know, this project will produce hydrogen, and ammonia at very low-carbon intensity. As the first company to make these unique low-carbon hydrogen and ammonia products, at a large scale, we expect to get a premium for the product, which will allow us to achieve double-digit returns on capital.

Additionally, the scale of our activities will provide a cost advantage over other similar projects in development at this time. We are really excited about the future of low-carbon hydrogen, and ammonia, that is by our -- this project in Louisiana is well underway, and we are laying the groundwork to meet the expected additional demand in the future. The additional infrastructure we are building now will continue to be a competitive advantage for Air Products in the future.

Now, it is my pleasure to turn the call over to Melissa Schaeffer, our Chief Financial Officer, to give you a summary of the fourth quarter 2023 results. Melissa?

Melissa Schaeffer
Senior Vice President and Chief Financial Officer at Air Products and Chemicals

Thank you, Seifi, and my thanks to the people of Air Products, who have again delivered double-digit average earnings growth in a difficult environment., an impressive trend that we have achieved in nine of the past 10 quarters. Now, please turn to slide 13 for a review of our fourth quarter results. In comparison to last year, we have again achieved underlying sales growth despite ongoing economic weakness. Merchant price was 4% higher compared to last year, with positive pricing in most regions. This corresponds to a 2% price improvement for the whole company. Higher on-site volumes, including strong demand for hydrogen, and higher LNG sale of equipment activities, were offset by one-time opportunities in the prior year, resulting in flat volumes for the company overall.

Declining natural gas costs in Europe and the Americas reduce energy cost pass-through to our on-site customers. This 14% decline in sales has no impact on profit, but was a significant contributor to our higher margin. The overall impact of currency was minimal, as the strengthening of the euro and British pound against the US dollar was mostly offset by a weak Chinese RMB. EBITDA of $1.3 billion improved 10%, as favorable price, variable costs, and equity affiliate income more than offset higher other costs. EBITDA was up in four of our five reporting segments. EBITDA margin jumped more than 700 basis points, with lower energy cost pass-through contributing to about two-thirds of the improvement. ROCE progressed steadily to reach 12%, which is 90 basis points higher than last year.

We expect to maintain this steady progression as we continue bringing new projects on stream, and put the cash on our balance sheet to work. Adjusting for cash, our ROCE would have been relatively flat at 13.4%. Sequentially, results improved primarily due to increased LNG sale of equipment activities as well as on-site.

Now, please turn to slide 14 for a discussion of our earnings per share. Our fourth quarter adjusted earnings were $3.15 per share, up $0.30 or 11% compared to last year, due to strong pricing and higher equity affiliate income, partially offset by unfavorable cost. Price, net of variable costs, contributed $0.44 this quarter, benefiting from both price actions and lower power costs. Cost has been an unfavorable impact of $0.28, driven by higher inflation and higher maintenance, as well as our ongoing efforts that support our growth strategy, including bringing new assets on stream. Equity affiliate income was $0.19 higher, due to the contribution of the second phase of the Jazan projects, and positive results from other unconsolidated joint ventures across the region. The remaining items, including non-controlling interests, interest expense and the tax rate, together had a modest negative $0.03 impact.

Now, please turn to slide 15. We remain committed to maintaining our current targeted Aa2 rating. With our strong cash flow and additional debt leverage, we estimate that we can put more than $30 billion to work over the next 10 years. Today, we have a backlog of over $19 billion, with approximately $15 billion of projects focused on the energy transition. We believe that investing in these high-return projects, is the best way to create long-term shareholder value.

Now to begin the review of our business segment results, I'll turn the call to Dr. Serhan.

Samir J. Serhan
Chief Operating Officer at Air Products and Chemicals

Thank you, Melissa. During our first -- fourth quarter, we again saw broad-based improvements across our businesses. Profits were favorable in four out of our five segments compared to the previous year. Please turn to slide 16 for a review of our Americas segment results. Compared to last year, merchant price improved 10%, which corresponded to a 4% improvement for the overall region. Volumes grew 3% due to a strong demand for hydrogen. EBITDA of just over $600 million improved 17%, driven by strong price, volume, and equity affiliate income, while partially offset by higher cost. EBITDA margin of 44.5% jumped more than 1,100 basis points. About two-thirds of the margin improvement was driven by lower energy cost pass-through. Sequentially, EBITDA increased 6% mainly on better hydrogen volume.

Now please turn to slide 17 for a review of our Asia segment results. Compared to last year, Asia volumes were negatively impacted by slower economic recovery in China, a weak electronics market, and one-time opportunities that benefit last year results. Despite these volume headwinds, our team has maintained a focus on price. EBITDA and margin were down, primarily due to the unfavorable volumes. Sequentially, price and volume were flat. However, EBITDA declined primarily due to unfavorable business mix.

Please turn to slide 18 for a review of our Europe segment results. Compared to last year, our costs subsided, while merchant pricing remained stable. Strong volumes in our on-site business were offset by weaker demand for merchant products, resulting in flat volumes for the segment overall. EBITDA was up 15%, driven by the lower power cost, and stronger currencies against the US dollar, which more than compensated for the other cost increases. EBITDA margin was 1,000 basis points higher, approximately two-thirds of which was due to the impact of lower energy cost pass-through. Sequentially, the region's EBITDA was relatively flat as higher-volume was offset by unfavorable price and costs.

Like I mentioned before, we brought the new project in Uzbekistan on stream last month, earlier than previously anticipated. We expect this project to gradually ramp-up, and significantly contribute to growth in this segment going forward.

Now, please turn to slide 19. Before we move on to the next reporting segment, I would like to take this opportunity to highlight the recently-announced largest blue hydrogen project in Europe. Blue hydrogen project is being developed in conjunction with Porthos CO2 transport and storage project in the Port of Rotterdam, where we have an extensive hydrogen pipeline network. Porthos will transport the CO2 emission from participating industrial companies and sequester them in depleted gas fields in the North Sea. Air Products will build, own, and operate the carbon capture, and CO2 treatment facility, which will allow us to capture the emissions from our existing hydrogen facility, as well as the customer refinery. The resulting low-carbon hydrogen produced will be supplied to ExxonMobil under a long-term off-take agreement. European regulations are supportive of low-carbon projects. We have secured additional support from the Dutch government. We expect the project to be on stream in 2026.

Now, please turn to slide 20 for a review of our Middle East and India segment. Compared to last year, sales were lower due to lower volume. The second phase of the Jazan project, which closed in mid-January of this year, added to equity affiliate income, and it drove the region's overall results.

Now, please turn to slide 21 for our corporate and other segment results. This segment includes our sale of equipment businesses, as well as our centrally managed functions and corporate costs. The sales and profit for this segment improved this quarter, primarily due to higher LNG sale of equipment activities. We continue to have robust discussions with customer interested in our LNG technology and equipment. We're pleased to announce a significant new project involving sale of equipment in Malaysia last week, adding to our already robust project pipeline. Echoing Seifi and Melissa, the outstanding results this quarter, again, demonstrate the strength of our businesses. I also would like to thank our teams around the world for their hard work and commitment.

I would like now to turn the call back to Seifi to provide his closing remarks.

Seifi Ghasemi
Chairman, President and Chief Executive Officer at Air Products and Chemicals

Thank you very much, Dr. Serhan. Appreciate that. Now, please turn to slide number 22. We present this slide during every earning call because it is, our core belief, that the commitment and motivation of our people are the key drivers of our success. After all, technologies, processes, and physical assets, which are often cited as competitive advantages, are all created by people in the organization. At Air Products, we have built an outstanding organization. Our people working together are creating innovative technologies, processes, and facilities that are making us a first-mover, in supporting the transition to lower and zero carbon energy, and decarbonizing the transportation and industrial sectors.

We are doing this alongside our excellent core industrial gases business, which has also underpinned -- which is also underpinned by sustainability, and delivering significant productivity, and environmental benefits to our customers around the world. At Air Products, our higher purpose is to bring people together, to collaborate and innovate solutions to a significant energy and environmental challenges in our world. I can say that our entire team is focused on sustainable growth opportunities, generating a cleaner future for humanity.

With that, we are now ready to answer any of your questions, and we welcome them. Operator, we are ready for questions, please.

Skip to Participants
Operator

Thank you. [Operator Instructions] We'll take your first caller. John McNulty from BMO Capital Markets. Please go ahead.

John Roberts
Analyst at Mizuho

Yeah, good morning. Thanks for taking my question. So, I guess, I wanted to dig into the Louisiana project a little bit more, and the incremental $2.5 billion of spend. I guess, it sounds like there's a bunch of buckets, including capitalized interest, taking over more utilities, kind of expanding the scope of the project. I guess, can you help us to put into buckets where the bulk of that $2.5 billion is going?

Seifi Ghasemi
Chairman, President and Chief Executive Officer at Air Products and Chemicals

Good morning, John. John, excellent question. Number one, obviously, as we said, we announced this project 2.5 years ago. Everybody knows that there has been inflation. There is no escaping that, and there will be inflation as we continue to do this project. The labor markets are tight. Some of the supply equipment and so on are tight. Therefore, there is significant inflation that we have had to deal with, and we have included that in the new capital projects.

Order of magnitude, I mean, let's say that it's about $1 billion or more is inflation. The rest of it is the fact that we have -- as I've said during the call, we have put in interest on capital. Obviously, as capital goes up, we do charge ourselves interest during our own capital because otherwise, we would apply it under. So that is a significant part of that $2.5 billion.

And then, in addition to that, we have decided because we see demand for these products being significant, that right now, some of the fundamental infrastructure we want to build it bigger, so that when we want to expand, we don't have to build smaller units again, things like water supply, things like land preparation, things like we bought additional 1,000 acres for expansion. So, it's a combination of all of that, that adds up to the $2.5 billion, you'd say, increase. We also have put in contingency, and we have reviewed this thing in detail with our Board, and I'm very happy that they have supported us. But I keep going back to the fundamental issue that we are reiterating, but [Indecipherable] very carefully, that we expect double-digit return now on $7 billion, better than double-digit return on $4.5 billion [Phonetic].

So, if you want to look at it in a glass half-full, we are actually going to make more money than before. John, I cannot overstress the fact that we see the demand for the product materializing. It is serious, and as we go forward, we will be able to demonstrate that to you, but this is a very exciting project, it's a unique project. We are executing it. We are in the field, and our people are very excited about it, and we are all very excited and very positive about this project.

John McNulty
Analyst at BMO Capital Markets

Got it. Thanks very much for the color on that.

Seifi Ghasemi
Chairman, President and Chief Executive Officer at Air Products and Chemicals

Thank you, John.

John McNulty
Analyst at BMO Capital Markets

And then, I guess, my second question would just be on the Netherlands project. You know, it sounds like it's an interesting kind of emerging opportunity. Can you help us to think about how much capital may get put to work on that project, and how you're thinking about the returns for it as well?

Seifi Ghasemi
Chairman, President and Chief Executive Officer at Air Products and Chemicals

Yeah, I'm going to have Dr. Serhan give you more color, but, obviously, the return for that will be double-digits as like anything else we do. But Dr. Serhan is very close to that project, and I'd like him to comment on that. Serhan?

Samir J. Serhan
Chief Operating Officer at Air Products and Chemicals

Thanks, Seifi. We're really not going to talk about the specific about the capital for the project, but again, it's a very exciting opportunity. It's our third project in our first-mover advantage when it comes to blue hydrogen. We started with the net-zero blue hydrogen project in Edmonton, Canada, and we went to that Louisiana Darrow project, and now this is really the third, and it's really the biggest also in Europe. Very excited about it, with long term off-take agreement with a subsidiary of ExxonMobil, Esso. We capture -- we will capture CO2 from our existing hydrogen facility in the Port of Rotterdam, and we will also capture CO2 from another Exxon hydrogen plant, what we basically provided to Porthos sequestered under the North Sea. Again, emphasizing the double-digit return for the project, and coming onstream.

John McNulty
Analyst at BMO Capital Markets

Thanks very much for the color.

Samir J. Serhan
Chief Operating Officer at Air Products and Chemicals

Thank you. Thanks very much.

Seifi Ghasemi
Chairman, President and Chief Executive Officer at Air Products and Chemicals

Thank you, John.

Operator

We'll hear next from John Roberts from Mizuho.

John Roberts
Analyst at Mizuho

Thank you. Nice quarter. Staying on the blue hydrogen project in Europe, anything unique about the gas sourcing for that project, given Europe's disadvantaged gas situation, and is that replacing existing hydrogen capacity, or is your customer expanding their demand?

Seifi Ghasemi
Chairman, President and Chief Executive Officer at Air Products and Chemicals

Well, I can answer that, and then if Dr. Serhan wants to add to that, but, fundamentally, it is an existing plant that we have, existing plants that Exxon has, we have the technology and the know-how. We are going to put carbon capture on these existing units, and capture the carbon, and put it in this pipeline, to go and be sequestered. So, we are actually reducing CO2 emission into the air. This is not the new plant that people say that you are building a new plant, you're capturing the CO2, but you're not really reducing existing emission. This is really reducing existing emissions.

And that is where our technology is, and that's where our know-how is, and therefore, it's a very positive project. It's received very positively, and it is a significant project. We don't want to disclose the exact amount because of NDAs that we have, but it is not a $10 million project, but it's not a $2 billion project either, but it's a substantial amount of capex. Dr. Serhan, do you want to add anything?

Samir J. Serhan
Chief Operating Officer at Air Products and Chemicals

Again, it's really emphasizing no additional hydrogen. It's just really converting a gray hydrogen to blue hydrogen, and again, with full support of the Dutch government for low-carbon hydrogen.

John Roberts
Analyst at Mizuho

And on the volume weakness in China, could you peel apart syngas versus electronics versus merchant [Indecipherable]?

Seifi Ghasemi
Chairman, President and Chief Executive Officer at Air Products and Chemicals

John, that is a very, very good question. You know, I've been trying to get a handle on that myself, it's just not that easy, but where the weaknesses, but there is, obviously, weakness in the electronics, but there is a weakness in the fundamental Chinese economy, and we are beginning to see that. So I don't want to go through all the details of the breakdowns, but we are seeing a general weakness, and hopefully that trend will change, but that -- you know, despite that, we are giving you the guidance that we're giving you because we are saying that if the Chinese economy doesn't develop, as well as it should, then, what -- we will take additional productivity measures to make sure we deliver the guidance that we have given you.

John Roberts
Analyst at Mizuho

Great. Thank you.

Seifi Ghasemi
Chairman, President and Chief Executive Officer at Air Products and Chemicals

Thank you, John.

Operator

[Operator Instructions] We'll hear next from Vincent Andrews from Morgan Stanley.

Vincent Andrews
Analyst at Morgan Stanley

Thank you, and good morning. Seifi, I wanted to follow up on Louisiana in two-ways. One, it sounds like some of the incremental capex will be spent now, but the benefits won't necessarily accrue to the company at the time the first phase starts up, so I just want to understand. You'll have $7 billion of total capex spent when the project starts up, and traditionally we think of your return, you know, coming to the company in that first year. Will you not get the full -- will you not get the return on the full $7 billion of capex when you start up, or you have to wait until Phase II to get some of the return on some of the infrastructure and real estate spend that you're doing incrementally?

Seifi Ghasemi
Chairman, President and Chief Executive Officer at Air Products and Chemicals

Vincent, good morning. Excellent question. We are not going to leave any money on the table. We are going to price the product in such a way that we get double-digit return on the project on the $7 billion, right from the start.

Vincent Andrews
Analyst at Morgan Stanley

Okay, and then secondly, if I -- go ahead.

Seifi Ghasemi
Chairman, President and Chief Executive Officer at Air Products and Chemicals

Yeah No, no, after you.

Vincent Andrews
Analyst at Morgan Stanley

Okay. And then secondly, I wanted to ask about your Canadian project. I believe you -- one of your off-take partners is also constructing a facility up there in part to use your product, and I believe that an investor event earlier in September where that project might be delayed, if that project is delayed, how does that impact Air Products' economics and their ability to market their own product?

Seifi Ghasemi
Chairman, President and Chief Executive Officer at Air Products and Chemicals

Well, the way I would like to answer that is that, first of all, we are committed to meeting the requirements of our customer. So, whenever our customers comes on stream, we will have our plants ready for them. They are a very valued customer. You know who they are, Exxon, and they are one of our largest customers, and we have a lot of respect for them, and we worked with them very closely. In terms of if they are delayed, then, we are ready, not 100% of the product is going to them. We have other customers that we believe will be taking the product on-time. We have a liquid hydrogen plant that we are going to feed. Therefore, we would expect that effect on Air Products would not be that material.

Vincent Andrews
Analyst at Morgan Stanley

Thank you very much for all the detail. I appreciate it.

Seifi Ghasemi
Chairman, President and Chief Executive Officer at Air Products and Chemicals

Is that okay?

Vincent Andrews
Analyst at Morgan Stanley

Sure.

Seifi Ghasemi
Chairman, President and Chief Executive Officer at Air Products and Chemicals

Thank you.

Operator

We'll hear next from David Begleiter from Deutsche Bank.

David Huang
Analyst at Deutsche Bank Aktiengesellschaft

Hi, good morning. This is David Huang here for Dave. I guess on the major project slide, are there any other material changes on other projects, in terms of project cost, and timeline that you haven't updated? And also, I guess, on project cost, if I think about the cost inflation on Louisiana project, that's about 20%, why shouldn't that be the case for other projects that you have in your pipeline?

Seifi Ghasemi
Chairman, President and Chief Executive Officer at Air Products and Chemicals

Well, first of all, with respect to other projects, there is no material change in the profitability of those projects that we want to bring to your attention now. And as we -- as I said, in my call, with some of these bigger projects, as we go forward in our earning calls, we give you more detail about the different projects. The second thing is that, if you take a look at the inflation thing, we -- one of the biggest projects we are executing versus Jazan, that is already done.

The next project, a big project, was NEOM. We have already given you the capital for that, and we don't expect any significant inflation on that. That is in our backlog. With Darrow, we gave you the numbers right now. The projects that we are doing, there are other projects that we are doing, are in such a way that the return is connected to the capital. So, even if the capital goes up, the return doesn't go down. So, there is nothing that material to report at that stage. Okay?

David Huang
Analyst at Deutsche Bank Aktiengesellschaft

Okay, thanks. And then, in F Q1, European pricing was down 1%. Is there any specific competitive dynamic that resulted in that 1% decline because I don't think you have a decline in pricing for a long time, and I think your peers still seeing some price increase in Europe in F Q4. Can you just talk about, you know, what's causing that, and then your expectation on pricing in Europe, and then just in general, for next year?

Sidd Manjeshwar
Vice President of Investor Relations and Corporate Treasurer at Air Products and Chemicals

I would obviously love to answer your question in detail, but you know that we do have a very strong policy, and we adhere to that, all of us adhere to that. We do not talk about forward looking on pricing. That is not appropriate in our industry. And we can talk to you about what has happened in the past, but we do not have any opinion, or any suggestions about what is going to happen in the future. And so, my apologies, I will not be able to answer that question, ordering or policy and my chief legal officer is nodding his head that I'm doing the right thing. Okay? Thank you.

Operator

We'll move next to Mike Leithead from Barclays.

Mike Leithead
Analyst at Barclays

Great. Thank you. Good morning. First I wanted to circle back on--

Seifi Ghasemi
Chairman, President and Chief Executive Officer at Air Products and Chemicals

Good morning.

Mike Leithead
Analyst at Barclays

Good morning, Seifi. I want to circle back to Louisiana. You just answered an earlier question I think, talking about pricing the product appropriately to get your double-digit return upon startup, which is great, but when should investors expect a signed off-take agreement to help us get a bit more comfortable with the revenue stream from the projects?

Seifi Ghasemi
Chairman, President and Chief Executive Officer at Air Products and Chemicals

Well, on that one, I have been very -- kind of very clear about what is our philosophy. We could have signed agreements, long-term agreements for selling that product two years ago, but we always said that we do not want to do that because as we go forward, it is going to become very clear to prospective customers that there are not that many plants or sources of low carbon -- the level of low-carbon intensity, hydrogen, and blue ammonia that we are going to produce. And therefore, the value of our products will go higher.

We are not in a hurry to sign long-term agreements. The demand is going to be there, but right now, if we are negotiating with any of these prospective customers, to be very frank, they give you a list of 20 projects that, oh, wait a minute, I can buy from this guy in the Middle East, and this guy in Louisiana, and this project and this project. All of those projects are paper projects. Nobody is doing anything. We are the only people who are actually building a plan. So we have another two, three years before these plants come on stream. We should not be in a hurry to go and sell this stuff cheap just because that makes everybody feel happy. We -- our business, our goal, our responsibility is to make as much money as we can for the shareholders.

We think the value of these products will become higher as we get closer to where the demand is there, and there is not that many people who are supplying it. So, do not expect for us to come in and make a big announcement about selling this product in the near future because we are just not going to do that. We believe that the demand is there. Our customers know that the demand is there. It's just a little bit of a game about at what point people are going to come to the table, and we just don't think that right now is the time to do that.

But obviously, at some point in time, we do want to sell the product, there's no question about that. But it's just the fact that we are trying to get the maximum value for the unique product that we are going to be making. Nobody else in the world is producing this kind of product, and by the time this plant comes on stream, there is nobody else who is going to be producing this product at this scale because nobody has made the commitment, and it takes a long time to develop these projects, and build these projects.

Mike Leithead
Analyst at Barclays

Okay. Thank you for that very thoughtful answer. And then second, just a quick follow-up on cash flow, maybe for Melissa, I think, operating cash flow the past two years is about $3.2 billion, whereas capex is running about $5 billion, and the dividend is about $1.5 billion annually, so leverage is, obviously, moving a bit higher short term. When in your multi-year outlook would you expect that to peak out, or when should we start to see operating cash flow helped by the project start to move meaningfully higher in your view?

Melissa Schaeffer
Senior Vice President and Chief Financial Officer at Air Products and Chemicals

Sure. Thanks, Seifi. Hi, Mike. How are you? So, as you mentioned, we do continue to have very strong cash flow to support our ongoing business. We do continue to increase dividends, which is our commitment, and we are executing against our global project backlog. With that situation, because of the cash outlay, we do expect to go to the debt market this year -- this fiscal year. With that being said, as we bring these assets on stream, we will, of course, naturally be delevered. So that will be a -- you know, a decrease in our leverage, and obviously, we'll continue to maintain that Aa2 rating as Seifi mentioned. So, again, likely will go out this year with the cash needs, but we do feel very comfortable that we will stay within that 2 times leverage, so that we can maintain our Aa2 rating.

Mike Leithead
Analyst at Barclays

Great. Thank you so much.

Operator

Jeff Zekauskas from J. P. Morgan, your line is open. Please go ahead.

Jeff Zekauskas
Analyst at J. P. Morgan

Thanks very much. The working capital was a use of $424 million this year, and your undistributed earnings of equity method investments was negative $260 million. So if you add that up, that's $685 million, that was pulled away from cash from operations. And so, your cash flow was flat year-over-year. For 2024, what do you expect that? $3.5 billion? $4 billion? More than $4 billion? Is working capital an outflow, or an inflow? Can you explain your cash flow dynamics for next year?

Seifi Ghasemi
Chairman, President and Chief Executive Officer at Air Products and Chemicals

Good morning, Jeff.

Jeff Zekauskas
Analyst at J. P. Morgan

Good morning.

Seifi Ghasemi
Chairman, President and Chief Executive Officer at Air Products and Chemicals

As usual, you are asking a very good, and a very detailed question and I'm going to refer that details to Melissa, to give you some color on that, but Melissa?

Melissa Schaeffer
Senior Vice President and Chief Financial Officer at Air Products and Chemicals

Yeah, absolutely. Thanks, Jeff. I appreciate your questions, and you always definitely have very interesting and detailed questions. So, as we mentioned, we do still have a very strong cash inflow. This year, we had a few significant large cash outflows, including the closing of our Phase 2 for Jazan that happened in January. However, with that being said, working capital is still being largely funded by our ongoing inflow and trade activities. This year, as we mentioned, we do expect to have capex at around $5 billion to $5.5 billion, which is not far off where we were this year, including the closing of the Jazan joint venture. So we are very comfortable, given our current cash flow, that we will be able to meet ongoing working capital needs as well as execute against our growth strategy.

Jeff Zekauskas
Analyst at J. P. Morgan

Okay. All right. For my follow-up, if your investment in Louisiana is going to be $7 billion, is that $7 billion to be spent by 2026? And so, should we assume that your capex in 2025 and '26 should be higher than the $5 billion to $5.5 billion range you've got for '24?

Seifi Ghasemi
Chairman, President and Chief Executive Officer at Air Products and Chemicals

Yes, I'll take that question

Jeff Zekauskas
Analyst at J. P. Morgan

Please.

Seifi Ghasemi
Chairman, President and Chief Executive Officer at Air Products and Chemicals

We have announced officially today that we expect the project cost to be $7 billion. We have not announced that we expect that Air Products will spend $7 billion on building the project. We can, as we go forward, and we sign long-term agreements to sell the product, we can, and we will seriously consider like we did with NEOM to lever the project and finance the project. So, you might end up that out of the $7 billion, our actual cash outlays for the project might be $2 billion, $2.5 billion, $3 billion, not $7 billion.

So, there is a possibility of doing that. Please don't forget that. So we are -- we have the capacity to spend our own cash, but we would rather project finance these products, so that we have more cash for future projects. And this, we have demonstrated, we did this with Jazan, where it was a $12 billion project, and we project financed that. We have done that with NEOM. And there is a good possibility, I'm not saying 100%, but there is a good possibility that we will do that with this project, which is a very interesting project and very amenable to having the project financed. Okay, Jeff?

Jeff Zekauskas
Analyst at J. P. Morgan

Yes, thank you so much.

Seifi Ghasemi
Chairman, President and Chief Executive Officer at Air Products and Chemicals

Thank you very much.

Operator

Moving next to Marc Bianchi from TD Cowen.

Marc Bianchi
Analyst at TD Cowen

Hi, thank you. I'd first like to ask for an update on the NEOM project. Can you talk about progress there, remind us of the timeline, and any updates on potential off-take agreements?

Seifi Ghasemi
Chairman, President and Chief Executive Officer at Air Products and Chemicals

Our NEOM project is moving forward very nicely. We are certainly almost done with the engineering. We are actually constructing the plant. We have, as you saw, that announcement today by NEOM Green Hydrogen Company that they are taking delivery of the wind turbines. So, that project is expected, but right now, the timeline that we have announced is at the end of 2026, beginning of 2027, and we fully expect to meet that deadline.

So that -- in terms of discussions about the uptake, again, the comments that I made about Louisiana apply to that, but also, at the same time, there has been public announcements by other people about their demand for green hydrogen in Europe. You saw that one of the largest oil companies in the world announced that they will need 500,000 tons of green hydrogen by 2030. Just to put it in perspective, 500,000 tons is equivalent to three times the capacity of NEOM. So, there is going to be plenty of demand for that project, but we will wait, as I said, in terms of our strategy to price that appropriately so that we can get appropriate return on that project.

Marc Bianchi
Analyst at TD Cowen

Thank you, Seifi. That's a great overview. Thank you.

Seifi Ghasemi
Chairman, President and Chief Executive Officer at Air Products and Chemicals

Thank you.

Marc Bianchi
Analyst at TD Cowen

The other question I had was on the targeting greater than 10% internal rate of return. Does that suggest that there's -- this is an upgrade from your prior messaging of sort of EBIT contribution of 10% of the project cost, and does this now include the benefit of IRA, I believe, before the comment was that you were not including the benefit of IRA?

Seifi Ghasemi
Chairman, President and Chief Executive Officer at Air Products and Chemicals

Well, it's a combination of all of that. We have always said that 10% IRA is the minimum. That really translates to what you said, $0.10 of operating profit on a dollar of investment, those two go together. We do expect, and we have demonstrated that. Now that you have all the detailed numbers, please take a look at the return we are getting on Jazan. I mean, Jazan is a $12 billion project. And if you look carefully, you'll find out that in terms of IRR, the returns on that is more than 15%. So we obviously, as I said, we price our products not based on just the return, the price is based on what the market bears. And -- but if it goes below 10%, we usually don't do the projects, unless it is phenomenally a strategic, and we don't have that -- too many of those. So, overall, the 10% IRR is our minimum, and we expect most of our projects to produce more than that. Okay?

Marc Bianchi
Analyst at TD Cowen

And the inclusion of benefit from IRA?

Seifi Ghasemi
Chairman, President and Chief Executive Officer at Air Products and Chemicals

Well, the IRA, it depends on which project and how much it affects that and all of that. But IRA obviously, we've had, but as you know, IRA was designed in such a way that we would be able to get a good return, but also price the product to encourage the customers to use that because it was an incentive for that. So, it's going to help both sides.

Marc Bianchi
Analyst at TD Cowen

Okay. Thank you very much.

Seifi Ghasemi
Chairman, President and Chief Executive Officer at Air Products and Chemicals

Thank you.

Operator

We'll move next to Mike Sison from Wells Fargo.

Mike Sison
Analyst at Wells Fargo & Company

Hey, good morning. Nice quarter and outlook. I apologize. I just want to ask Louisiana again, maybe, I just don't understand. So I take the $7 billion, and then your normal, you know, 10% of capital should be applied to the $7 billion, or is that is less than $7 billion?

Seifi Ghasemi
Chairman, President and Chief Executive Officer at Air Products and Chemicals

Well, the rule of thumb that we said you should expect -- once that plant is fully operational, you should expect -- if we have financed that ourselves and the $7 billion is our money, you should expect the $700 million uplift on the operating income of Air Products. But as I said, we might decide to project finance it, which, in that case, it will be in accordance with how much cash we put in there, but if it was all of our money, yeah, you should expect $700 million, yeah.

Mike Sison
Analyst at Wells Fargo & Company

Okay. And then, you know, given that the cost has gone up from $4.5 billion to $7 billion, is the pricing assumption on what you're going to sell, has that changed, and, you know, does that 10% return change on a certain price that you need to get for the product?

Seifi Ghasemi
Chairman, President and Chief Executive Officer at Air Products and Chemicals

Yeah, we believe that -- well this is why our Board approved the project at $7 billion because they see that we -- except that we will be able to sell the product at a price, and at a premium to get that return. Look, it is not very difficult for the investors to take pen to pencil, and just go through order of magnitude of that plant to make it simple, assume it is making 3.5 million ton a year of blue ammonia. Assume a price for blue ammonia, you know where the price of gray is, obviously, blue is going to be higher than that, and then see what the revenue is.

And then the cost. It is natural gas costs that you can calculate, it is operating cost that you can calculate, it's electricity cost that you can calculate very easily, and then by the time you get done with the math, you'll find out that, that plant has -- at a reasonable price for blue ammonia, it can easily make more than $1.4 billion, $1.5 billion of EBITDA. So then, that's where $7 billion becomes a decent return project. So, it is not difficult to actually do the calculation. You know, right now, you know where the price of gray ammonia is, but it is not very difficult to convince yourself that, that project is a very, very good project. The important thing for Air Products is to execute the project, and bring the project, get the permit for the classics well, do the sequestration, those are -- the execution is the challenge for us, but I think the rest of it will work out very nicely. Okay?

Mike Sison
Analyst at Wells Fargo & Company

Understood. Thank you very much.

Seifi Ghasemi
Chairman, President and Chief Executive Officer at Air Products and Chemicals

Thank you.

Operator

Kevin McCarthy from Vertical Research Partners. Your line is open.

Kevin McCarthy
Analyst at Vertical Research Partners

Yes, good morning. Seifi, about three weeks ago, the US government announced its intention to establish seven regional hydrogen hubs at a cost of $7 billion to be funded by the Bipartisan Infrastructure Law. Would be curious to hear your thoughts on that program. I believe you're involved with the so-called ARCHES project or hub in California.

On the one hand, I suppose this accelerates some market development. On the other hand, there are many dozens of partners in these hubs, some of which might be customers, others might be existing competitors or possibly future competitors. So maybe you can put that into context for us in terms of your involvement, and how you see that market developing?

Seifi Ghasemi
Chairman, President and Chief Executive Officer at Air Products and Chemicals

For that particular project, which is part of the infrastructure project, we have never really emphasized that too much because that in terms of helping what we are doing is not comparable to the IRA. It is $7 billion spread over a lot of different projects. By the time it gets to any one-off individual company and so on, the amount is not that much to move in either. We, obviously, welcome any kind of investment to promote the use of hydrogen. That is a positive thing. But in terms of any kind of material -- we are part of the ARCHES thing. I mean, we have an NDA, we cannot talk about it that much. But fundamentally, that contribution from that infrastructure bill, as you said, $7 billion divided by all of these projects is not going to move the needle for us in terms of what we were, or we were not going to do that.

We have never counted that as being anything significant. That is not comparable to anything like the IRA because with the IRA, it becomes very meaningful when you start. We are sequestering in Louisiana 5 million of ton -- of CO2 at $80, that's $400 million a year of contribution. Obviously, it costs some money to sequester this, but as I said, the numbers are not comparable. So on the infrastructure bill, we have always said it's a good thing. It, obviously, is a good thing, it's better than nothing, but it's not something that will make any material difference to what we are doing or not doing.

Kevin McCarthy
Analyst at Vertical Research Partners

Okay, thank you for that. And then secondly, if I may, would you comment on your outlook for the corporate and other line. It came down quite a bit in the fiscal fourth quarter, and you've been active on LNG. So, maybe you can comment on the forward profile for LNG, as well as the controllable expenses flowing through that line in 2024.

Seifi Ghasemi
Chairman, President and Chief Executive Officer at Air Products and Chemicals

Sure. I have made this statement in the last quarter, and I'd like to reiterate that, that we do have programs in order to control our corporate cost. We had a significant amount of corporate costs in 2023 because we were pursuing a lot of projects and starting up a lot of projects, those things do cost money. We don't expect that the amount will be as much in 2024. In addition, the fact that our LNG business and so on, and the other businesses are doing well, will help on that. So, we do expect a reduction of that corporate cost in 2024 versus 2023 by a significant amount.

Kevin McCarthy
Analyst at Vertical Research Partners

Okay. Thank you so much.

Seifi Ghasemi
Chairman, President and Chief Executive Officer at Air Products and Chemicals

Sure, thank you. And next question?

Operator

Moving next to Stephen Byrne from Bank of America.

Stephen Byrne
Analyst at Bank of America

Yes, thank you. Was the strength in hydrogen demand during the quarter in the Americas, specifically in your US Gulf Coast pipeline, and if so, what fraction of those pipeline customers are you in dialogue with about switching them from gray to blue? And if the demand outlook in that region for blue hydrogen is so robust, are you -- might you potentially consider reducing the design and scope of the Louisiana project and drop the ammonia piece of it, which would include, you know, the offshore, you know, port and so forth in addition to an ammonia reactor?

Seifi Ghasemi
Chairman, President and Chief Executive Officer at Air Products and Chemicals

You are asking a very, very good question. I do not expect that we would get to the stage that we would drop the ammonia part because there will be a robust demand for blue ammonia. But you are very right, the demand for blue hydrogen is growing in that part of the world. We are engaged with all the customers, and the interesting thing is that if we ever expand the project, that is where we can focus more on what you said that maybe produce more blue hydrogen than trying to produce more ammonia. So overall, the story is very positive, as you said, and the fact that Air Products has a 700-mile hydrogen pipeline, in that part of the world, gives us significant advantage in being able to optimize this. But that is a very good position to be, and I think you're pointing out a very good point.

Stephen Byrne
Analyst at Bank of America

And then one follow-on with respect to the Netherlands blue hydrogen project. I believe Air Liquide is also involved in a project with Porthos. And my question for you is, as the Netherlands is moving in this direction of blue hydrogen, do you see potential that the rest of Europe might relax its preference for green and embrace blue more?

Seifi Ghasemi
Chairman, President and Chief Executive Officer at Air Products and Chemicals

Right now, the blue hydrogen project in the Netherlands is very practical because you do have these steam methane reformers there, and it's very efficient to capture the CO2 from the -- and produce blue hydrogen, it's better than the gray hydrogen. But I do not think that, that signals that the fundamental demand for new applications in Europe, especially for mobility and for some of the refineries, will go to blue. I think green hydrogen will still be the -- will end up being a preference for Europe, as you have seen in the announcement of some of the major possible users. So, I think it will be a combination of the two.

Stephen Byrne
Analyst at Bank of America

Thank you.

Seifi Ghasemi
Chairman, President and Chief Executive Officer at Air Products and Chemicals

Thank you. Next?

Operator

[Operator Instructions]. We'll hear next from Josh Spector from UBS.

Chris Perrella
Analyst at UBS Group

Hi, Good morning. It's Chris Perrella on for Josh. A follow-up on, I guess, the volume outlook for this coming year with volumes in Asia down, and some of the one-off deals that you did in 2023 rolling off, what are the volume assumptions underpinning your guidance for this coming year?

Seifi Ghasemi
Chairman, President and Chief Executive Officer at Air Products and Chemicals

Well, on that one, the way we have looked at this thing and, you know, it's very difficult to, obviously, predict the future. But overall, the way we have looked at this thing that, you know that our business is very much related to -- not to GDP, but to industrial production. So we have -- the way we have kind of budgeted ourselves is that industrial production in the US will be positive, and you know, not double-digit or anything like that. Last year, it was about 2.5%, something like that, maybe a little bit less than that. So positive in the US, flat in Europe, and down in Asia. That's the very much overall economic condition under which we have produced the guidance for next year.

Chris Perrella
Analyst at UBS Group

All right. Thank you. And one quick follow-up on the Rotterdam project. How should we think about the capital spend? And will -- with Porthos taking the CO2 from you, what's the cost involved in having them essentially dispose of it?

Seifi Ghasemi
Chairman, President and Chief Executive Officer at Air Products and Chemicals

Well, they are going to charge us certain dollars per ton for disposing the CO2, which we will, obviously, pass-through to our customers. We wouldn't be paying for that. And then we obviously -- we have a charge for our capital, and then there is a charge for the sequestration, and I don't think we are at liberty to quote the number that Porthos is going to charge us, but at some point in time, they might decide to make that public.

Samir J. Serhan
Chief Operating Officer at Air Products and Chemicals

But the Dutch government is providing incentives for the CO2 sequestration.

Seifi Ghasemi
Chairman, President and Chief Executive Officer at Air Products and Chemicals

But Dr. Serhan is adding that the Dutch government is also contributing on the cost for the sequestration.

Chris Perrella
Analyst at UBS Group

All right. Is there a capital -- a rough capital number for this -- for the carbon capture?

Seifi Ghasemi
Chairman, President and Chief Executive Officer at Air Products and Chemicals

We haven't disclosed that. We are not allowed to disclose that. But as I said, it is more than $100 million and less than $1 billion. So, somewhere in between.

Chris Perrella
Analyst at UBS Group

Fair enough. Thank you very much.

Seifi Ghasemi
Chairman, President and Chief Executive Officer at Air Products and Chemicals

Sorry about that. We are not allowed to disclose the number. Okay?

Chris Perrella
Analyst at UBS Group

All right. Thank you.

Seifi Ghasemi
Chairman, President and Chief Executive Officer at Air Products and Chemicals

Thank you very much. Okay, with that, I think we have significantly gone overtime. Is there anybody else on the queue, operator?

Operator

At this time, there are no -- there's no callers in the queue.

Seifi Ghasemi
Chairman, President and Chief Executive Officer at Air Products and Chemicals

Okay. Well, with that, I would like to thank everybody for being on our call today. We appreciate your interest in Air Products, and we look forward to discussing our results with you again next quarter. Stay safe, stay healthy, and all the best, and have a great day.

Operator

[Operator Closing Remarks]

Corporate Executives
  • Sidd Manjeshwar
    Vice President of Investor Relations and Corporate Treasurer
  • Seifi Ghasemi
    Chairman, President and Chief Executive Officer
  • Melissa Schaeffer
    Senior Vice President and Chief Financial Officer
  • Samir J. Serhan
    Chief Operating Officer
Analysts

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