Air Products and Chemicals Q1 2023 Earnings Call Transcript

Presentation

[Operator]

Good morning, and welcome to Air Products' First 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.

[Sidd Manjeshwar, Vice President, Treasury & Investor Relations at Air Products and Chemicals]

Thank you, Katy. Good morning, everyone. Welcome to Air Products' first quarter 2023 earnings results teleconference.

This is Sid Manjeshwar, Vice President of Investor Relations and Corporate Treasurer. I am pleased to be joined today by Seifi Ghasemi, our Chairman, President and CEO; Dr. Samir Serhan, our Chief Operating Officer; Melissa Schaeffer, our Senior Vice President and Chief Financial Officer; Sean Major, our Executive Vice President, General Counsel and Secretary; and Simon Moore, our Vice President of Investor Relations, Corporate Relations and Sustainability, who as previously announced will be retiring at the end of March. After our comments, we will be pleased to take your questions. Our earnings release and slides for this call are available on our website at airproducts.com.

This discussion contains forward-looking statements. Please refer to the forward-looking statement disclosure that can be found in our earnings release and on slide number two. In addition, throughout today's discussion, we will refer to various financial measures. Unless we specifically state otherwise, when we refer to earnings per share, operating income, operating margin, EBITDA, EBITDA margin, the effective tax rate and ROCE, both on a total company and segment basis, we are referring to our adjusted non-GAAP financial measures. Adjusted earnings per share, adjusted operating income, adjusted operating margin, adjusted EBITDA, adjusted EBITDA margin, adjusted effective tax rate and adjusted return on capital employed. Reconciliations of these measures to our most directly comparable GAAP financial measures can be found on our website in the relevant earnings release section.

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

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

Thank you, Sid, and good day to everyone. Thank you for taking time from your very busy schedule to be on our call today.

I am proud to say that the people at Air Products delivered great results this quarter, despite the significant macroeconomic headwinds. I would like to thank each of our talented, dedicated and motivated employees for their hard work.

Now please turn to slide number three. Our safety performance, which is always our highest priority. As you can see, we have made significant progress since 2014, but we always work hard to do better. Our goal is to achieve zero incidents and zero accidents.

Now please turn to slide number four. For the first quarter of our fiscal year 2023, our earnings per share was $2.64, an improvement of $0.16 per share or 6% versus last year. But our underlying performance versus last year was much better than that. The items that you need to consider to make a fair comparison versus last year are at $0.15 negative impact from currency, and a one-time gain of $0.20 in the first quarter of last year from the finalization of the Jazan ASU joint venture. I would like to point out also that our guidance for the first quarter was to deliver earnings per share of $2.60 to $2.80. Our actual EPS is $2.64, which is within our guidance, but at the lower end. The principal reason is that the Chinese and European economies were weaker than our expectation in early November, when we gave you the forecast.

Now please turn to slide number five. We are committed to reporting our shareholders, while pursuing our long-term growth strategy. I am pleased to say that we have again raised our quarterly dividend, this time by 8% to $1.75 per share per quarter or $7 a share on an annual basis, extending our record of more than 40 consecutive years of dividend increase. We expect to pay out more than $1.5 billion to our shareholders in 2023, reflecting our commitment to return cash to our shareholders.

Now please go to slide number six, still my favorite slide, which shows our EBITDA margin trend. While energy costs remain high, our margin improved this quarter. Our team has worked hard on increasing prices to offset the higher energy costs in our merchant business and we continue to work on productivity. I would also like to point out that three quarters of the margin decline, since the peak margin of around 42% is due to higher energy cost pass-through in our onsite business, which increases our sales, but does not impact our profit.

Now please turn to slide number seven. In addition to delivering strong results, we also achieved several significant project milestones during the quarter. In December 2022, we were very excited to announce our $4 billion green hydrogen project in the United States. This project will be located in Northern Texas, and is our latest mega-scale zero carbon, which means green hydrogen project since the announcement of our revolutionary NEOM green hydrogen project in 2020, and it will be by far the largest green hydrogen project in the United States. The information about this project and the recording of our December 8th webcast for this project are available on our website.

Now please turn to slide number eight. We were pleased to announce on January 19th, the completion of the second phase of the $12 billion Jazan gasification and power project, which is 51% majority owned by Air Products and it is 60% project finance. During the first quarter, with the first phase of this project, which was completed in October of 2021, Air Products contributed at about $1.5 billion for the purchase of $7.1 billion of assets from Saudi Aramco.

In the second phase, which was just completed, Air Products contributed an additional $900 million for the purchase of $4.2 billion of additional assets. Our total cash contribution for this project is $2.5 billion. As expected, the first phase of the project at end was $0.80 to $0.85 per share on an annual basis, which significantly contributed to our results in fiscal year 2022. With the completion of the second phase, we now expect about a total of $1.35 per share of earning contribution on an annual basis. This is fully in line with what we announced to investors more than three years ago.

Now please turn to slide number nine, where I wanted to provide you with an update on our great NEOM green hydrogen project, which is appropriate to give you an update since we are very close to completing a major milestone, which is signing the definitive project financing agreement for this project. And therefore, we wanted to give you an update before you read about that in the next few weeks. We have been making excellent progress on this world-scale project to bring energy to the world. The engineering is now about 30% complete. All major sub-contracts for the project have been awarded, including the electrolyzers and the power plant and all of that. Land preparation is completed and construction has started, and the joint venture team is in place and executing the project.

Now please turn to slide number 10. As you know, Air Products has a one-third ownership position of the NEOM production joint venture. But importantly, and this is very important, we remain the sole off taker of 100% of the green hydrogen produced in the form of green ammonia produced at this facility, and in an exclusive 30-year contract. We continue to see significant opportunities to use this green ammonia to bring green hydrogen to consumers around the world. And as I said, we are the sole off taker and distributor of this product. Then I want to emphasize that their off take price for this green ammonia remains the same as then we negotiated the original project in the summer of 2020 when we announced the project. This is a very key point that the fact that now our project financing this project. And as a result, we are absorbing all of the project financing charges and so on. That has not changed the off take price.

Then now please turn to Slide 11. Initially, the three partners planned, which are Air Products, NEOM which is owned by PIF and ACWA Power, we intended to use our own cash to fund the project -- the total project. But over the past two years, we have seen significant interest from the global financial institutions who see tremendous value proposition of this project. Therefore, we got tempted and we considered and we decided that the best course of action to minimize our cash contribution and maximize the return on the cash is to do non-recourse project financing for this project. The partners will contribute 25% cash and the remaining 75% will be non-recourse project financing.

And obviously, if you are doing non-recourse project financing, you want to maximize the amount of money that you can borrow, therefore, you put a lot of your ongoing costs and you bring them forward to the real present value and borrow against that. I'm going to explain this a little bit more when we get to the detailed chart. This means that Air Products -- this project financing means that now our cash contribution to this project will be $800 million -- less than $800 million, which significantly less than the $1.7 billion that we originally expected. That is what you would expect us to do, that is the whole point of project finance.

Now please turn to slide number 12. I am pleased to say that the non-recourse financing is well underway and these are more than two times oversubscribed from what we want to borrow. We have received commitments from over 20 global financial institutions, demonstrating their confidence in this project. Later this month, we expect to complete what we call the dry close, which is the signing of the definitive financing agreements, and we expect the full financial close to be completed a few months later. We'll obviously let you know as we make progress on the project finance.

Now please turn to slide number 13, so that I can provide you with an overview of the total project capital needs. First, the original $5 billion that we have mentioned before, for the capital required to build the facility. We have increased that -- it has increased by about $0.5 billion due to inflationary pressure that everybody expects. Then in addition, we have further increased the project investment by $1.2 billion to include items that we were going to buy service from other people, but now we want to provide those services ourselves in order to make the project totally self-contained and we wouldn't be dependent on others. These include power transmission lines and other infrastructure that was needed for the project. This increases the capital cost, but it decreases the operating costs and we decided that was a better trade-off. But the key point was to make sure that the project is not dependent on other people doing such things and we would have control over the whole thing, so that when we come on stream, we have everything that we need for the project to be operating.

Now the other item and I'm sure will be a subject of the questions from people is the $1.8 billion for projects financing costs. That is a big number. But it is very explaining what that is. Again as I said, if you have project financing, you want to put and borrow as much money as you can. First of all, about a $1 billion of that $1.8 billion is the interest during construction. So we are spending money. We want to borrow that money. There is an interest in that borrowing, therefore that adds up for the net total length of the project to about a $1 billion, you want to finance that and borrow against that.

Then we are using the land, instead of leasing the land for 50 years, we decided to pay for the land upfront, that reduces our ongoing costs and we can finance that. That is a few hundred million dollars spares for the project. Usually you by the spares as you go forward, we decided to buy all the spares upfront and finance that. So those are the kind of costs that comprise the $1.8 billion. It makes a lot of sense and that is the beauty of project finance that you can -- you have the flexibility of bringing up forward a lot of your costs that will save your operating costs in the future. So altogether, the total funding needed for the project is $8.5 billion,

Now please turn to slide 14, which is the overview of the funding. As I described before, the $8.5 billion is made of $6.2 billion of non-recourse debt, which we wanted to maximize and $2.3 billion of cash funded through partners. Therefore, obviously, the Air Products cash contribution is about one-third of that which is less than $800 million, and this is as compared to the $1.7 billion that we originally expected. So overall, we are very pleased with we are. We are very pleased with the fact that we are project financing this thing, minimizing our cash flow and we are very pleased that the price that we are paying for the ammonia has stayed the same as it was in 2020. We are very optimistic about project and the prospects for a good return for the total supply chain as we go forward.

Now, please turn to slide number 15. I would like to summarize the discussion by sharing some thoughts about our strategy. As I have mentioned before, there are two pillars for growth strategy at Air Products and sustainability is the foundation for both of them. Through our core industrial gas business, we supply customers in dozens of industries with critical products and services at lower emissions and increased efficiency and productivity. Through our blue and green hydrogen [Indecipherable] project of the future, we would commit more than $15 billion by 2027 to deliver clean hydrogen at a scale, helping to drive the energy transition and moving humanity forward. These two pillars, which support each other for success, put us in the heart of solving the world's needs for sustainable energy and environmental solution. I am proud to say that the people of Air Products have continued to drive these results in the near-term and make excellent progress in executing our growth projects as we move forward.

Slide number 16 summarizes our management principles, which I reiterate every quarter. These principles are critical to Air Products' success and will continue to guide us in the future.

Now, I am pleased to turn the call over to Melissa, our Chief Financial Officer. Melissa?

[Melissa Schaeffer, Senior Vice President & Chief Financial Officer at Air Products and Chemicals]

Thank you, Seifi.

As Seifi mentioned earlier, we've delivered another set of impressive results this quarter, even with significant macroeconomic headwinds. Our commercial teams across the region continued to execute price actions and their efforts paid-off. Price drove the 25% operating income improvement, despite a significant negative currency impact. And operating margin was also 300 basis points higher compared to last year. I also would like to thank the team at Air Products for their continued outstanding efforts.

Now, please turn to Slide 17 for a review of our first quarter results. In comparison to last year, sales, volume, and price were up nearly 10%. The 7% gain in price to the total company equaled a nearly 20% improvement in merchant price compared to last year. The fifth quarter in a row of double-digit increase. Volumes were up 2% higher, driven by better on-site and merchant, but partially offset by lower sales of equipment activity. Volumes were strong in America and Asia, but weaker in Europe. Currency translation from the strengthening US dollar reduced debt by about 6% and lowered operating income by 8%. Despite this headwind, operating income jumped 25% and operating margin was 300 basis points higher, primarily driven by strong pricing.

Operating income was higher across the regions and particularly strong in America and Europe. Improvements in EBITDA and EBITDA margin were not as significant as operating income and operating margin, due to the prior year one-time item, primarily related to the Jazan ASU joint venture finalization. ROCE has climbed steadily the last six quarters, reaching 11.3%, which is 120 basis points higher than last year. We expect ROCE to further improve, as we bring new projects on-stream and continue to put our cash on the balance sheet to work.

Adjusting for cash, our ROCE would have been 13.3% this quarter. Sequentially, volume was weaker following a strong prior quarter, which also benefited from spot sales and favorable contract attention. Price continued to gain strength across the regions. Merchant price improved 3% versus last quarter. EBITDA was down 5% primarily due to weaker volume, while EBITDA margin was up 200 basis points, and positive price and energy cost pass-through more than offset the lower volume.

Now, please turn to Slide 18 for a discussion of our earnings per share results. Our first quarter adjusted EPS was $2.64 per share this year, up $0.16 or 6% compared to last year. Strong price drove the improved results. Price, net of variable costs, contributed over $0.70 this quarter, as our price actions more than offset the higher variable cost increases. Cost was $0.11 unfavorable, primarily due to inflation and higher maintenance. Price, volume, and cost together added $0.63 or a 25% increase compared to last year. However, the negative $0.15 from currency and a roughly $0.20 of prior year one-time benefit associated with the finalization of the Jazan ASU joint venture moderated the strong underlying results.

The Jazan item accounted for much of the $0.14 decline in equity affiliates' income and an unfavorable $0.10 in non-controlling interest. The effective tax rate of 19.1% was 210 basis points unfavorable due to less tax benefit this year. We expect an effective tax rate of 19% to 20% in FY 2023. For the quarter, a non-service component of our defined benefit plans were favorable $0.04 last year and unfavorable $0.07 this year. As I shared with you last quarter, we now exclude that component from our adjusted results.

Now, please turn to Slide 19. Our distributable cash flow continued to climb driven by improving EBITDA. While cash expenses included interest, cash tax, and maintenance capex remained relatively stable over the last three years. Over the last 12 months, we generated close to $3.1 billion of distributable cash flow or almost $14 per share. From our distributable cash flow, we paid over 45% or over $1.4 billion as dividends to our shareholders, while still having almost $1.7 billion to invest for growth. Our ability to grow distributable cash flow, especially in challenging conditions, demonstrates the strength and stability of our business. It enables us to continue to create shareholder value by increasing dividends and deploying capital for high-return projects.

Slide 20 provides an update of our capital deployment. As you can see, we have over $36 billion of capital deployment potential through fiscal 2027. The $36 billion includes over $8 billion of cash and additional debt capacity available today, about $17 billion we expect to be available by 2027 and almost 20 -- $12 billion already spent. We still believe this capacity is conservative, given the potential for additional EBITDA growth, which would generate additional cash flow and additional borrowing capacity. As always, we continue to focus on managing our debt balance to maintain our current targeted A/A2 rating. So you can see our backlog of nearly $20 billion will provide a substantial amount of growth in the future.

However, please note, this figure still includes the second phase of Jazan project that was completed in January, as well as the capital required for NEOM at its original higher value, as we work through the finalization of project financing. Moreover, we will include the $4 billion Texas green hydrogen project when the project reaches final investment decision. We've already spent over 30% and committed 74% of the updated capacity we show on this slide. We have made great progress and still have substantial investment capacity remaining to invest in high-return projects. We believe that investing in these high-return projects is the best way to create shareholder value for the long run. We continue to evaluate our capital deployment options and determine the best way to use available cash entrusted to us by our shareholders.

Now, to begin the review of our business segment results, I'll turn the call back over to Seifi.

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

Thank you, Melissa.

Now, please turn to slide number 21 for our Asia first quarter results. Our business has been able to deliver positive volume and price despite the negative COVID impact in certain parts of China. Volume improved 7%, supported by new assets. This quarter, we benefited from more than 25 new small-to-mid-sized traditional industrial gas plants, which came on-stream across the region over the last years. Price was up 1% in total, which is -- which translates to 3% in our merchant business. Although underlying sales grew 8% versus last year and energy pass-through was a positive 2%, overall sales [Indecipherable] offset by a 10% weaker currency, which is obviously translation.

Negative currency also reduced operating income and EBITDA, each by about 10%. Operating income and EBITDA both improved versus prior year, as better volume and price more than offset the negative COVID impact. Higher price and volume also drove margin improvement. Although, China's government has relaxed its rules related to COVID, yet subsequent high infection rates have impacted business activity. We expect economic recovery in China to take time. We anticipate power costs across the region to continue to rise and we are taking action, which, I mean, pricing action, to mitigate the impact. Sequentially, results compared unfavorably to last quarter, which benefited from some specific spot sales.

At this point, I would like to turn the call over to Sidd to discuss our European results. Sidd?

[Sidd Manjeshwar, Vice President, Treasury & Investor Relations at Air Products and Chemicals]

Thank you, Seifi.

Now, please turn to Slide 22. As the chart shows, power costs for Europe moderated sequentially this quarter, but are still at a historically elevated level. Our commercial team has executed significant price actions to compensate to these costs in our merchant business, and their hard work has paid off. Although we have fully recovered the higher power costs for the quarter, we are keeping a close eye on the dynamic power market in this region. As a reminder, power costs in our merchant business is the primary focus when managing the escalating energy costs in Europe. Our on-site business has contractual pass-throughs, which enables us to pass energy cost to our customers and almost all our natural gas usage is for on-site hydrogen production.

Now, please turn to Slide 23 for a review of our Europe results. Successful price actions, we have worked hard to implement, the last few quarters drove a significant improvement in Europe's results. Compared to prior year, price increased 14% for the region, corresponding to a 24% improvement in merchant pricing. Volume declined 6%, reflecting challenging conditions in the region. Demand for our hydrogen was weaker as customers continued to optimize their own hydrogen operations. Our merchant business was lower, partly due to the divestment of our business in Russia. Energy cost pass-through was up 9% due to higher natural gas cost, although it had no impact in profit.

Operating income jumped nearly 50%, while EBITDA was up almost 30%, primarily due to strong price. Although, unfavorable currency reduced operating income and EBITDA each by more than 10%. Price primarily drove the more than 400 basis points EBITDA margin increase, this was net of the higher energy cost pass-through, which lowered the margin by about 200 basis points. Compared to the prior quarter, volume was unfavorable due to weaker merchant this quarter and a favorable contract amendment in the prior quarter.

Now, I would like to turn the call over to Dr. Serhan for a discussion of our other segments.

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

Thank you, Sidd.

Now, please turn to Slide 24 for a review of our Americas results. Underlying sales increased 15%, despite the adverse effects of severe weather in December. Price improved further by 9%, this is equivalent to a 26% increase in the merchant business. Our team in the Americas has successfully raised the prices to cover the higher energy cost. Volume grew 6% due to better merchant and on-site, volume also benefited from a new short-term agreement, which will benefit Americas results for the next few quarters.

Operating income was up almost 30% over last year, and operating margin improved to 300 basis points, it's driven primarily by the strong price. Volume also contributed to profits, but costs were unfavorable. EBITDA improved less than operating income, because of a lower equity affiliate income due to unfavorable one-time items and lower medical oxygen volume in Mexico, as the COVID impact subsided. Sequentially, the price continued to gain strength, merchant price was up 7%, but volume was down 3% following a strong previous quarter.

EBITDA margin improved by around 400 basis points, primarily due to lower energy cost pass-through, which accounted for three quarters of that. We expect our planned maintenance activity to increase next quarter in parallel with our customers' planned turnaround.

Please now turn to Slide 26 for our Corporate segment. This segment includes our -- I'm sorry.

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

Samir, you need to -- it is Slide number 25, please.

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

I'm sorry. I review then Middle East results and India before going to that. So please let's go to Slide 25 first for review of our Middle East and India segment. Sale and operating income in this segment are modest since our Middle East and India wholly-owned operations are smaller in size. However, the segment's EBITDA is significant, since it includes the equity affiliate income related to the Jazan gasification and power joint venture, our India joint venture INOX Air Products, and other joint ventures.

For the quarter, an acquisition benefited sales and operating income versus last year, but was partially offset by planned maintenance activities. Although our share of the ongoing Jazan gasification and power joint venture net profit added to the region's results, the equity affiliate income declined by $28 million, primarily due to the one-time benefit associated with the Jazan ASU joint venture finalization in the first quarter of last year. As Seifi mentioned before, we have successfully completed the second phase of the Jazan gasification and power project, and we have begun to receive additional income in the second quarter.

Now, please turn to Slide 26 for our Corporate segment. This segment includes our sales of equipment businesses, as well as our centrally-managed functions and corporate costs. For our sale of equipment activities, our LNG business historically has been the anchor, but our non-LNG-related project activities have also grown in recent years to become major contributors to this segment. The cadence of project activities and timing of sales and profit recognition can vary the segment results. Our ongoing effort to support our growth strategy has also increased the centrally-managed functions and corporate costs.

For the quarter, the segment sales and profits were lower than last year, primarily due to lower sale of equipment project activities. We also continued to add resources to support our growth strategy. As mentioned before, inquiries for potential LNG projects have picked up recently. However, these projects take time to develop. We're excited, however, that we have signed one new agreement in the quarter and working hard to sign additional new projects.

At this point, I would like to return the call back over to Seifi to provide his closing comments. Seifi?

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

Thank you, Dr. Serhan.

Now, please turn to slide number 27. The outlook for the global economy remains uncertain, however, we remain confident in Air Products and the prospects that we have in the future, and the stability of our business, which is supported by our robust capital deployment strategy, as you have seen. Therefore, for fiscal year 2023, we have left our guidance unchanged despite the significant uncertainties that exists in the world. For the second quarter of fiscal year '23, which is usually our weakest quarter, our earnings per share guidance is $2.50 to $2.70, up 7% to 15% over last year. We still see our capex at $5 billion to $5.5 billion for the year, including the approximately $1 billion for the completion of the Jazan project that we just talked about.

Now, please turn to slide number 28. We include this slide in all our earnings call presentations. It describes very clearly my view that an enterprise can only be successful for the long-term when the people in the enterprise are motivated and committed to a mission. At Air Products, our higher purpose, our mission, as a company, is to bring people together so that they can collaborate and innovative solutions to the world's most significant energy, environmental, and sustainability challenges. We continue to build a diverse and inclusive culture that are more than 21,000 people feel they belong and matter and are motivated to achieve our goals. I believe Air Products is uniquely positioned to help the world transition to a cleaner and better future, and we are putting our efforts towards that each and every day.

Now, we are very pleased to answer your questions. Operator, we are ready for questions.

Questions and Answers

[Operator]

Thank you. [Operator Instructions] We will go first to Christopher Parkinson with Mizuho.

[Christopher Parkinson, Analyst at Mizuho]

Great. Thank you so much. Seifi, just given all the macro uncertainty that's prevailing across the globe, can you just give us your current assessments of where you think you stand, as well as the operating rates for the regional merchant businesses. Thank you.

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

Thank you very much, Chris. Well, right now, obviously, it's very difficult under the current circumstances to predict what is going to happen in the next two quarters, but we feel very confident about our own operations and about our ability to keep our plants running and service our customers. And as I look around the world, we obviously saw the Chinese economy a little bit weaker in the first quarter than we expected. Right now, my view on the Chinese economy is we have to wait and see how it comes out after the Chinese New Year. We don't expect any kind of disaster or any bad news, but it's just a question of that -- the rate of improvement, how would that be. We are very well-positioned there. We have taken action to increase prices.

And most important, as I've said, we are benefiting from the fact that we have 20, 25 smaller projects that usually we don't announce, but they are standard industrial gas projects, they are coming on-stream, and they are contributing. So we feel that we will be able to deliver on Asia in general. In Europe, the economy, again, was weaker than we expected in the first quarter, but right now, energy prices seem to have a stabilized, power prices have stabilized, natural gas prices have not yet, but overall, we think that we should be okay in Europe. And in the US, you saw our actions with respect to pricing. Last quarter, we got overall 7% -- overall, for the whole Company, we got 7%, but in the US, we got almost 14% price increase, which translates to almost 19% -- 20% price increase on the merchant side. Latin America is always very weak, so we don't talk about it too much. So overall, we feel pretty confident that we should be able to deliver the forecast that we have given you for the year.

[Christopher Parkinson, Analyst at Mizuho]

That's helpful. And just as a quick follow-up, just given now that investors and your team has -- had an opportunity to digest the IRA. Is there any key opportunity that's, let's say, specific to Air Products that you believe investors are missing? Is there something on the HEICO facility retrofits? Is there just anything else in terms of that materialization over the next several years that we all should be paying attention to? Thank you.

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

Chris, that's a very, very good question. I don't want to comment too much about the IRA benefits, because the law is there, everybody can read that. But the opportunities for Air Products that we will definitely follow through is, number one, we did put carbon capture on our existing facilities. There is two benefits on that, number one, we reduced our CO2 emissions, and number two, that gives us an opportunity to have a lower carbon hydrogen that we can sell at higher prices. We will definitely do that. Then, we are benefiting from the IRA on a project we had announced before the IRA, which was the project in Louisiana. We did that project with the economic space on no IRA benefit on $85 for CO2 capture. We've been counting on about $50. So that additional $35 enhances the returns on that project.

And then we will do significant amount of green projects in the United States. We did announce the project in northern Texas and we definitely are working on other mega projects to produce green hydrogen in the United States. The IRA credits for $3 for green hydrogen production, plus the fact that if you make an integrated facility, you'll also get credit for the renewable power that you generate, makes it very attractive to make these investments in the US. We are extremely well-positioned with our pipeline in the Gulf Coast and with our know-how and with our distribution capabilities to do things that other people cannot do because anybody cannot really take advantage of the credits, if you can do something with the hydrogen. I mean, people can run around and say, okay, I'm going to build a plant to produce green electricity and produce hydrogen, but then what you do with the hydrogen.

Air Products is one of the very few companies who knows what to do with the hydrogen, we are a hydrogen company. Therefore, we are in a very unique position to take full advantage of the IRA legislation. We are very pleased with that. That was a very significant step forward in the United States. And then the very good news for us is that that has prompted other countries to take action, and I think, yesterday or the day before that, you saw an announcement from the European Union that they are going to have a program of about EUR280 billion to promote the same kind of things, which would, obviously, be very good for us because we are a global company. Okay, Chris?

[Christopher Parkinson, Analyst at Mizuho]

It's very helpful, Seifi. Thank you so much.

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

Thank you.

[Operator]

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

[Anthony Mercandetti, Analyst at Deutsche Bank Aktiengesellschaft]

Thank you. Good morning. This is Anthony Mercandetti on for David. Seifi, you mentioned in your slides your new capital structure and the changes on the capital cost and contributions to NEOM. What is the return on this project versus what you were expecting when you first announced the project in July of 2020?

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

Well, the thing is that I have three partners, and I don't want to speak for them and disclose the detail on the project. But think that you have to take a look at is that we don't look at the return on the project, because we are going to take the off take and sell that and make money on that and that is how we take a look at the return on the total investment. So on that front, the return on that is going to be in accordance with what they have given you a guidance, which is for every dollar that we in invest, you should expect about $0.10 of operating income. So you have to look at total supply chain from Air Products point of view.

In terms of the specific return on the project, that is up to my partners to decide whether they want to disclose that or not. I don't want to disclose that because for us, that doesn't mean anything, it's the total supply chain. The important thing that you need to focus on is the fact that we are off taking their ammonia as the same price that it was negotiated in 2020. Okay?

[Anthony Mercandetti, Analyst at Deutsche Bank Aktiengesellschaft]

Yes. Understood. And as a follow-up on the green ammonia. If you did not lock-in this price to purchase, how much higher do you think it would be today versus when the project comes on stream?

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

Well, it depends on what we would have negotiated with our partners. I don't expect it to have been significantly different. But because -- I mean, you talked about the additional capital cost, but as I've said, a lot of the operating cost is being capitalized. So that necessarily doesn't affect the return on the project. But again, I just don't -- I have two other partners and I respect them and I don't want to disclose their financials there. But as I've said, please, from an end-products point-of-view, you need to look at the total supply chain. Is that okay?

[Anthony Mercandetti, Analyst at Deutsche Bank Aktiengesellschaft]

Yes, thank you very much.

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

Thank you, sir.

[Operator]

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

[John McNulty, Analyst at BMO Capital Markets]

Yeah, good morning. Thanks for taking my question, Seifi. So you seem excited about the price of the off take for NEOM basically remaining flat. So I guess, why is that? Are you seeing interest from buyers right now that are higher than what you thought they would be at the time that you were originally signed into this contract? I guess, how should we be thinking about that?

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

Well, I think that's one way of putting it. The thing that we see is significant interest in the product. And obviously as a business man, we would like to off take anything that we buy at the most favorable price that we can get. But I'm particularly interested in -- the reason I keep mentioning that because I just want to make sure that people don't think that, well, these guys said $5 billion, now its $8.5 billion. Therefore, their price of ammonia must have gone up, it did not. Look, one other thing, John. You know this better than I do. We are project financing this thing, which some of the biggest banks in the world giving us money. They have looked at this project, they have looked at the plan of the project and they are willing to financing it. So, I guess, they all think this is a good project and a good prospect, and they're going to get their money back. You know what I mean?

[John McNulty, Analyst at BMO Capital Markets]

Yeah. No, for sure. I guess, maybe looking at it from a slightly different angle. So when you think about -- like, when I think about project financing, the benefit of it is that tend to juice the returns a little bit more, but it don't take out some of the EPS on the -- tied to the equity that's being put to work as there's less equity involved. I guess, when you think about the total capital of the project overall, the distribution side as well as the actual production side and the economics around that, I guess, how has that changed relative to what you thought originally with the project financing now in place?

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

John, it has obviously improved because I'm putting less cash on the production side. So we are bit off. And as long as the price of ammonia is the same, so we have made an improvement. We have another $1 billion that we were going to invest to do other things.

[John McNulty, Analyst at BMO Capital Markets]

Got it. Fair enough. Thanks very much, Seifi.

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

Thank you.

[Operator]

We'll go next to John Roberts with Credit Suisse.

[John Roberts, Analyst at Credit Suisse Group]

Thank you. Exxon Mobile recently announced a blue hydrogen project in the Gulf Coast that includes ammonia as well and it looks like it has merchant ambitions there. Since refiners are a large customer for Air Products, help us understand, would you have bid for that project as well? Or how do we think about how your customers might play in the hydrogen and potentially ammonia market?

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

Well, I can't comment on their strategy of Exxon and what they are going to do. But this is a competitive world. If Exxon decides that they want to get into the merchant ammonia business and make blue ammonia to sell, then we will have an extra -- an additional competitor. Hydrogen that they are going to produce, a significant amount of that from what I understand is going to be used to replace the natural gas that they are using, because the whole purpose of the project is to reduce the carbon emissions. So if they do that, now they are going to make so much hydrogen, they have extra amount to do merchant. I don't know, I don't have any visibility on that and all of that. It's up to them to do what they want to do. You know what we are doing. And as I said, I'm sure other people will get attracted to these projects. But it's one thing talking about these things is actually doing the details, they just announced they're doing a feed, they have to wait until they do the feed, they add to costs and then they find out what the total cost is and all of that. But it's already up to them. They decided to do it themselves, which is fine.

[John Roberts, Analyst at Credit Suisse Group]

Okay. And then since the Alberta blue hydrogen plant will be the first really big project up online, do you think you'll get a premium on all of the hydrogen out of that plant? Or do you think some of the hydrogen is going to be sold with the existing grey hydrogen market?

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

Well, an interesting thing as you mentioned Exxon, our project in Canada, the customer for that project is Exxon. We are right now almost sold-out of that project. And we are getting a significant premium, yes, because EXXON through their subsidiary, which we have announced this publicly. So I'm not putting anything new to their ancillary, which is the Imperial Chemical Limited, they are going to use the blue hydrogen we give them to produce renewable diesel that they are going to sell in California at premium prices. And as a result, they are giving us a significant premium for the blue hydrogen that they are buying from us in Canada.

[John Roberts, Analyst at Credit Suisse Group]

Great. Thank you.

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

Thank you.

[Operator]

We'll take our next question from Steve Byrne with Bank of America.

[Steve Byrne, Analyst at Bank of America]

Yes, you had some pretty hefty merchant price increases in Europe and in Americas. My question for you is, how much of that had a surcharge in it, given gas costs have dropped in both regions. Could you see some sequential decline in pricing in those regions?

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

Well, the question that you are asking, Steve, is irrelevant. We obviously have increased the prices in order to recover the power costs. Obviously, at some point in time, if the power costs go down then some of the customers would expect us to decrease those prices. And we will listen to that and we will make a decision based on supply-demand situation as we always do. So it is possible. But if the price declines in the future, then that would be as a result of power price declining, therefore, theoretically there shouldn't be an impact on our bottom line.

[Steve Byrne, Analyst at Bank of America]

Okay. And just a follow-up on NEOM, has the design of that changed, is it still a couple of gigawatts of electrolyzer capacity or has this changed. Could you produce more than the 1.2 million tons of ammonia. It seems like you could with battery backup. Is that also enabling you to lead -- to have an unchanged ammonia price from this project?

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

Steve, you are asking me a very good question, which is a subject of internal discussion quite a bit. We are -- this is the first significant project that we are doing for green. We are obviously installing a significant amount of wind and solar capacity and we are installing a significant amount of electrolyzer capacity. What these electrolyzers and the wind and the solar they we do actually might end up giving us the capability of making a lot more than the 1.2 million, but I don't want to get ahead of ourselves, I don't want to promise that. But you are on the right track that there might be an upside in that side. And I personally think there could be an upside, but we have to wait and see.

[Steve Byrne, Analyst at Bank of America]

Thank you.

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

Thank you.

[Operator]

We'll take our next question from Mike Leithead with Barclays.

[Mike Leithead, Analyst at Barclays]

Great. Thanks. Good morning, guys. First question on NEOM, on the new $8.5 billion kind of all-in capex number. Can you just give us some comfort or framework around how locked-in that number is? Obviously, there's still about 70% or so of the engineering work left. Just any comfort around kind of what you're doing to make sure that number is not going to move again, say, in the next three years.

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

At this point, I can say that we have enough contingency there, and we have done enough work that I think that's a pretty good number. But nothing is 100%, but I feel pretty good about that number at this stage.

[Mike Leithead, Analyst at Barclays]

Got it. Makes sense. And then --

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

And I have Dr. Serhan on the line, who is in-charge of our -- all of our engineering and all of that, but I think both of us feel pretty comfortable that that is a good number. We have spent a lot of time making sure that when we are doing project financing that we don't have to go back for additional financing, but we feel pretty good about the number at this stage.

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

Besides the engineering, we have to take the major orders on the projects. So basically, that's also much then for like and even for the construction for the green element that's also being in place.

[Mike Leithead, Analyst at Barclays]

Great. Thank you.

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

Okay?

[Mike Leithead, Analyst at Barclays]

Yeah, and just as a quick follow-on, with the new capital structure, debt obviously can sometimes come with some level of covenants or restrictions around distribution. So just how should we think about the cash dividends from the projects? Should they generally match income or are there some constraints or restrictions around the cash you can get back to Air Products?

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

Well, the cash income from the project itself, obviously, the project will have a cash flow that will go to servicing the debt, and if there is any extra of that, which I hope there is, that will come back to the shareholders. That's the way it is structured.

[Mike Leithead, Analyst at Barclays]

Got you. Thank you.

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

Thank you. We'll take our next question from Kevin McCarthy with Vertical Research Partners.

[Kevin McCarthy, Analyst at Vertical Research Partners]

Yes, good morning, with regard to Asia you had healthy volume growth of 7%, but in the prepared remarks I think you made a comment that you started 25 new assets in the region over the past year, which sounds like a fairly large number. So, I was hoping you might be able to put that into context for us. Looking ahead, would you expect the contributions from those start-ups to remain elevated or regress by some amount, how would you describe the shape of that profile in Asia?

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

Kevin, quite honestly, that's a very good question, this is Serhan good morning. I really think this is a good opportunity for me to make a comment, you know. A lot of time people think that Air Products the only we do is make our projects. We have our base business and we're making good progress in our base business, We are getting our share of all of these are small projects. We don't announce it every time we have a $50 million nitrogen generator, but these things do add-up.

We have about 25 of them on-stream in Asia, what they are doing is that they are helping us to deliver the volume increases despite the fact as you know, the economic activity in China was almost -- it has gone from that 6%, 7% to back to about 2% to 3%. So we are getting the benefit of that and these things will help us in the future to make-up for any weakness, and therefore continue to help us to deliver good results for that region. Despite the fact that China might be flat or slowing down. So these are the good things, they are going to contribute and we are very excited about it.

[Kevin McCarthy, Analyst at Vertical Research Partners]

Yes, thank you for that. And then secondly, if I may In North America you made a comment that volume benefited from a new short-term agreement. Can you elaborate on that. What impact did that have and how long might it persist?

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

Well. I don't want to disclose the name of the customer and so on, but we did give an opportunity because we could serve customer that other people couldn't serve. So we did get that benefit, but that would like to turn it over to Melissa to expand on that. Melissa?

[Melissa Schaeffer, Senior Vice President & Chief Financial Officer at Air Products and Chemicals]

Thank you. So from a volume perspective in the Americas that agreement was about 3% of the increase in the volume, as we will see that over the next four quarters, be pretty consistent. So that's what we will see estimated 2023.

[Kevin McCarthy, Analyst at Vertical Research Partners]

That's helpful. Thank you very much.

[Melissa Schaeffer, Senior Vice President & Chief Financial Officer at Air Products and Chemicals]

Thank You.

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

Thank you.

[Operator]

We'll take our next question from Jeff Zekauskas with JPMorgan.

[Jeff Zekauskas, Analyst at JPMorgan Chase & Co.]

Thanks very much. In the NEOM Ammonia production project did the net present value of your one-third ownership stake in your mind change, that is you had a net present value assessment is it different now or is it the same or lower or higher?

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

Good morning, Jeff.

[Jeff Zekauskas, Analyst at JPMorgan Chase & Co.]

Hi, good morning.

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

You were saying that we had a net present value which was the discounting of all of the cash flows that we expect in few years. And now with the project financing is that higher or lower. I think it should be about the same or even better because we are doing project financing, Jeff.

[Jeff Zekauskas, Analyst at JPMorgan Chase & Co.]

Right, because here you said you're using more capital or that the whole is more capital that's going-in. The second question is, have you determined how much ammonia, you're going to make in your Louisiana project. And does that project -- is it necessary for there to be a substantial amount of ammonia for that project to go forward.

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

Jeff, that's a very good question. We have disclosed publicly that that project will produce about 1,850 ton a day approximately of hydrogen.

[Jeff Zekauskas, Analyst at JPMorgan Chase & Co.]

Yep.

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

That project is literally next to our pipeline. So, we are assessing how much of that we can put through the pipeline and sell. Because 1,850 tons of hydrogen. Is not that huge compared to the total sales of hydrogen that we have on our pipeline. Because our pipeline number over there, can do significantly more than that. Significantly more than that. Therefore one scenario, Is that all of the customers on the pipeline, due to environmental regulations or debate and legislation development so on decide hey, I want blue hydrogen. Then we can just have all of the hydrogen into the pipeline. Then it is possible that not all of them would convert, some of them would say, no I'm still okay with gray hydrogen, then we will have excess hydrogen to put and make it into ammonia.

Therefore, what we are doing is that in terms of the actual building of the plants, we are building the plant to have ammonia facility, that means we will build ammonia plants. And then we will have ultimate capacity and ultimate flexibility to use as much of the hydrogen in the pipeline and whatever we can use we make into ammonia. The ammonia plants themselves Jeff, in the context of the overall don't cost that much. Your ammonia plant -- once you have the infrastructure, putting a 1.2 million ton ammonia plant by itself is only $250 million. So we are not going to lose anything significant by having basically cycle spare capacity.

And then the other thing is, obviously, how the demand for blue ammonia developed as we go forward in the next few years. So we are building a plant to give us the flexibility, and this is the beauty of the situation that Air Products has that nobody else has, is that we can make blue hydrogen and we have total flexibility, whether we can sell it as hydrogen or we can sell it as ammonia, because of the unique situation, because we have the pipeline. And as a result of that, I think we can maximize the profitability of that better than anybody else then possibly can.

[Jeff Zekauskas, Analyst at JPMorgan Chase & Co.]

So you haven't determined how much ammonia you're going to make yet?

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

I said, we haven't determined how much ammonia we're going to sell. But that determine how many ammonia plants we're going to build.

[Jeff Zekauskas, Analyst at JPMorgan Chase & Co.]

Great. Thanks so much.

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

Thank you. Thank you very much, Jeff.

[Jeff Zekauskas, Analyst at JPMorgan Chase & Co.]

Yeah.

[Operator]

We'll take our next question from P.J. Juvekar with Citi.

[P.J. Juvekar, Analyst at Citi Investment Research]

Yes, good morning.

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

Good morning, P.J. How are you?

[P.J. Juvekar, Analyst at Citi Investment Research]

Good. Seifi, on the NEOM project, you had inflation and then you also had that $1.2 billion of increased sort of financing costs, et cetera. What does that -- and that is -- not the financing cost -- I'm sorry, there's the additional cost -- additional scope, I should say, and you're going to build transmission lines yourself, et cetera. What does that mean? Does that additional scope mean that the project could get delayed? Or do you think it's still on time for 2027?

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

Maybe they're still on time for 2027. The additional scope is something that we have been thinking of and planning on it. And then -- the progress on this project is that at the beginning, you go over there and you say, okay, I'm going to build the plant. All of the infrastructure is already there or it's going to be there, and therefore, we can draw on that. As the project goes forward, you will start getting a little bit concerned about the ability of other people to build teams that you need. Therefore, with the project finance, we decided that we are going to do all of that, that increases the capital, but it saves us operating costs, as I mentioned before.

[P.J. Juvekar, Analyst at Citi Investment Research]

Okay. Thank you. And there was earlier discussion about hydrogen price. The IRA gives $3 per kilogram benefit to green hydrogen. But how much of that you think you and the industry will have to pass it on to customers, so they get lower hydrogen price? And I think that's the ultimate goal of the government is to lower the hydrogen price. So do you have any thoughts on how the industry or the hydrogen price evolves over time? Thank you.

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

Thank you, P.J. Obviously, that will be the case, because if you are building a plant and we are going to get $3 for the green hydrogen. And as I said, that $3 is actually more because if you build an integrated facility like we are doing, that means that the wind and the solar is part of the project. You also get a benefit for the wind and solar. So the total thing translated to per kilogram of hydrogen is more than $3. So we obviously -- when we do projects, we expect the return, if you are getting the subsidy that improves the returns, so we will pass through some of that to the customer and we will achieve the goal of the government, which is the goal of -- is to fundamentally reduce the price of hydrogen, so that people can convert. That is exactly the goal, and that is exactly what will happen, P.J.

[P.J. Juvekar, Analyst at Citi Investment Research]

Thank you very much.

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

Thanks you, sir.

[Operator]

We'll take our next question from Mike Sison with Wells Fargo.

[Mike Sison, Analyst at Wells Fargo & Company]

Hey, good morning. So on slide 30, you talk about downstream hydrogen supply chain is about $2 billion between '25 to '28. Is that $2 billion a number that could go up as new projects? Or you looking for new opportunities in the supply chain? And any thoughts in terms of the timing between '25 and '28?

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

Well, that was our estimate before about the $2 billion. But that number could be less, could be more. And let me just explain. It depends on the customers. It is possible that you can have -- because when you look at the customers, there are some customers that are like the mobility. There you need a lot of infrastructure to serve you. You have to bring the hydrogen to a port, have an ammonia tank, crack it, liquefy it, have the trucks to go and deliver to the gas stations and sell it to that. That is one way of selling the hydrogen.

Another way is that somebody develops ships that can use ammonia and they've on green ammonia. And in that case, there is no infrastructure because the ship can dock in NEOM, put ammonia in it and then use it as fuel, then there is no new project cost. Another customer could be somebody that you bring ammonia to a port, you crack it and then you put it in a pipeline and that goes into a chemical plant or some other kind of a plant. And they use all of that, then you don't have to liquefy it, you don't have to build the infrastructure for trucks and so on. So because of that infrastructure is very much dependent on the exact kind of customers.

Right now, our best estimate is that with the $2 billion, we will be able to build enough infrastructure to use the capacity of NEOM. But that could be significantly less or it could be more depending on exact infrastructure. But if it is more, then that means that the infrastructure needed for the trucking is obviously more expensive, which means that the price of hydrogen at the pump is a lot higher than the price of selling it if we didn't have to be liquefy it. So it will all adjust for itself. Is that okay?

[Mike Sison, Analyst at Wells Fargo & Company]

Got it. Thank you.

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

Thank you.

[Operator]

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

[Steve Haynes, Analyst at Morgan Stanley]

Hi, this is Steve Haynes on for Vincent. Thanks for taking my question. Just wanted to ask quick one on the other cost line in your EPS bridge it was about $0.11 of headwinds in the quarter. How should we kind of be thinking about that going forward? Thank you.

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

Well, the other costs, I'd like to have Melissa comment on that. Melissa?

[Melissa Schaeffer, Senior Vice President & Chief Financial Officer at Air Products and Chemicals]

Yes, absolutely. So the other cost line, we had a number of components this quarter play into there. We had a sizable maintenance, both in the Americas as well as in our India joint venture, our India segment. So that added additional costs this quarter. We should see that go down in the next quarter. Fixed cost inflation, however, is a driver in that $0.11, and that will be consistent throughout this fiscal year.

[Steve Haynes, Analyst at Morgan Stanley]

Thank you.

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

Hello?

[Operator]

Thank you. We'll take our next question from Josh Spector with UBS.

[Josh Spector, Analyst at UBS Group]

Yeah, hi. Thanks for taking my question. Just on the near-term, when I look at your next quarter guidance, Jazan based on your math maybe to add 10 -- $0.12 or so sequentially, I was thinking there's maybe some merchant benefit as energy prices come down, maybe those volumes down a little bit, but December quarter wasn't super strong from a demand perspective. So, I guess, why wouldn't earnings be up sequentially given some of the tailwinds? What am I missing?

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

I don't think you're missing anything and your logic is very correct. The only thing is that when we make guidance, we have to kind of be cautious to make sure that we deliver it. The part that we are very concerned about, and we don't have any visibility is what is going to happen in the Chinese and European economy. I don't know how the Chinese economy is going to come out of the New Year holiday. And we don't have much visibility quite honestly in how energy prices are going to develop in Europe. That is why we are a little bit cautious. And you are very correct to kind of say, maybe say maybe you are being conservative, maybe we are, but we just wanted to make sure that we don't get ahead of ourselves.

[Josh Spector, Analyst at UBS Group]

Fair enough. Appreciate that.

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

Sure, absolutely. Thank you.

[Josh Spector, Analyst at UBS Group]

Sorry, I feel you had more go ahead, but I was going to ask just second quickly, the Canada project financing, was that expected that anticipated in your economics? Does that change your cash on hand base at all?

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

I'm sorry, I didn't understand.

[Melissa Schaeffer, Senior Vice President & Chief Financial Officer at Air Products and Chemicals]

So thank you for asking that. So just to be clear, on our Alberta project, we have no project financing associated to that project.

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

Exactly. On the project financing, we do the sharp project by project. And the Alberta I think the -- because it's a very complicated project and so on, difficult to finance. NEOM was pretty easy because there's a off take price and so on, and we can calculate that. Now with our project in Texas, the $4 billion project that we announced, we will most probably look at project finance on that. But we make the decision step by step, the options that Air Products has, which is I love, is that we have the option of using our own cash because we have the cash. We have the option of raising money by going to the market as end products and raising bonds and then they have the option of project finance. So we take everything into consideration and come up with the best possible solution.

So with NEOM, with the partners and so on, we decided project finance was the best thing. Obviously, for project finance, we are going to pay a higher interest than if we have gone and increased bonds, but that was a joint decision with other partners. Now for the project in Texas, we will probably do project finance. For the project in Louisiana, we probably wouldn't. It depends. And this is something that keeps our finance department and our treasury department busy trying to assess all of these things, and we do ask all of those questions, and we make the most optimum decision.

[Josh Spector, Analyst at UBS Group]

Okay. Thank you.

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

Okay. Any more questions, operator?

[Operator]

And we'll take our next question from Laurent Favre with BNP.

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

Okay. We have time for another two questions. Okay.

[Laurent Favre, Analyst at BNP Paribas]

Hello? My question is on inflation for the rest -- inflation risk for the rest of the backlog. So if we take out NEOM from the $19.4 billion, that is about $16 billion less. I was wondering if you could talk about the risk that there we also see $1 billion or $1.5 billion of extra cost and whether you have flexibility on selling prices to adjust for that to maintain returns? Thank you.

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

Well, thank you. The rest of our profits, obviously, some of them are -- there are other projects that we have announced are actually in a much more advanced-stage than NEOM. So we have a pretty good feel for their cost and all of that. But I don't want to here deny the fact that there is inflation, but we just don't think that the inflation is something that we cannot manage or it will significantly cause a struggle because which some of the projects, I mean, let's take the project in Louisiana. The project in Louisiana, if there is inflation and our capital costs goes up, then we will probably sell ammonia and the hydrogen out of that facility accordingly. So there's not the kind of the project that we have committed to a sales price for the product and now you have to keep the additional project costs. We plan for additional costs, but most of those things are just about that. So that's why we think we can manage.

[Laurent Favre, Analyst at BNP Paribas]

Okay, thank you.

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

Thank you. Operator, we have time for one more question, please.

[Operator]

Thank you. We'll take our final question from Laurence Alexander with Jefferies.

[Kevin Estok, Analyst at Jefferies Financial Group]

Hi, this is Kevin Estok on for Laurence. Thank you for taking my question. I just giving forecast that we'll be likely entering a recession. I just wanted to get a sense of how merchant volumes and pricing fared during the last recession? If you can give me an overview of that, I would appreciate it. Thank you.

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

Well, that's a good question. The good thing is that I can answer that very definitely because you have seen our results during the last recession. The last big recession obviously was in 2008, 2009 and the second one was during COVID. And you saw, as we always said that industrial gases business, we have very good resiliency because half of our business is on top. That doesn't get really affected by the recession, because they are day to day contracts. And it's our merchant volumes usually go down, but they do not go down significantly. We take action to control our costs and therefore, you can take a look at our actual results during 2009 and 2010 and 2008, over results in 2020 and 2021 and you see that we held up pretty well.

[Kevin Estok, Analyst at Jefferies Financial Group]

Thank you.

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

Okay. Well, thank you very much. At this stage, I would like to thank everyone for joining our call today. We appreciate your interest, and we look forward to discussing our results with you again next quarter. As I've said earlier, please stay safe and healthy, and all the best to all of you. Thank you.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Sidd Manjeshwar, Vice President, Treasury & Investor Relations
• Seifi Ghasemi, Chairman, President & Chief Executive Officer
• Melissa Schaeffer, Senior Vice President & Chief Financial Officer
• Samir J. Serhan, Chief Operating Officer

Analysts

• Christopher Parkinson, Mizuho
• Anthony Mercandetti, Deutsche Bank Aktiengesellschaft
• John McNulty, BMO Capital Markets
• John Roberts, Credit Suisse Group AG
• Steve Byrne, Bank of America Co.
• Mike Leithead, Barclays PLC
• Kevin McCarthy, Vertical Research Partners
• Jeff Zekauskas, JPMorgan Chase & Co.
• P.J. Juvekar, Citi Investment Research
• Mike Sison, Wells Fargo & Company
• Steve Haynes, Morgan Stanley
• Josh Spector, UBS Group AG
• Laurent Favre, BNP Paribas
• Kevin Estok, Jefferies Financial Group Inc.