Air Products and Chemicals Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
May 5, 2022

There are 12 speakers on the call.

Operator

Good morning and welcome to

Speaker 1

the Air Products Second 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 These are subject to copyright by Air Products and all rights are reserved. Beginning today's call is Mr. Simon Moore.

Speaker 1

Please go ahead, sir.

Speaker 2

Thank you, Jess. Good morning, everyone. Welcome to Air Products' Q2 2022 earnings results teleconference. This is Simon Moore, Vice President of Investor Relations, Corporate Relations and Sustainability. I am pleased to be joined today by Safi Ghassemi, our Chairman, President and CEO Doctor.

Speaker 2

Samir Surhan, our Chief Operating Officer Melissa Shaffer, our Senior Vice President and 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. This discussion contains forward looking statements. Please refer to the forward looking statement disclosures that can be found in our earnings release and on Slide number 2.

Speaker 2

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, EBITDA, EBITDA margin, the effective tax rate and ROCE both on a company wide and segment basis, we are referring to our adjusted non GAAP financial measures. Adjusted earnings per share, 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 Sacy.

Speaker 3

Thank you, Simon, and good day to everyone. Thank you for taking time from your very busy schedule to be on our call today. I want to begin by saying a few words regarding Air Products' response to the current situation In Eastern Europe, we are deeply concerned by the human tragedy in Ukraine And

Operator

the impact of this

Speaker 3

conflict has on the world. We condemn this aggression And we encourage all efforts for Peace. Our hearts go out to those affected, And we are continuing to support our employees in this region. As a company, we are providing humanitarian support, including assistance to the International Committee of the Red Cross and Air Cross Foundation. Our employees have also responded with care and generosity, reaching out to their affected colleagues Our presence in Ukraine is minimum and about $5,000,000 in sales last fiscal year.

Speaker 3

And we have suspended the development of a small gas separation unit in the country. Our business in Russia is also very small with less than $25,000,000 in sales last fiscal year. We are in the process of exiting Russia and have stopped doing business Now before we get into the details, I want to thank Each and every one of our 20,000 employees around the world for their hard work, Last quarter, despite the very difficult conditions caused by war, Significant inflation in energy costs, supply chain disruptions and lingering effects of the COVID-nineteen virus, Our people delivered strong results with an earnings per share of $2.38 which is 14% higher than the previous year. As always, our people's commitment and dedication Now please look at Slide number 3, focusing on safety, which is our highest priority. Our Q2 safety performance was similar to last quarter, But still behind last year.

Speaker 3

Although we are proud of the fact We have made significant progress in this area over the past few years. This result is not acceptable. Our goal remains 0 accidents and 0 incidents, and we are committed to achieving that goal across the organization. Slides number 4 to number 7 include our role, Our management philosophy and our pipeline plan for moving forward. We have also included our higher purpose size to explain what We are trying to do every day a difficult to work.

Speaker 3

We have shared these slides with investors many times before, But we're always happy as part of our package to emphasize the point that these are the principles As we have explained to our investors in the past, Our strategy for moving forward is based on 2 pillars. The first is absolute excellence in running our existing industrial gases business. That is to operate with the greatest efficiency and productivity, invest and maintain our market share And improved pricing to compensate for inflation. Our results that we have Just announced, confirmed that we are successfully implementing this strategy. Since we are delivering strong results and the very difficult and challenging circumstances, The second pillar of our strategy for the future is to take advantage of our unique technologies And expertise to be a meaningful player in this significant worldwide effort We are focused On developing and executing mega projects to produce plume and green hydrogen and other sustainable fuels for the world.

Speaker 3

In summary, this explains Content of the almost $20,000,000,000 of projects that we have in Our backlog and there are more of these projects to come. In the Q2 of fiscal year 2022, We announced projects that confirm in a significant day Our commitment to these 2 strategic pillars. 1st, in our base business, as you can On Slide 8, we announced $1,300,000,000 of investment in 2 major Projects for the electronic industry. These are real makeup projects with long term pay for pay contracts It's some of the largest semiconductor manufacturers in the world. We are proud to be executing these projects that confirm Our significant position in the semiconductor industry.

Speaker 3

As related to the second As you can see on the Slide 9, we announced that we are building a $2,000,000,000 facility In Southern California, we convert a conventional refinery to one that produces sustainable Aviation Q, all set. This facility will use as its raw material, Renewal organic material such as base cooking oil, animal fats, etcetera and use substantial amount of hydrogen to convert these raw materials to fuel for airplanes. The total capacity of this plant will be approximately 340,000,000 gallons per year. Although this sounds like a big number, in 2019, world jet fuel consumption It was more than 100,000,000,000 gallons. The Board Airlines are looking to decarbonize.

Speaker 3

Major corporations in the Board are focused on reducing the carbon emissions generated There are already significant incentives in place We encourage and move towards sustainable aviation fuel. This is the fundamental reason In line with our strategy, we pursue this opportunity. We started developing this project 3 years ago In partnership with Ford Energy, a private company that is currently a leading producer of sustainable airline fuel. And Board Energy will provide the raw material. Board Energy will also sell the project, The product has a contractual commitment to pay Air Products a fixed fee that ensures an acceptable return on Air Products investment.

Speaker 3

We are very excited about this project Since it also uses a significant amount of hydrogen that we can supply from our established and extensive Ford Energy is a private company. So I know and fully appreciate that there is little information available about them We have permission from the principles of the company to disclose the following information, which can be found on Slide 10. This information It's self explanatory, and we are delighted to work with CorEnergy on this great project. I'd just like to point out that at the bottom of Slide 10, Sandia included Sales and profitability numbers, dollars 400,000,000 sales up $94,000,000 of profit. That is just For the products that Boat Energy sells out of the Permian's refinery that we are converting Today, in addition to that, Cord Energy has the capacity in their other plants In America and Canada, we produce 150,000,000 gallons a year of biodiesel.

Speaker 3

I also want to report to you at this time that we continue to make good progress in building And bringing on stream key mega projects that we have already announced. Slide number 11 highlights the major projects to reflect on our performance over the past 8 years. In July 2014, During my first conference call with investors as Chairman, President and CEO of Air Products, I promise the shareholders that our goal was to deliver over the long term On Slide 12, you can see that for the past 8 years, we have delivered More than what we promised 8 years ago. And our goal for the future is to continue We delivered similar results as we move forward. On Slide 13, You can see that we have shared positive growth with our investors and increased our dividend on average 10% a year over the last 8 years.

Speaker 3

And finally, please turn to Slide 14, Still my favorite slide. It shows our EBITDA margin since 2014. Despite all of the turmoil in the quarter, significant energy cost inflation With supply chain disruptions, our EBITDA margin last quarter was almost 1,000 basis points higher ending 2014. Now it's my pleasure to turn the call over to Melissa to discuss our results

Operator

Thank you, Stacy. As Stacy mentioned earlier, we are executing our growth strategy and supporting our base business at the same time. We expect large projects to drive our long term growth, Our base business continues delivering near term results. Both large projects and base businesses Contribute to our fiscal 2nd quarter results. The Jazan joint venture that started up during Q1 provided a full quarter of benefits, consistent with our commitment of $0.80 to $0.85 per share on a full year basis.

Operator

Our pricing actions also contributed, We gained exceeding variable cost increases this quarter. And outperformance was particularly noteworthy in Europe, where you experienced the most significant energy cost pressure. I want to express my thanks to the team for their speed of execution and a job well done. Now please turn to Slide 15 for our 2nd quarter results. Energy costs remain elevated this quarter, and our team continue to implement significant press actions in response to the unprecedented surge.

Operator

6% total company price increase translates to 13% increases in price for the Merchant business. This is our 2nd consecutive quarter of double digit price cadence across our Merchant business. Volume was also strong, increasing 8% overall, up in all segments, driven by new assets, hydrogen recovery, Strong merchant demand and increased sales equipment activity. Price and volumes combined were up 14%, accounting for most of the 18% sales increase compared to last year. EBITDA increased 9% Our 3rd consecutive quarter exceeding the $1,000,000,000 mark, as favorable volume, prices and equity affiliate income EBITDA margin declined 270 basis points from the prior year Higher energy tax rate lowered EBITDA margins by about 200 basis points.

Operator

Sequentially, volumes were down 3%, primarily due to lower rider volumes on specific customer operational actions and the Lunar New Year. Operating income was up 7%, driven by payroll price and costs. However, EBITDA was up 2% Net income was down 5%, primarily due to non recurring items related to the finalization We currently have significant cash on our balance sheet, which will support the major projects we have announced. Adjusting for this cash, Our ROTE would have been 13.7%. We expect ROTE to improve as we move to cash Now please turn to Slide 16.

Operator

Our 2nd quarter adjusted EPS was which is $0.30 or 14% from last year, the 4th consecutive quarter Today, we estimate the stability and growth of our business. Volume was favorable at $0.18 and price net of variable cost was favorable at $0.14 Before netting against variable costs, we distributed around $0.50 Our other costs were higher due to the This helps provide reliable helium supply to our customers globally. This investment increased our cost now, But we expect to generate significant value from this investment in the future. We also see higher costs as we increase resources prior to bringing projects on stream. For example, we have hired approximately 30 3 people, We will be responsible for operating the Zhuhai gasifier complex once it comes on stream next year.

Operator

The purposeful strategic actions taken to ensure the long term success of our company are responsible for roughly half the total increase this quarter. The remaining half is primarily external factors attributable to inflation and supply chain challenges across the region. We remain focused on driving productivity across our business. The Jazan joint venture Tribute to its 1st full quarter of results and continues to deliver as expected. Our shared results It is slightly different than we discussed last quarter, but we believe this approach will be clear for our investors moving forward.

Operator

There is no difference to the bottom line EPS. The project continues to deliver as we expected. Overall for the quarter, equity affiliates income was $0.18 higher, driven by our share of the Joint Ventures' profit. Our 2nd quarter adjusted tax rate of 18.6% was 160 basis points lower Last year, including the favorable impact to Jazan, we expect our tax rate to be between 19% 20% for the remainder of this Non operating income is $0.03 lower, driven by higher pension expense. Now please turn to slide 17.

Operator

The stability of our business continues to allow us to generate strong cash Despite the challenging geopolitical and energy environment, over the last 12 months, we generated around $2,800,000,000 of distributable cash flow for nearly $12.70 per share From the distributable cash flow, we've gained over 45% or over $1,200,000,000 of dividends to our shareholders. We still have about $1,500,000 available for high return deposits. This strong cash flow, even in uncertain times, In fact, we see potential opportunities significantly greater It's still 2027. Dollars 34,000,000,000 includes about $8,000,000,000 of cash An additional tech capacity available today were $16,000,000,000 which we expect to be available by 2027 We still believe this capacity is conservative given the potential for additional EBITDA growth, which will generate additional cash flow and additional borrowing capacity. We will continue to focus on managing our debt balance To maintain our current targeted AA2 rate, so you can see we've already set 29% We have already committed 74% to the updated capacity we show here.

Operator

We have made great progress. We continually evaluate our capital spending process and determine the best way to use available cash entrusted to us by our shareholders. To begin the review of our segment results, I'll turn the call back over to Dave. Dave?

Speaker 3

Thank you, Melissa. Now please turn to Slide 19 for our Asia results. Sales were up 8% compared to last year, primarily on 6% higher volume As a variety of new traditional industrial gas plants came on stream across the region. Price was again positive. A 1% over price overall price improvement for the region equals to about 3% increase for the mission business.

Speaker 3

China's dual control policy has eased, Our COVID restrictions in part of China have modestly impacted customer demand. They also impacted our plant efficiency and increased our supply chain costs. Costs are unfavorable primarily due to inflation and resources needed to support new project startups, as Melissa mentioned. EBITDA was up 2% as better volume and Price more than offset by costs. Compared to last quarter, volumes declined 2% Primarily due to the Lunar New Year holiday, price was 2% lower sequentially.

Speaker 3

As mentioned during our last earnings call, China's government has relaxed its power tariff program To allow local power costs to fluctuate, this market oriented has resulted in higher power costs compared to last quarter. However, our overall costs were lower Due to better operating and supply chain efficiencies, our EBITDA was down 9% sequentially EBITDA margin decreased 60 basis points as the unfavorable volume and price more than offset Lower costs. For the second half of the fiscal year, We are very concerned about the potential impact of the COVID related restrictions in China, And we do expect higher planned maintenance activities. Now I would like to turn the call over to Simon to to talk about the European results. Simon?

Speaker 2

Thank you, Zvi. Now please turn to Slide 20. Energy costs in Europe began the quarter moderating, but then moved up significantly and were the highest yet in March. Natural gas costs peaked in January more than 7 times higher than a year ago, while power costs stayed almost 4 times higher. As Melissa mentioned, our on-site business has contractual pass through to higher costs, so we are not directly impacted by higher natural gas prices.

Speaker 2

Higher power costs are also passed through in our ASU on-site business. In our merchant business, our team implemented Significant price actions which more than covered the higher power costs this quarter. In fact, we recovered this quarter's higher power costs And about half of the unrecovered costs from Q1. Again, a great job by the team. However, we remain vigilant and are working to drive further improvement.

Speaker 2

Now please turn to Slide 21 for a review of our Europe results. Compared to the prior year, sales were up 32%. Energy cost pass through, which increases sales but not profits, Accounted for more than 2 thirds of the sales increase. Price increased 14% for the region, which translates to 22% for the merchant business. Prices were higher across all major product lines and subregions.

Speaker 2

Volume was up 2% on higher merchant volume. EBITDA was down 3% as favorable price net of variable costs And better equity affiliate income were more than offset by negative currency, unfavorable volume mix and higher other costs. For the quarter, the supply chain disruptions caused by the significant energy cost increases persisted, negatively impacting both We also saw higher costs due to inflation while we continue to prepare for new projects coming on the stream. EBITDA margin was 9.50 basis points lower. Most of the decline about 700 basis points was due to the significant energy pass through The remainder was mostly driven by higher cost and negative volume mix, partially offset by strong merchant pricing and higher equity billings income.

Speaker 2

Compared to the prior quarter, price was up 5%, further improved from the already strong performance last quarter, which allowed us to more than offset the higher energy costs. This equates to an 8% increase on the merchant business. Volume was 7% lower due to reduced hydrogen demand on customer specific operating actions. EBITDA jumped 17% sequentially And EBITDA margin improved 380 basis points as strong price, higher equity affiliate income and lower non energy related costs Now I would like to turn the call over to Doctor. Sirhan for a brief discussion of our other segments.

Speaker 4

Thank you, Simon. Now please turn to Slide 22 for a review of our Americas results. Sales increased 12% versus last year. Volume and price together were up 11%. Our team in the Americas also did an excellent job raising prices to cover the higher energy costs this quarter.

Speaker 4

Prices improved in all key product lines over the last year and were also up sequentially. The 5% price gain for the region compared to last year is equivalent to a 12% increase in our merchant business. Why is net to variable cost was also positive for the region. Volume grew 6% primarily due to hydrogen recovery and better merchant demand. In general, We see hydrogen demand back near pre COVID levels, although HIFO volumes this quarter were impacted by the planned shortages.

Speaker 4

We expect the Q3 to continue at a high level of plant outages and expect volume to fully recover as we move into 2023. Meanwhile, our merchant volume was weaker in South America is due to lower demand for medical oxygen as COVID cases declined. A decreased demand for medical gases also reduced Americas Equity Affiliate Income. As we expected, plant maintenance increased costs this quarter. Costs were also unfavorable, primarily due to inflation And supply chain related challenges, including a driver of shortages that are broadly impacting the industry.

Speaker 4

Operating income improved as positive price and volume more than covered unfavorable mix and higher costs. EBITDA was flat as it was impacted by lower equity affiliate income. EBITDA margin It was 4 60 basis points lower than the previous year, due to higher costs, negative volume mix and reduced equity affiliate income, which were partially offset by barrel price. Sequentially, volume this quarter was lower due to plant maintenance outages. Operating income was up primarily due to strong price, but was partially offset by higher maintenance costs.

Speaker 4

EBITDA was down, additionally impacted by lower equity affiliate income. Now please turn to slide 23, Our Middle East and India segment, which includes our businesses in the Middle East, including the Jazan joint venture in India. Sales 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 significance includes the equity affiliate income related to the Dizan joint venture and our India joint venture, INOX AP. The $55,000,000 increase in equity of Elliott income Included our share of the Jazan joint venture net profit for the full quarter that Melissa previously discussed.

Speaker 4

I'm pleased to report that the team successfully started up a number of gasifier and steam turbine units And the rest of the Phase 1 start up is continuing as planned. Sequentially, Equity affiliates income was lower due to the positive non recurring items in quarter 1 related to the finalization of our previous Jazan ASU joint venture. Now please turn to Slide 24, which addresses our Corporate This segment includes our sale of equipment businesses as well as our centrally managed functions and corporate costs. Over the past few years, Our non L and D sale of equipment businesses have grown considerably and are now reasonably responsible for most of the sales and profit increases this quarter. Our LNG Project activities remained robust and also contributed to these increases.

Speaker 4

As expected, Inquiries for potential LNG projects have increased significantly. But since our customers' major projects take time to develop, It will be some time until this interest translates into new projects. At this point, I would like to return the call back over to Seifi to provide further closing comments.

Speaker 3

Thank you, Doctor. Serhan. Although the consequences of the conflict in Ukraine are far from clear, The evolving situation has once again brought a critical issue of energy independence And national security to the forefront, emphasizing the critical nature of the energy transition Where Air Products has highly valued technologies, skills and experience To utilize their own resources in an environmentally friendly way, reducing Air imports of fuel and chemicals. Meanwhile, renewable energy, Including green hydrogen and fuels drive from sustainable organic resources, including renewable diesel and sustainable aviation fuel We'll allow countries to reduce their reliance on fossil fuels. Furthermore, the design for diversified energy supply will also encourage We wish on LNG Projects to the future, a positive development for Air Products as we are the leading technology And equipment provided for these large LNG projects.

Speaker 3

Air Products' strategy And competencies are allowing us to be a leader in the energy transition. Our industry leading gasification technologies are suitable for various types of feedstocks, This can create net zero hydrogen. The Neom Green Hydrogen Project is the largest project of its kind in the world. Our LNG heat exchangers, which convert natural gas to liquid, are an integral part to all LNG The sustainable aviation fuel to be produced in our new facility in California It's a direct drop in replacement of conventional jet fuel. It can significantly reduce carbon footprint of the Aviation Industry without any equipment modification.

Speaker 3

The focus on energy security and energy transition It's creating significant new project opportunities now and in the future. Therefore, We firmly believe that investing in high return projects Rather than share buyback, it's the right day forward to support energy transition, Now please turn to Slide 25. I remain highly confident Air Products' resilient business model, our strategy and our execution. However, I do have some concerns about the economic backdrop driven by continued COVID challenges, Even with these challenges for Q3 fiscal year 2022, Our earnings per share guidance is $2.55 to $2.65 up 10% to 15% over last year and almost $0.20 higher than last quarter. For fiscal year 2022, Our average share guidance remains unchanged at $10.20 to $10.40 which is 13% to 15% better than last year.

Speaker 3

We continue to see our CapEx in 'twenty two It will be around $4,500,000,000 to $5,000,000,000 including approximately $1,500,000,000 previously invested for Phase 1 of the Jazan project. At this point, I'd like you to turn to Slide 26. The drive for energy security and transition to a more sustainable future are not mutually Excluding, the Board needs cleaner, lower carbon forms of energy and more diverse sources of energy. We believe our strategy directly addresses these needs. As we drive towards clean energy world, The talent and dedication of our people are the key for making this vision a reality.

Speaker 3

We need and fortunately have talented and dedicated people to help us accelerate the progress. As I always say, our long term competitive advantage is the commitment and motivation of our people. So at this point, I would like to end my comments, and we will be very delighted to answer questions. Operator, we are ready for questions.

Speaker 2

Thank

Speaker 1

Our first question will come from Vincent Andrews with Morgan Stanley. Your line is open. Please go ahead.

Speaker 5

Thank you and good morning, Casey. How are you? Very

Speaker 3

good, Vincent. Great to hear from you.

Speaker 5

Okay. Thank you. I'm wondering if you could just talk a little bit more to start off with about the volume decline In Europe and how much of that was related to sort of customer financial conditions versus maintenance or anything else and Through how you're seeing the European operating environment in general, just given obviously the inflation for the consumer and for corporates And some of the other macro challenges.

Speaker 3

Sure. Our volume decline in Europe and our HIFU business Well, it's specifically related to one specific customer who decided to kind of Change the feedstock for the CASifiers because of the high natural gas prices. Overall, we do see a small decline. I think you said that our volumes in Europe sequentially are down about 2%. That is obviously the effect of the very high energy prices.

Speaker 3

And there were those high energy prices did affect and it is affecting demand. But it is not dramatic, and it is not Significant cause of concern, but it is a cause of but it is a reality that we have to deal.

Speaker 5

Okay. Thank you. And as a follow-up, the other costs that you called out from the investments, obviously, Keith, you understand what you're doing there. Could you help us understand whether those costs have now sort of plateaued on a sort of year over year basis such We'll begin to lap them and

Speaker 2

they won't become an incremental issue or do you think

Speaker 5

there's going to be more investment coming in future quarters?

Speaker 3

Well, obviously, we watch our costs every penny. But Cost increases, for example, in Europe are related to the fact that we are building the infrastructure That we need to build in order to bring our green ammonia into Europe, crack it and So it is early days, but we have to start with that process. And that requires people and expenditure and buying properties and renting equipment and Trying to do engineering and all of that because that is we need to get ready because by 2020 Yes, 627, we need to bring in the green ammonia and sell it to our customers and the customers expect us to start building the infrastructure. And then around the world, you are starting up new plants and all of that. So those costs are very Focus and necessary for us to maintain the growth.

Speaker 3

It is software related as you see right now, Our costs are a little bit higher than they should be, but in the overall scheme of things, they would be well more than justified as we move forward. But I don't expect to see a significant uptick on those costs, if that is very or very concerned.

Speaker 5

That's exactly what I wanted to know.

Speaker 3

Thank you very much, Stacy. I'll pass it along. Sure. Yes. Thank you.

Speaker 1

Our next question comes from Kevin McCarthy of Vertical Research Partners. Your line is open. Please go ahead.

Speaker 5

Good morning. This is Corey on for Kevin.

Speaker 6

In the context of Asia, Why has the pricing in Asia lagged? And can you help us understand maybe the pricing in the region? And then for the volume, it Climb modestly on a sequential basis. How much of that was related to Lunar New Year versus COVID? And Have you seen any impact thus far in the current quarter as it relates to COVID impact on volume?

Speaker 3

With respect to pricing, the reason that the prices haven't gone up so much in Asia is because There is no significant energy inflation in Asia that It justifies us going to the customers and increasing prices. So that is the fundamental dynamic. The decrease in volumes are mainly due to Lunar New Year. But starting in March, The restrictions that the Chinese government has put in Shanghai and so on are beginning to have some effect. And as we are in this current quarter, We do see more impact because of the COVID disruptions restrictions.

Speaker 3

It is Almost impossible to predict what would be the effect because it depends on how much they relax Restrictions are actually increased depending on the progress of COVID. So we are watching that situation very carefully Because it's been swing back and forth in a significant way.

Speaker 6

Understood. Yes, And as a quick follow-up, in the context of rising interest rates, I'm curious how you think about capital deployment going

Speaker 3

Rising interest rates, if we need to raise new capital, obviously, we would have to pay More interesting that, but right now, currently, we have a lot of cash and we are not in the market to do that. Was that your point or did I miss that?

Speaker 6

I guess I meant more broadly sort of structurally, as you think About the 10% returns that you generally target, would you raise that target and

Speaker 3

how

Speaker 6

would you think about

Speaker 7

the project

Speaker 6

you take on? Thank you.

Speaker 3

No, that I understand your question completely. Of course, we do. I mean, if we are going to bid on a new project or consider a new project, We will consider it in the view of Buddies' cost of capital obviously the cost of capital has gone up as interest goes up. Sure.

Speaker 8

Okay. Thank you.

Speaker 3

Thank you.

Speaker 1

Our next question comes from David Begleiter of Deutsche Bank. Your line is open. Please go ahead.

Speaker 9

Hey, good morning. This is Anthony Mercadetti on for Jim Biglider. Would you expect earnings in Europe to be up year over year in the second half? And then in regards to Asia, do Do you think merchant pricing is slowing there? It was up just at least 3% year over year.

Speaker 3

I think first of all, if I may ask the second question first, metric pricing in the second half in Asia Depends very much on how the energy costs are and all of that. If you see energy costs going up that our costs are going up, we certainly will increase This last year, significant pricing power than it is justified. So we can do that. As far as Whether our earnings in the second half of the year for Europe may be higher than before, I don't want to make Forward predictions like that, but from the guidance that we have given you for the quarter and We expect that we will do fine. This is last year.

Speaker 3

That's why that's the only way we can meet our focus.

Speaker 9

Okay. Thank you. And yes, and just maybe as one more follow-up here. Is the entire increase in the Middle East and In India, equity income of I think $55,000,000 is it all from Jazan?

Speaker 3

Most of it is from Jazan. Our joint venture operations in India is doing very well too. But most of that is from Jazan. Doctor. Serhond, do you want to make any comments to that?

Speaker 4

Yes. Definitely, Gezant is the main driver for the results in the Q2. But again, when it comes to our joint venture fifty-fifty NxAP in India, that's also doing very well. We're currently basically Executing around 20 new plants for India. They are basically the number one industrial gas company in India and they are on a significant growth.

Speaker 4

We anticipate in the future that we're going to get more contribution from that.

Speaker 3

Great. Thank you. Sure.

Speaker 1

Our next question comes from Mike Leithead of Barclays. Your line is open. Please go ahead.

Speaker 5

Great. Thanks. Good morning. First, I wanted to ask on your Slide 11 on the 2023 project. I appreciate we're still A bit early in 'twenty two, but I think you've got over $2,000,000,000 of projects starting up there.

Speaker 2

So could you maybe just help level set roughly how

Speaker 5

we should think about the EPS contribution in 'twenty three? I know Jazan should be immediately accretive upon close, other projects might need to ramp. Just Roughly how

Speaker 9

we should mess that all together here?

Speaker 3

Well, I think we have laid it out for you because We say that every dollar that we spend should get us $0.10 in operating income and you know our tax rate and all of that. So the projects that we have, we have given you the capital. Not all of them are not going to come on the scene at the beginning of 'twenty three, but You can make a good guess about how much contribution those projects will make to our bottom line, and it is not small.

Speaker 5

Okay, great. And then maybe just secondly on the SAF project, I think there's obviously been tremendous customer interest for Sustainable aviation fuel, as you rightly talk about.

Speaker 6

But my understanding is there

Speaker 5

is still some questions in the industry about constraints on feedstock and what that ultimately means So obviously, you're investing and backing a company growing very tremendously from say $4,000,000 $250,000,000 So, I guess, just how do

Speaker 4

you get comfortable with the

Speaker 5

questions of feedstock supply and the economics behind that?

Speaker 3

Well, because we have confidence in both Energy people who have been very responsible for coming up with TD stock, they have been in the business of Buying and providing feedstock with their facilities for the past 20 years. That company has been around since 1999. Everybody in the world is trying to do this thing. As you know, that's why a company like Chevron went and bought REG and all that. Everybody is trying The Refineries is sustainable airline fuel because that is the fuel of the future.

Speaker 3

The great thing about sustainable aviation fuel is The fact that it's a direct dropping, you don't need to change the engine of the plane or anything like that. Obviously, we believe that 50 years from now most of these planes, especially the short haul volumes will be fueled by hydrogen. But I think that in the meantime, right now, sustainable airline fuel is the SaaS is the solution And everybody wants it, not only the airlines, but also companies, some of the biggest companies in the world That they want to take credit for decarbonizing their business travel. So the demand is very high on that. We are very excited about that front.

Speaker 3

Great. Thank you. Thank you.

Speaker 1

We'll go next to Mike Harrison at Seaport Research Partners. Your line is open. Please go ahead.

Speaker 10

Hi, good morning. Good morning, Mike. How are you? Doing well. Thanks, Seifi.

Speaker 10

You noted the increases You've seen in LNG inquiries, obviously, given the natural gas situation in Europe. Can you give us a sense Of how many of these inquiries can turn into equipment sales? And I guess maybe how should we think about the contribution Of LNG Heat Exchangers as we think about the next couple of years.

Speaker 3

Well, I'm going to turn this question to Doctor. Sean to answer because he runs the business on a day to day basis. But obviously, they are not going to We are seeing significant additional inquiries, but let me make the comment. Doctor. Siron, would you like to?

Speaker 4

Yes. Thanks, Sethi. Yes, we're currently executing 7 large word scale of projects right now that are under execution. Everything is going well. And actually, we're getting lots of pressure from our customers to supply these exchangers earlier because of the demand for LNG.

Speaker 4

And I can tell you our pipeline right now for projects is more than 15 projects that basically we're developing with our customers and we see this is going to be coming In the future, so we do expect very steady flow on income out of our LNG business. It's really in a very good position.

Speaker 10

Okay, Mike. All right. That's great. And then wanted to ask a question about the helium business. Talk a little bit about what you're seeing in that market and how much contribution that's having to both earnings and pricing.

Speaker 10

And You

Speaker 3

can talk a little bit about what

Speaker 10

we should expect from the helium business in the second half compared to what you're seeing now. Thank you. Mike,

Speaker 3

our Helium business is The business that we don't usually talk about the details of that, but in terms of how much contribution and all of that. It's a great business. We are the world leader on that. The fact of the matter is that the Board expected That's a very large project that will produce helium, called Amur project in Russia, Would be on stream in 2021, and that would put a lot of helium in the market, And therefore, it would have a negative price negative effect on pricing. That was the expectation.

Speaker 3

In starting up those plants in Russia, they had one explosion in one train And then 6 months later, they had an explosion in the second train. So nothing came no helium came out of Russia in 2021, And nothing has come out of it in 2022 yet. But now on Top of the fact that they have to repair those units because of the damage that was done, Now you have the issue of the sanctions on Russia. So I am not sure that even when they are ready Bring that material to the market, how much of it can they bring on the market considering the sanctions. As a result of all of that, you would expect that the market for

Speaker 10

Excellent. Thanks very much. Thank you, Mike.

Speaker 1

We'll move next to Josh Spector with UBS.

Speaker 7

Yes. Hi, good morning. Thanks for taking my question. Just first on the guidance. I guess looking at your guide for next quarter and the full year, You're implying about a 10% -ish step up sequentially each of the next two quarters.

Speaker 7

Wondering if you can break down The drivers there between price cost recovery, volume or anything else, particularly in light of the perhaps more challenging volume outlook you had discussed previously?

Speaker 3

Well, I'm very happy that you laid it out like that because It does show that it is a pretty robust forecast, 10% comes each quarter going up. The reason that we feel confident about that is that number 1, historically, if you look at our results, We delivered about 47% 48% of our EPS in the first half And 52%, 53% of our results in the second half. Seasonally, the second half is stronger. So that is one reason. The second reason is that we are very confident about the fact that we can deal Inflation and energy cost increases by increasing prices.

Speaker 3

So as a result, and I hope the investors get some comfort About that, looking at our results, that we have that capability. And I think that is one of the most important things That I hope people notice about our results that we have the capacity and the ability to do that. And the only reason we can do that Because our products are products that our customers need and our products are not a significant part of our customers' cost. So with the increased prices, we are not increasing the final price of the product that the customer sells to the market that much. So we have the ability to recover that.

Speaker 3

So therefore and then with the volumes, We are optimistic that at least I don't know what's going to happen in Asia, but we are At least in the U. S. And in Europe, we will see some pent up demand because of the now that the COVID is And therefore, we will see that evolve.

Speaker 7

Okay, thanks. That's very helpful. And I guess just 2nd question just on hydrogen logistics. I guess with the Neon project you guys announced there's $2,000,000,000 of infrastructure to be spent along with that. With staff you talked about some infrastructure there.

Speaker 7

The Arizona plant that you shared some language that it could be a hydrogen hub to an extent. And you announced the Rotterdam commercial truck hydrogen hubs as well. Is that Is that $2,000,000,000 being spent in some of those projects? Or is

Operator

that contemplated for some different applications?

Speaker 3

The $2,000,000,000 is just related to NIO. The other things that you're talking about are additional costs to get to them. Okay. Thank you. Sure.

Speaker 1

We'll go next to Laurence Alexander with Jefferies. Your line is open. Please go ahead.

Speaker 11

Good morning. This is Dan Rizzo on for Laurence. Thank you for taking my question. Just want

Speaker 2

to think over time, what do you

Speaker 11

think is a good mix in terms of profit contribution from the vertically integrated JVs,

Speaker 3

May I just focus on your question to make sure that I understood it correctly?

Speaker 11

I just want to know how we should think about mix over the long term from JVs, From on-site from merchant and packets, how it should break out?

Speaker 3

Well, our JVs right now, if You add up the sales of our JVs. I think we disclosed that publicly. Simon, we do I disclosed it publicly so I can mention that, right?

Speaker 2

Correct.

Speaker 3

Yes. Our sales from JVs is getting close to more than $2,500,000,000 So we see a very good growth in our JVs. Our major JVs are an excellent company that we have in Italy called Satio. We have an outstanding company in India. And as Doctor.

Speaker 3

Sedan mentioned, they are growing Very fast, with 20 new plants and the construction. And then we had a great JV in Thailand And a significant joint venture in Mexico. Those 4 and obviously, we have a JV in Taiwan, they'd be fully consolidated. But these JVs, they're all very good companies, Longly established companies and they are doing very well and because some of those economies are doing well. So we expect those to Continue to grow.

Speaker 3

And then our merchant business, right now, I think our on-site business is about About 52%, 53%, 55% of our portfolio. And we expect that with all of the projects That we are doing that we would end up our on-site business, if you look at it 10 years from now, it might grow to be about I mean, 70% of our business, but that doesn't mean that our merchant business is shrinking. Our Fetcher business has continued to grow, but the percentage will come down because the whole company did become much bigger company.

Speaker 11

That's very helpful. I really appreciate that. And then just one follow-up. With the equity income, Does it have the same seasonality as the rest of the company? I think you mentioned 52%, 48% for EPS.

Speaker 11

I was just wondering If the income from affiliates is relatively the same?

Speaker 3

I wouldn't characterize it that way because those are different countries, different dynamics and all of that. But usually, the second half of the year is stronger for most people usually. Thank you very much. Thank you.

Speaker 1

With BMO Capital Markets. Your line is open. Please go ahead.

Speaker 5

Yes. Hi, Stacy. Thanks for taking

Speaker 3

my question. So I guess

Speaker 5

we understand the lockdowns in China are a little bit difficult to predict going forward. But I guess, is there a way to think about how much April was down relative to, say, The first quarter excuse me, your fiscal 2Q levels, just so

Speaker 8

we can kind of set a baseline

Speaker 5

and then and think about how it kind of changes throughout the quarter.

Speaker 3

First of all, good morning, John. John, if I start Closing that since I know the results for the month of April is kind of talking about the quarter while we are in the middle of it. But let me just, in general, say that April was a little bit worse than the month of March. And I'm pretty desperate. The situation compared to March hasn't improved.

Speaker 3

I hope it does improve, but it's totally unpredictable, John. I don't think even the Chinese authorities know that in terms of It just depends on the spread and number of cases of COVID, right?

Speaker 5

Got it. Okay. And then just

Operator

a housekeeping kind of question. So

Speaker 5

In the Slide 16 where there was kind of a breakdown of the earnings contributions, You had about $0.18 from equity affiliate income and I'm assuming the bulk of that's Jazan. But when I annualize that, it doesn't quite get to that kind of $0.80 to 0.85 And contribution that Jazan is supposed to be giving. So am I missing something on this or does Jazan have kind of another kind of When we think about moving from fiscal 2Q to fiscal 3Q that we should be thinking about whether there's a startup issue or what have you like, I guess how How would you characterize that?

Speaker 3

I'll give Melissa to think about this thing before I turn it over to her to answer the specific question. But With respect to Jazan, there is no step up. I mean, what you saw in the second quarter It's a pretty good is it a presentation of what that will do every quarter until the Phase 2 comes on the stream. So now if you are taking the contribution that we have had and annualizing and say that That is the $0.88 I think you should get to that. I think Melissa mentioned that we did get to that.

Speaker 3

But, Melissa, would you like to make any comments on this?

Operator

Yes. So, thank you, J. C. Just to be clear, the $0.18 that you're seeing there is versus prior year, right? So Yes.

Operator

So you have to take the that is a portion of the prior year. To be clear, if you're analyzing the IGCC, It's around $0.22 for this quarter, but we did have some headwinds in other joint ventures, specifically Our Mexican joint venture had some headwinds because of reduced sales from COVID lock sales, clinical oxygen.

Speaker 3

Got it.

Speaker 4

Okay. Now that makes sense. Thanks

Speaker 5

for the color. Appreciate it.

Speaker 1

We'll go next to Chris Parkinson with Mizuho. Your line is open. Please go ahead.

Speaker 8

Hi, good morning. This is Kieran on for Chris.

Speaker 3

Hi. I was just wondering if you can speak a little

Speaker 8

bit about your current, let's say, traditional on-site project backlog. You seem to be getting some benefits in Asia throughout this quarter, but how should we think about contributions from that business in the balance of the year and maybe into 'twenty three? And Maybe more of a long term picture, are you seeing an uptick in opportunities, I guess, particularly in terms of energy or chemical or electronics end markets? Thank you.

Speaker 3

Sure. We are doing very well in that regard. We are getting projects Which are more than our so called traditional share of the market. We are very successful in the electronic industry as you saw on the projects that we have announced and there are also projects that we haven't announced. And in other things like oxygen plants, nitrogen generators and so on, we certainly are winning Our share of the market.

Speaker 3

So if you look at the industrial gases business worldwide And look at our market share, which is about, I think, 14%, 15%, 17% depending how You look at it, we certainly are winning more than that in terms of the so called traditional hydrogen generator, oxygen generators And electronics high purity nitrogen generators. We were doing fine there and we are very pleased.

Speaker 8

Great. And then maybe just a

Speaker 3

really quick follow-up in terms of

Speaker 8

the Americas logistics challenges. I think you mentioned Trucking being a bit of a drag in terms of the quarter. Any thoughts in terms of that improving, Whether it's just preliminary thoughts into what you've seen throughout April May or just your thoughts into the back half of the year would be helpful. Thank you.

Speaker 3

Sure. I mean, our challenge in the United States is that you know that we are obviously a very big trucking company because we have all of these trucks Developing delivering products to our customers. I don't mind telling you that we, right now, We have had in the last quarter about 150 positions open for truck drivers that we cannot get. So despite that, we are delivering product to our customers and so on. But you know what that means.

Speaker 3

That means that our costs Increase. Number 1, we have to offer a lot more to hire drivers. And number 2, people have to work significant amounts of overtime In order to compensate for the shortage of the drivers that we have. So that is creating an issue for us, but that has been with us in the last two quarters. And The effect I've had on our bottom line is included in the second quarter.

Speaker 3

So in the next few quarters, I don't think the situation will get worse, But I think we owe it to you to describe what the challenges are.

Speaker 8

Okay. Thank you very much.

Speaker 3

Sure.

Speaker 1

We'll go next

Speaker 3

to Steve

Speaker 1

Byrne with Bank of America. Your line is open. Please go ahead.

Speaker 5

Hi. This is Rob Hoffman for Steve Byrne. My first question is Regarding the first SAF project, does World Energy have any long term contracts for SAF? And if so, Will pricing be competitive with conventional aviation fuel? And then will the hydrogen plant be a POX or ATR technology

Speaker 3

Okay. Number 1, I'll answer your second part of the question. The hydrogen plants that we have So, finally, this thing now when it comes on the stream will be the regular SMRs. But in the future, we can put CO2 capture on those, but capturing CO2 in Southern California, you have a challenge of what do you do with it. Our plan in the long The long term is to try to supply that facility with green hydrogen, which We can bring to Los Angeles from our different plants making green hydrogen and use our pipeline to deliver that.

Speaker 3

So that is how we would suit the decarbonize. In terms of price competitive pricing, as you know, when you sell Sustained airline fuel to an airline, you charge them a certain amount, Then there is incentives, the low LCFS, No carbon fuel subsidies that people get. So theoretically, you can sell me a gallon of Sustainable Aviation Fuel for $5 or $6 The price that you pay for the conventional thing, but then one can get about $3 to $4 or Sometimes more than that depending on the carbon intensity as a subsidy, which is it's a tradable commodity right now. So as a result, the end result will be as if you are selling it for $9 or $10 a gallon these days. So that is how that's been bought.

Speaker 3

Therefore, it is very competitive.

Speaker 4

Okay. Got it.

Speaker 5

Thank you.

Speaker 2

Thank you.

Speaker 5

Quick follow-up. Just what was the source of hydrogen recovery in the Americas? And is there more opportunity for this?

Speaker 3

The source of hydrogen recovery is basically the fact that the refineries are running harder because the demand for gasoline has gone up.

Speaker 5

Got it. Okay.

Speaker 3

Thank you, sir. Thank you.

Speaker 1

And with no other questions I'll turn the conference back for any additional or closing comments.

Speaker 3

Thank you very much. I would like to take a moment and thank Everybody for their participation in our call. We appreciate your good questions, And we look forward to talking to you in about 3 months about our 3rd quarter results.

Speaker 7

In the

Speaker 3

meantime, stay safe and have a wonderful day. Thank you very much.

Speaker 1

Ladies and gentlemen, that will conclude today's call. We thank you for your participation. You may disconnect at this time.

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Earnings Conference Call
Air Products and Chemicals Q2 2022
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