Air Products and Chemicals Q1 2023 Earnings Report

Air Products and Chemicals EPS Results

• Actual EPS: $2.64
• Consensus EPS: $2.73
• Beat/Miss: Missed by -$0.09
• One Year Ago EPS: $2.52

Air Products and Chemicals Revenue Results

• Actual Revenue: $3.17 billion
• Expected Revenue: $3.27 billion
• Beat/Miss: Missed by -$90.34 million
• YoY Revenue Growth: +6.00%

Air Products and Chemicals Announcement Details

• Quarter: Q1 2023
• Date: 2/2/2023
• Time: Before Market Opens
• Conference Call Date: Thursday, February 2, 2023
• Conference Call Time: 8:30AM ET

Air Products and Chemicals (NYSE:APD) is a global industrial gases and chemicals company headquartered in Allentown, Pennsylvania. Founded in 1940, the company supplies atmospheric and process gases, including oxygen, nitrogen, argon, hydrogen, helium, carbon monoxide and syngas, along with related equipment and technical services.

Air Products serves customers in industries such as refining, chemicals, metals, electronics, manufacturing, food and beverage, healthcare and energy. Its offerings support applications including combustion, metal fabrication, semiconductor production, food preservation, medical care and industrial processing. The company also develops technologies and projects involving hydrogen, ammonia, carbon capture and other lower-carbon energy solutions.

Through a global network of production facilities, pipelines, storage systems and distribution operations, Air Products serves customers across North America, South America, Europe, the Middle East, Asia and other international markets. Its business includes both on-site supply arrangements for large industrial customers and packaged or merchant gas distribution for smaller and specialized users.

Air Products and Chemicals Q1 2023 Earnings Call Transcript

Key Takeaways

• Air Products delivered Q1 FY2023 adjusted EPS of $2.64, up 6% year-over-year and within its guidance range, despite a $0.15 currency drag and the absence of last year’s $0.20 joint-venture gain.
• The board raised the quarterly dividend by 8% to $1.70 per share (annualized $7.00), extending over 40 consecutive years of dividend increases and committing to return more than $1.5 billion to shareholders in 2023.
• Strong pricing actions in the merchant business offset elevated energy costs, driving a 25% increase in operating income and a 300 basis point improvement in EBITDA margin despite macroeconomic headwinds.
• Key project milestones include completing Jazan Phase II—boosting annual EPS contribution to $1.35—announcing a $4 billion green hydrogen plant in Texas, and progressing NEOM’s $8.5 billion green ammonia project to a >2× oversubscribed financing close.
• Air Products reaffirmed FY2023 guidance (EPS $2.50–2.70; CapEx $5.0–5.5 billion), supported by a nearly $20 billion backlog and a $36 billion capital deployment capacity through FY2027 for high-return growth investments.

Presentation

[Operator]

Good morning. 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. Siddharth Manjeshwar. Please go ahead.

[Siddharth Manjeshwar, VP of Investor Relations and Corporate Treasurer at Air Products]

Thank you, Katie. Good morning, everyone. Welcome to Air Products' first quarter 2023 earnings results teleconference. This is Siddharth 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 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 disclosure that can be found in our earnings release and on slide number 2.

[Siddharth Manjeshwar, VP of Investor Relations and Corporate Treasurer at Air Products]

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

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

Thank you, Sid, good day to everyone. Thank you for taking time from your busy, 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 3, 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 4. 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.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

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 a $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 earning per share of $2.60-$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. Please turn to slide number 5. We are committed to rewarding our shareholders while pursuing our long-term growth strategy.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

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 one and a half billion dollars to our shareholders in 2023, reflecting our commitment to return cash to our shareholders. Now please go to slide 6. It's still my favorite slide. It 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 they continue to work on productivity.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

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 passthrough in our on-site 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. It will be by far the largest green hydrogen project in the United States.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

The information about this project and the recording of our December 8th webcast for this project, are available on our website. Please turn to slide 8. We were pleased to announce in January, 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. With the first phase of this project, which was completed in October of 2021, Air Products contributed about one and a half billion dollars 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.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

Our total cash contribution for this project is two and a half billion dollars. As expected, the first phase of the project has earned us $0.80-$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 3 years ago. Please turn to slide number 9, 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 agreements for this project.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

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 green energy to the world. The engineering is now about 30% complete. All major subcontracts 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. Please turn to slide number 10. As you know, Air Products has a one-third ownership position of the NEOM Green Hydrogen Company. Importantly, and this is very important, we remain the sole offtaker of 100% of the green hydrogen produced in the form of green ammonia produced at this facility under an exclusive 30-year contract.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

We continue to see significant opportunities to use this green ammonia to bring green hydrogen to consumers around the world. As I said, we are the sole offtaker and distributor of this product. I want to emphasize that the offtake price for this green ammonia remains the same as when 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 we are financing this project, and as a result, we are absorbing all of the project financing charges and so on, that has not changed the offtake price. 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 total project.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

Over the past two years, we have seen significant interest from the global financial institutions who see tremendous value proposition on this project. 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 on this project. The partners will contribute 25% cash, and the remaining 75% will be non-recourse project financing. Obviously, if you are doing non-recourse project financing, you want to maximize the amount of money that you can borrow. You put a lot of your ongoing costs, and you bring them forward to the real present value and borrow against that. I will explain this a little bit more when we get to the detailed chart.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

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 is 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. Please turn to slide 12. I am pleased to say that the non-recourse financing is well underway, and we are more than 2 times oversubscribed for 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.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

We will obviously let you know as we make progress on the project financing. Please turn to slide number 13, so I can provide you with an overview of the total project capital needs. First, the original $5 billion that we had mentioned before for the capital required to build the facility, we have increased that. It has increased by about half a billion dollars due to inflationary pressure that everybody expects. 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.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

This increases the capital cost, but it decreases the operating cost. We decided that was a better trade-off. The key point was to make sure that the project is not dependent on other people doing something, that 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 that I'm sure will be a subject of questions from people is the $1.8 billion for project financing costs. That is a big number, but it is very explained why that is. Again, as I said, if you are project financing, you want to put and borrow as much money as you can. First of all, about $1 billion of that $1.8 billion is the interest during construction. We are spending money.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

We want to borrow that money. There is an interest to that borrowing. That adds up for the net total length of the project to about $1 billion. We want to finance that and borrow against that. We are using land. Instead of leasing the land for 50 years, we decided to pay for the land up front. That reduces our ongoing cost, and we can finance that. That is a few hundred million dollars. The spares for the project. Usually, you buy the spares as you go forward. We decided to buy all the spares up front and finance them. Those are the kind of costs that can comprise the $1.8 billion.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

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 you operating costs in the future. Altogether, the total funding needed for the project is $8.5 billion. 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 from the three partners. Therefore, obviously, Air Products' cash contribution is about one third of that, which is less than $800 billion, and this is as compared to the $1.7 billion that we originally expected.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

Overall, we are very pleased with where 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. 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 to our 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 that lower emissions and increase efficiency and productivity.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

Through our blue and green hydrogen mega projects of the future, we will commit more than $15 billion by 2027 to deliver clean hydrogen at 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 solutions. I'm proud to say that the people of Air Products have continued to drive these results in the near term and made excellent progress in executing our growth project 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. I'm pleased to turn the call over to Melissa, our Chief Financial Officer. Melissa?

[Melissa Schaeffer, SVP and CFO at Air Products]

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 view of our first quarter results. In comparison to last year, sales volume and price were up nearly 10%. The 7% gain in price for the total company equals a nearly 20% improvement in merchant price compared to last year. The fifth quarter in a row of double-digit increases.

[Melissa Schaeffer, SVP and CFO at Air Products]

Volumes were up 2% higher, driven by better on-site and merchant, partially offset by lower sales equipment activities. Volumes were strong in America and Asia, weaker in Europe. Currency translation from the strengthening U.S. dollar reduced sales by about 6% and lowered operating income by 8%. Despite the headwinds, operating income jumped 25%, operating margin was 300 basis points higher, primarily driven by strong pricing. Operating income was higher across the region 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.

[Melissa Schaeffer, SVP and CFO at Air Products]

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 a favorable contracted demand. Price continued to gain strength across the region. Merchant price improved 3% versus last quarter. EBITDA was down 5% primarily due to weaker volume, while EBITDA margin was up 200 basis points as positive price and energy cost pass-through more than offset the lower volume. 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 $0.60 or 6% compared to last year.

[Melissa Schaeffer, SVP and CFO at Air Products]

Strong price showed the improved results. Price net of variable cost contributed over $0.70 this quarter as our price action 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. 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 affiliate income and the unfavorable $0.10 in non-controlling interest. The effective tax rate of 19.1% was 210 basis points unfavorable due to less tax benefits this year.

[Melissa Schaeffer, SVP and CFO at Air Products]

We expect an effective tax rate of 19%-20% in FY2023. For the quarter, the non-service component of our defined benefit plan were favorable $0.04 last year and unfavorable $0.07 this year. As I shared with you last quarter, we now exclude this 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.

[Melissa Schaeffer, SVP and CFO at Air Products]

Our ability to grow distributable cash flow, especially in challenging conditions, demonstrates the strength and stability of our business. It enables us to continue creating 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 $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.

[Melissa Schaeffer, SVP and CFO at Air Products]

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 have 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.

[Melissa Schaeffer, SVP and CFO at Air Products]

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, and CEO at Air Products]

Thank you, Melissa. Please turn to slide number 21 for our Asia first quarter results. Our businesses were 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-size traditional industrial gas plants, which came on the stream across the region over the last years. Price was up 1% in total, which translates to 3% in our merchant business.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

Although underlying sales grew 8% versus last year, and energy pass through was a positive 2%, overall sales were flat, 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, the 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.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

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

[Siddharth Manjeshwar, VP of Investor Relations and Corporate Treasurer at Air Products]

Thank you, Seifi. 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 for 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 costs to our customers, and almost all our natural gas usage is for on-site hydrogen production. Please turn to slide 23 for a review of our Europe results.

[Siddharth Manjeshwar, VP of Investor Relations and Corporate Treasurer at Air Products]

Successful price actions we have worked hard to implement the last few quarters drove the 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 costs, although it had no impact in profit. Operating income jumped nearly 50%, while EBITDA was up almost 30%, primarily due to strong price. Unfavorable currencies reduced operating income and EBITDA each by more than 10%. Price primarily drove the more than 400 basis point EBITDA margin increase.

[Siddharth Manjeshwar, VP of Investor Relations and Corporate Treasurer at Air Products]

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

[Samir Serhan, COO at Air Products]

Thank you, Sid. 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. The price improved quarterly 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 costs. Volume grew 6% due to better merchant and on-site. Volume also benefited from a new short-term agreement, which will benefit America's results for the next few quarters. Operating income was up for almost 30% over last year, and operating margin improved to 300 basis points, driven primarily by the strong price. Volume also contributed to profits, but costs were unfavorable.

[Samir Serhan, COO at Air Products]

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 turnarounds. Please now turn to slide 26 for our corporate segment. This segment includes our. I'm sorry.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

Samir, you need to describe the slide number 25 please.

[Samir Serhan, COO at Air Products]

I would like to review, I'm sorry, review the Middle East results and India before going to that. Please let's go to slide 25 first for review of our Middle East and India segment. 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 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.

[Samir Serhan, COO at Air Products]

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, we have begun to receive additional income in the second quarter. 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, our non-LNG related project activities have also grown in recent years to become major contributors to this segment.

[Samir Serhan, COO at Air Products]

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 profit were lower than last year, primarily due to lower sale of equipment project activities. We also continue 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, and CEO at Air Products]

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 FY2023, we have left our guidance unchanged despite the significant uncertainties that exist in the world. For the second quarter of FY2023, which is usually our weakest quarter, our earning per share guidance is $2.50-$2.70, up 7%-15% over last year. We still see our CapEx at $5 billion-$5.5 billion for the year, including the approximately $1 billion for the completion of the Jazan project that we just talked about.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

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 innovate solutions to the world's most significant energy, environmental, and sustainability challenges. We continue to build a diverse and inclusive culture where our 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. We are very pleased to answer your questions.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

Operator, we are ready for questions.

[Operator]

Thank you. If you would like to ask a question, you may signal by pressing star one on your telephone keypad. If you're on a speakerphone, please make sure your mute function is turned off to allow your speaker, allow your signal to reach our system. Once again, star one for questions. We also ask that you limit yourself to one question and one follow-up question. We'll go first to Christopher Parkinson with Mizuho.

[Christopher Parkinson, Managing Director and Senior Equity Research Analyst at Mizuho]

Great. Thank you so much. Seifi, just given all the macro uncertainty that's, you know, prevailing across the globe, can you just give us, you know, 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, and CEO at Air Products]

Thank you very much, Chris. What right now, obviously, you know, it's very difficult under the current circumstances to predict what is going to happen in the next few quarters. We feel very confident about our own operation and about our ability to keep our plants running and service our customers. 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.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

We have taken action to increase prices, and most important, as I said, we are benefiting from the fact that we had 20, 25 smaller projects that we usually don't announce, but they are standard industrial gas projects. They are coming on a stream, and they are contributing. 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 stabilized. Power prices have stabilized. Natural gas prices have not yet, but overall, we think that we should be okay in Europe. In the U.S., you saw our actions with respect to pricing. Last quarter, we got overall 7%...

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

Overall for the whole company, we got 7%, in the U.S., we got almost 14% price increase, which translates to almost 20% price increase on the merchant side. Latin America is always very big, we don't talk about it too much. Overall, we feel pretty confident that we should be able to deliver the forecast that we have given you for the year.

[Christopher Parkinson, Managing Director and Senior Equity Research Analyst at Mizuho]

That's helpful. 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, you know, key opportunity, that's, let's say, specific to Air Products that you believe investors are missing? Is there something on the HYCO facility retrofits? Is there just anything else, in terms of that materialization over the last, next several years that we all should be paying attention to? Thank you.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

Right, Chris. That's a very, very good question. You know, I don't want to comment too much about the IRA benefits because the law is there, everybody can read that. The opportunities for Air Products that we will definitely follow through is, number 1, we will put carbon capture on our existing facilities. There is 2 benefits on that. Number 1, we reduce our CO2 emissions, number 2, that gives us an opportunity to have a lower carbon hydrogen that we can sell at higher prices. We will definitely do that. We are benefiting from the IRA on a project that we had announced before the IRA, which was the project in Louisiana. We did that project with the economics based on no IRA benefit on $85 for CO2 capture.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

We were counting on about $50, that additional $35 enhances the returns on that project. We will do significant amount of green projects in the U.S. We did announce the project in northern Texas, and we definitely are working on other mega projects to produce green hydrogen in the U.S. The IRA credits for $3 for green hydrogen production, plus the fact that if you make an integrated facility, you also get credit for the renewable power that you generate, makes it very attractive to make these investments in the U.S. 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, you can only take advantage of the credits, if you can do something with the hydrogen.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

I mean, people can run around and say, "Well, okay, I'm going to build a plant to produce green electricity and produce hydrogen." What do 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. The very good news for us is that that has prompted other countries to take action.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

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 EUR 280 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, Managing Director and Senior Equity Research Analyst at Mizuho]

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

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

Thank you.

[Operator]

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

[Anthony Mercandetti, Equity Research Associate at Deutsche Bank]

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 costs and contributions to NEOM. What is the return on this project versus what you were expecting when you first announced the project in July 2020?

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

Well, the thing is that I have three partners, and I'm, I don't want to speak for them and disclose the return on the project. The thing 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 offtake and sell that and make money on that, and that is how we take a look at the return on the total investment. On that one, 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 invest, you should expect about $0.10 of operating income. You have to look at total supply chain from Air Products point of view.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

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 offtaking the ammonia at the same price that it was negotiated in 2020. Okay?

[Anthony Mercandetti, Equity Research Associate at Deutsche Bank]

Yes, understood. 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, and CEO at Air Products]

It depends on what we would have negotiated with our partners. You know? I don't expect it to have been significantly different, but because I mean, you talked about additional capital costs, but as I said, a lot of the operating cost is being capitalized, so that necessarily doesn't affect the return on the project. Again, I just don't, I, you know, I have two other partners, and I respect them, and I don't want to disclose their financials. As I said, please, from an Air Products point of view, you need to look at the total supply chain. That okay?

[Anthony Mercandetti, Equity Research Associate at Deutsche Bank]

Yes. Thank you very much.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

Thank you, sir.

[Operator]

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

[John McNulty, Managing Director at BMO Capital Markets]

Yeah, good morning. Thanks for taking my question, Seifi. Seifi, you seem excited about the price of the offtake for NEOM basically remaining flat. 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 originally signed into this contract? I guess how should we be thinking about that?

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

Well, I think that's one way of putting it. The thing that we see is significant interest in the product. Obviously, as a businessman, you know, we would like to offtake anything that we buy at the most favorable price that we can get. 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 it's $8.5 billion, therefore, you know, the price of ammonia must have gone up. It did not. It just...

[John McNulty, Managing Director at BMO Capital Markets]

Okay.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

Look, one other thing, John, you know this better than I do. We are project financing this thing with some of the biggest banks in the world giving us money. They have looked at this project, they have looked at the return of the project, and they are willing to finance it. I guess they all think this is a good project and a good prospect, and they are going to get their money back. You know what I mean?

[John McNulty, Managing Director at BMO Capital Markets]

Yeah, no, for sure. I guess maybe looking at it from a slightly different angle. When you think about... Like, when I think about project financing, the benefit of it is they tend to juice the returns a little bit more, but it does take out some of the EPS on the, you know, tied to the equity that's being put to work because there's less equity involved. I guess when you think about the total capital of the project overall, you know, 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, and CEO at Air Products]

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

[John McNulty, Managing Director at BMO Capital Markets]

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

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

Thank you.

[Operator]

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

[John Roberts, Managing Director at Credit Suisse]

Thank you. ExxonMobil 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? How do we think about how your customers might play in the hydrogen and potentially ammonia market?

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

Well, I mean, I can't comment on their strategy of Exxon and what they want to do. You know, this is a competitive board. If Exxon decides that they want to get into the merchant ammonia business and make blue ammonia to sell, then we will have 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 their carbon emissions. If they do that, now are they going to make so much hydrogen that they have extra amount to do merchant? I don't know. I don't have any visibility on that and all of that.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

That's up to them to do what they want to do. We would have.

[John Roberts, Managing Director at Credit Suisse]

Okay.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

You know what we are doing. As I said, I'm sure other people will get attracted to these projects. It's one thing talking about these things. It's actually doing the details. They just announced they're doing the FEED. They have to activate it. Then they do the FEED, then they add the costs, and then they find out what the total cost is and all of that. It's entirely up to them.

[John Roberts, Managing Director at Credit Suisse]

Okay. Then.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

That's a project they decided to do it themselves, which is fine.

[John Roberts, Managing Director at Credit Suisse]

Okay. 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 gonna be sold to the existing gray hydrogen market?

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

The interesting thing is that 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. Exxon, through their subsidiary, which we have announced this publicly, so I'm not putting anything new out, through their subsidiary, which is the Imperial Oil Limited, they are going to use the blue hydrogen we give them to produce renewable diesel that they're going to sell in California at premium prices. As a result, they are giving us a significant premium for the blue hydrogen that they are buying from us in Canada.

[John Roberts, Managing Director at Credit Suisse]

Great. Thank you.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

Thanks.

[Operator]

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

[Steve Byrne, Managing Director in Equity Research at Bank of America]

Yes. You had some pretty hefty merchant price increases in Europe and 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, and CEO at Air Products]

What the question that you're asking, Steve, is very relevant. We obviously have increased the prices in order to recover the power costs. At some point in time, if the power costs go down, some of the customers would expect us to decrease those prices. We will listen to that, and we will make a decision based on supply-demand situation as we always do. It is possible. If the price declines in the future, that would be as a result of power price declining. Therefore, theoretically, there shouldn't be an impact on our bottom line.

[Steve Byrne, Managing Director in Equity Research at Bank of America]

Okay. Just a follow-up on NEOM. Has the design of it 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 have an unchanged ammonia price from this project?

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

Well, Steve, you're asking a very good question, which is a subject of internal discussion quite a bit. 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 will do actually might end up giving us the capability of making a lot more than $1.2 billion. 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. I personally think there could be an upside, but we have to wait and see.

[Steve Byrne, Managing Director in Equity Research at Bank of America]

Thank you.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

Thank you.

[Operator]

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

[Mike Leithead, Director of Equity Research 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, and CEO at Air Products]

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. You know, nothing is 100%, but I feel pretty good about that number at this stage.

[Mike Leithead, Director of Equity Research at Barclays]

Got it. Makes sense.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

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

[Samir Serhan, COO at Air Products]

Besides the engineering, we have placed the major orders on the project. Basically, that's also locked in for the equipment and even for the construction for the green element. That's also being in place.

[Mike Leithead, Director of Equity Research at Barclays]

Great. Thank you.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

Okay.

[Mike Leithead, Director of Equity Research at Barclays]

Yep. 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. Just how should we think about the cash dividends from the project? 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, and CEO at Air Products]

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, Director of Equity Research at Barclays]

Got it. Thank you.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

Thank you.

[Operator]

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

[Kevin McCarthy, Partner at Vertical Research Partners]

Yes, good morning. With regard to Asia, you had healthy volume growth of 7%. 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. I was hoping you might be able to put that into context for us. Looking ahead, would you expect the contributions from those startups to remain elevated or regressed by some amount? How would you describe the shape of that profile in Asia?

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

Kevin, quite honestly, that's a very good question. First of all, good morning. I think this is a good opportunity for me to make a comment. You know, a lot of times people think that Air Products, the only thing we do is mega project. We have our base business, and we are making good progress in our base business. We are getting our share of all of these 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 coming on stream in Asia.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

What they are doing is that they are helping us to deliver the volume increases despite the fact that you know that economic activity in China was almost it has gone from 6%-7% to back to about 2%-3%. 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. These are the good things they are going to contribute, and we are very excited about them.

[Kevin McCarthy, Partner at Vertical Research Partners]

Okay. Thank you for that. 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, and CEO at Air Products]

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

[Melissa Schaeffer, SVP and CFO at Air Products]

Yes. Thank you. From a volume perspective in the Americas, that agreement was about 3% of the increase in the volume. We will see that over the next four quarters be pretty consistent. That's what we would see attributed to 2023.

[Kevin McCarthy, Partner at Vertical Research Partners]

That's helpful. Thank you very much.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

Thank you.

[Operator]

We'll take our next question from Jeffrey Zekauskas with J.P. Morgan.

[Jeffrey Zekauskas, Managing Director and Senior Equity Research Analyst at J.P. Morgan]

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, and CEO at Air Products]

Well, good morning, Jeff.

[Jeffrey Zekauskas, Managing Director and Senior Equity Research Analyst at J.P. Morgan]

Hi, good morning.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

You were saying that we had a net present value, which was the discounting of all of the cash flows that we expect in the few years. 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.

[Jeffrey Zekauskas, Managing Director and Senior Equity Research Analyst at J.P. Morgan]

Right. Because you're using more capital or the whole there's 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? 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, and CEO at Air Products]

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

[Jeffrey Zekauskas, Managing Director and Senior Equity Research Analyst at J.P. Morgan]

Yep.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

That project is literally next to our pipeline. We are assessing how much of that we can put to the pipeline and sell. Because 1,850 tons of hydrogen is not that huge compared to the total sale of hydrogen that we have on our pipeline. Because our pipeline over there can do significantly more than that. One scenario is that all of the customers on the pipeline, due to environmental regulations or debate, legislation develops and so on, decide, "Hey, I want blue hydrogen." We can just about all of the hydrogen into the pipeline. It is possible that not all of them would convert. Some of them would say, "No, I'm still okay with gray hydrogen." We will have excess hydrogen to put and make it into ammonia.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

What we are doing is that in terms of the actual building of the plant, we are building the plant to have ammonia facility. That means we will build the ammonia plants, we will have ultimate capacity to and ultimate flexibility to use as much of the hydrogen in the pipeline. Whatever we can use, we make into ammonia. The ammonia plants themselves, Jeff, in the context of the overall, don't cost that much. The ammonia plant, once you have the infrastructure, putting a 1.2 million ton ammonia plant by itself is only $250 million. We are not going to lose anything significant by having basically it's like a spare capacity. The other thing is obviously how would the demand for blue ammonia develop as we go forward in the next few years.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

We are building a plant to give us the flexibility. 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. As a result of that, I think we can maximize the profitability of that better than anybody else can, possibly can.

[Jeffrey Zekauskas, Managing Director and Senior Equity Research Analyst at J.P. Morgan]

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

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

I said we haven't determined how much ammonia we are going to sell.

[Jeffrey Zekauskas, Managing Director and Senior Equity Research Analyst at J.P. Morgan]

Sell.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

We have determined how many ammonia plants we are going to build.

[Jeffrey Zekauskas, Managing Director and Senior Equity Research Analyst at J.P. Morgan]

Great. Thanks so much.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

Thank you. Thank you very much, Jeff.

[Jeffrey Zekauskas, Managing Director and Senior Equity Research Analyst at J.P. Morgan]

Yeah.

[Operator]

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

[P.J. Juvekar, Equity Research at Citi]

Yes, good morning.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

Good morning, P.J. How are you?

[P.J. Juvekar, Equity Research at Citi]

Good. Seifi, on the NEOM project, you had inflation, you also had that $1.2 billion of increased, you know, sort of financing cost, et cetera. Not the financing cost. I'm sorry. There's the additional cost, additional scope, I should say. You're gonna 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, and CEO at Air Products]

We will be still on time for 2027. The additional scope is something that we have been thinking of and planning on it. The progress on this project is that at the beginning, you go over there and you say, "Okay, I'm going to build a plant." All of the infrastructure is already there or is going to be there, and therefore, we can draw on that. As the project goes forward, you start getting a little bit concerned about the ability of other people to build things 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, Equity Research at Citi]

Okay, thank you. There was a, you know, there was earlier discussion about hydrogen price. You know, 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? I think that's the ultimate goal of the government, is to lower the hydrogen price. Do you have any thoughts on how the industry or the hydrogen price evolves over time? Thank you.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

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. The total being translated to per kilogram of hydrogen is more than $3. We obviously, when we do projects, we expect a return. If you are getting a subsidy, that improves the return, so we will pass through some of that to the customer, and we will achieve the goal of the government, which is to fundamentally reduce the price of hydrogen so that people can convert.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

That is exactly the goal, and that is exactly what will happen, P.J.

[P.J. Juvekar, Equity Research at Citi]

Thank you very much.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

Thank you, sir.

[Operator]

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

[Michael Sison, Managing Director at Wells Fargo]

Hey, good morning. On slide 30, you talk about downstream hydrogen supply chains, about $2 billion between 2025-2028. Is that $2 billion a number that could go up, you know, as new projects or you look for new opportunities in the supply chain? Any thoughts in terms of the timing between 2025 and 2028?

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

That was our estimate before about the $2 billion. That number could be less, could be more. Let me just explain. It depends on the customers. It is possible that when you look at the customers, there are some customers that are like the mobility, where you need a lot of infrastructure to serve it. 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. That is one way of selling the hydrogen. Another way is that somebody develops ships that can use ammonia, and they want green ammonia. In that case, there is no infrastructure because the ship can dock in NEOM, put ammonia in it, and then use it as fuel.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

There is no infrastructure cost. Another customer could be somebody that you bring the ammonia to a port, you crack it, you put it in a pipeline, that goes into a chemical plant or some other kind of a plant, and they use all of that. You don't have to liquefy it, you don't have to build the infrastructure for trucks and so on. The cost 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. That could be significantly less, or it could be more, depending on exact infrastructure.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

If it is more, then that means that the infrastructure needed for the trucking is obviously more extensive, which means that the price of hydrogen at the pump is a lot higher than the price of selling it if you didn't have to liquefy it. It will all adjust for itself. That okay?

[Michael Sison, Managing Director at Wells Fargo]

Got it. Thank you. Bye.

[Operator]

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

[Steven Haynes, Equity Research Associate at Morgan Stanley]

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

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

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

[Melissa Schaeffer, SVP and CFO at Air Products]

Yeah, absolutely. 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 or India segment. That added additional costs this quarter. We should see that go down next quarter. Fixed cost inflation, however, is a driver in that $0.11, that will be consistent throughout this fiscal year.

[Steven Haynes, Equity Research Associate at Morgan Stanley]

Thank you.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

Okay.

[Operator]

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

[Josh Spector, Executive Director of Equity Research at UBS]

Yeah. Hi. Thanks for taking my question. Just on the near term, when I look at your next quarter guidance, you know, Jazan closed based on your math, maybe it adds $0.10 or $0.12 or so sequentially. I would think there's maybe some merchant benefit as energy prices come down. Maybe there's volumes down a little bit, December quarter wasn't super strong from a demand perspective. I guess, you know, why wouldn't earnings be up sequentially, given some of the tailwinds? What am I missing?

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

I don't think you're missing anything. Your logic is very, 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 out of the New Year holiday. We don't have much visibility, quote, unquote, seeing how energy prices are going to develop in Europe. That is why we are a little bit cautious. You are very correct to kind of say, well, maybe you're being conservative. Maybe we are, but we just wanted to make sure that we don't get ahead of ourselves.

[Josh Spector, Executive Director of Equity Research at UBS]

No, fair enough. Appreciate that.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

Sure. Absolutely. Thank you.

[Josh Spector, Executive Director of Equity Research at UBS]

Sorry. If you had more, go ahead. I was gonna ask just second quickly, the Canada project financing. Was that expected, that anticipated in your economics? Does that change your cash contribution at all?

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

I'm sorry, I didn't understand.

[Melissa Schaeffer, SVP and CFO at Air Products]

Thank you for asking that. Just to be clear, on our Alberta project, we have no project financing associated to that project.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

Exactly. On the project financing, we do decide project by project. In Alberta, I think we, because it's a very complicated project and so on, difficult to finance. NEOM was pretty easy because there's a offtake price and so on, you can calculate it. With our project in Texas, the $4 billion project that we announced, we will most probably look at project finance on that. We make the decision step by step. The options that Air Products has, which is a lot, 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 Air Products and raising bonds, we have the option of project finance. We take everything into consideration and come up with the best possible solution.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

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 the 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. They're trying to assess all of these things, and we do ask all of those questions, and we make the most optimum decision.

[Josh Spector, Executive Director of Equity Research at UBS]

Okay. Thank you.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

Okay. Any more questions, operator?

[Operator]

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

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

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

[Laurent Favre, Senior Analyst at BNP Paribas]

Good morning, all. My question is on inflation for the rest, inflation risk for the rest of the backlog. If we take out NEOM from the $19.4 billion, there's about $15 billion left. I was wondering if you could talk about the risk that there we also see $1 billion or $1.5 billion of extra costs and whether you have flexibility on selling prices to adjust for that to maintain returns. Thank you.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

Well, thank you. The rest of our projects, obviously, some of them are, you know, a lot of the other projects that we have announced are actually in a much more advanced stage than NEOM. We have a pretty good feel for their cost and all of that. I don't want to here deny the fact that there is inflation. We just don't think that the inflation thing is something that we cannot manage or it will significantly cause a struggle. With some of the projects, I mean, let's take the project in Louisiana. The project in Louisiana, if there is inflation and our capital cost goes up, then we will price the ammonia and the hydrogen out of that facility accordingly.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

We don't. It is not the kind of project that we have committed to a sales price for the product and now we have to keep the additional project costs. We do have projects like that, most of those things are just about done. That's why we think we can manage it.

[Laurent Favre, Senior Analyst at BNP Paribas]

Okay. Thank you.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

Okay? 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, Equity Research Senior Associate in Chemicals, Emerging Technologies, and Industrial Biotech at Jefferies]

Hi, this is Kevin Estok on for Laurence. Thank you for taking my question. I just given forecasts 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, and CEO at Air Products]

Well, that's a very 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. You saw what we have always said, that industrial gas is business. We have a lot of resiliency because half of our business is on site. That doesn't get really affected by recession because they are take-or-pay contracts. Our merchant volumes usually go down, but they do not go down significantly.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

We take action to control our costs, and therefore, you can take a look at our actual results during 2009 and 2010, and 2008 or our results in 2020 and 2021, and you'll see that it held up pretty well.

[Kevin Estok, Equity Research Senior Associate in Chemicals, Emerging Technologies, and Industrial Biotech at Jefferies]

Thank you.

[Seifi Ghasemi, Chairman, President, and CEO at Air Products]

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

[Siddharth Manjeshwar, VP of Investor Relations and Corporate Treasurer at Air Products]

Thank you.

[Operator]

Thank you. That will conclude today's call. We appreciate your participation.

Participants

Executives

• Melissa Schaeffer, SVP and CFO
• Seifi Ghasemi, Chairman, President, and CEO

Analysts

• Anthony Mercandetti, Equity Research Associate at Deutsche Bank
• Christopher Parkinson, Managing Director and Senior Equity Research Analyst at Mizuho
• Jeffrey Zekauskas, Managing Director and Senior Equity Research Analyst at J.P. Morgan
• John McNulty, Managing Director at BMO Capital Markets
• John Roberts, Managing Director at Credit Suisse
• Josh Spector, Executive Director of Equity Research at UBS
• Kevin Estok, Equity Research Senior Associate in Chemicals, Emerging Technologies, and Industrial Biotech at Jefferies
• Kevin McCarthy, Partner at Vertical Research Partners
• Laurent Favre, Senior Analyst at BNP Paribas
• Michael Sison, Managing Director at Wells Fargo
• Mike Leithead, Director of Equity Research at Barclays
• P.J. Juvekar, Equity Research at Citi
• Samir Serhan, COO at Air Products
• Siddharth Manjeshwar, VP of Investor Relations and Corporate Treasurer at Air Products
• Steve Byrne, Managing Director in Equity Research at Bank of America
• Steven Haynes, Equity Research Associate at Morgan Stanley