Air Products and Chemicals Q3 2023 Earnings Call Transcript

Participants

Corporate Executives

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

Analysts

• Christopher Parkinson, Mizuho
• David Huang, Deutsche Bank Aktiengesellschaft
• Steve Byrne, Bank of America Co.
• John Roberts, Credit Suisse Group AG
• John McNulty, BMO Capital Markets
• Mike Sison, Wells Fargo & Company
• Josh Spector, UBS Group AG
• Mike Leithead, Barclays PLC
• Duffy Fischer, The Goldman Sachs Group, Inc.
• Jeff Zekauskas, JPMorgan Chase & Co.
• Steve Haynes, Morgan Stanley

Presentation

[Operator]

Good morning, and welcome to Air Products' Third Quarter Earnings Release Conference Call. 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. Sid Manjeshwar. Please go ahead.

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

Thank you, Sharon. Good morning, everyone. Welcome to Air Products' Third Quarter 2023 Earnings Results Teleconference. This is Sid Manjeshwar, Vice President of Investor Relations and Corporate Treasurer. I am pleased to be joined today by Seifi Ghasemi, our Chairman, President and CEO; Dr. Samir Serhan, our Chief Operating Officer; Melissa Schaeffer, our Senior Vice President and Chief Financial Officer; and Sean Major, our Executive Vice President, General Counsel and Secretary. After our comments, we will be pleased to take your questions. Our earnings release and the slides for this call are available on our website at airproducts.com.

Today's discussion contains forward-looking statements, including those about earnings and capital expenditure guidance, business outlook and investment opportunities. Please refer to the cautionary note regarding forward-looking statements that is provided in our earnings release and on slide number two. Additionally, throughout today's discussion, we will refer to various financial measures, including earnings per share, operating income, operating margin, EBITDA, EBITDA margin, the effective tax rate and ROCE, both on a total company and segment basis. Unless we specifically state otherwise, statements regarding these measures are referring to our adjusted non-GAAP financial measures.

Reconciliations of these measures to our most directly comparable GAAP financial measures can be found on our website in the relevant earnings release section. Now I'm pleased to turn the call over to Seifi.

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

Thank you, Sid, and good day to everyone. Thank you for taking time from your busy schedule to be on our call today. The committed and dedicated people at Air Products delivered another set of outstanding results this quarter, driven by strong organic sales growth, demonstrating the strength and the stability of our business. At Air Products, we have an excellent and resilient industrial gas business that is the foundation of who we are and what we do. We supply customers in dozens of industries, customers who depend on our people's expertise to make their products and processes more efficient and sustainable. We have been doing this for the last 83 years, and we will continue to do all we can to be the safest and most profitable industrial gas company in the world, providing outstanding service to our customers.

But at the same time, we are using all of our experience, financial strength and core competencies as the world's leading supplier of hydrogen to implement our low-and-zero carbon hydrogen mega projects around the world. When it comes to generating a cleaner future now, we want to lead the way, decarbonizing heavy duty transportation and heavy industry around the world with clean hydrogen at very large scale. This combination is our growth strategy, and it is the path forward for our continuous success and profitable growth in the quarters and years to come. I want to thank the hard-working and talented team at Air Products who make all of this possible.

Now please turn to slide number three. Our safety performance, which is always our highest priority. We have worked hard to realize significant progress since 2014. But we always drive and strive to do even better. Our goal is to achieve 0 incidents and 0 accidents. Now please turn to slide number four, which summarizes our management philosophy. We have shown you this slide every time that we have an earnings call, but I cannot emphasize enough our commitment to the basic principles delineated in these slides. These principles will guide our actions in the future. Now please turn to slide number five. Our third quarter adjusted earnings of $2.98 per share improved $0.40 or 16% versus last year and exceeded the top end of our guidance for the quarter.

Both price and volume were again positive. We continue to demonstrate significant pricing strength while our volume improved for the 9th consecutive quarter, driven by strong on-site performance including improved hydrogen demand in Americas and over 13 new assets that we have brought on stream. Additionally, we anticipate the recently announced $1 billion acquisition of the natural gas-to-syngas facility in Uzbekistan, and the new LNG sale of equipment projects will add significantly to our future earnings. As you can see on this slide, we have delivered an average of 11% cumulative average growth rate of earnings per share in the last nine years.

Now please turn to slide number six. We are committed to rewarding our investors by providing a healthy dividend and return cash to them. We are proud of our record of more than 40 consecutive years of dividend increases. We expect to return more than $1.5 billion of dividend to our shareholders in 2023. And also, this slide demonstrates that we have increased our dividend by an average of 10% in the last nine years. Now please turn to slide number seven, which shows our EBITDA margin. This continues to be my favorite chart. This graph is self-explanatory and clearly demonstrates the significant improvement of our margins as compared to nine years ago, when I had the honor and privilege of becoming the Chairman, President and CEO of Air Products.

Now please turn to slide number 8. I would like to again highlight the two fundamental pillars of our growth strategy. Our resilient core industrial gas business and the low and zero carbon hydrogen projects, the mega projects, each underpinned by sustainability. By running our existing business efficiently every quarter, we were able to deliver double-digit earnings per share growth in eight of the last quarters. And we continue to advance our blue and green hydrogen projects to help decarbonize the transportation, and the heavy industrial sector of our economy. We expect these world scale clean hydrogen projects to significantly add to our already strong profit stream in the future.

Now it is my pleasure to turn the call over to Melissa Schaeffer, our Chief Financial Officer. Melissa?

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

Thank you, Seifi. As Seifi has said, the consistency and resilience of our business was on full display this quarter. Price and volume gained 4% and 3%, respectively. And all profit metrics were up again double digits over last year in a difficult environment. Thanks to the people of Air Products for your continued commitment to serving our customers around the world. We are proud that our NEOM green hydrogen joint venture, the world's largest green hydrogen production facility, achieved financial close in May. The joint venture successfully secured over $6 billion of nonrecourse financing from over 20 global project finance leaders.

The project was two times oversubscribed, a clear demonstration of confidence in this project. Now please turn to slide nine for a view of our third quarter results. In comparison to last year, volume increased 3%, driven primarily by our on-site business. Merchant price was 10% higher compared to last year, the seventh consecutive quarter of double-digit increases. This equates to a 4% price gain for the total company with positive pricing across all regions. Declining natural gas costs in Europe and the Americas reduced energy cost pass-through to our on-site customers. This 11% decline in sales had no impact on profit but had a positive impact on margins.

The overall impact of currency was modest. However, Asian currencies were particularly weaker and contributed to slightly unfavorable currency impact against the U.S. dollar. EBITDA improved 12% as strong price and equity affiliate income, including the contribution from the second phase of the Jazan project that closed in January, more than offset higher costs. EBITDA margin jumped almost 600 basis points with lower energy cost pass-through accounting for 2/3 of the margin improvement. ROCE progressed steadily to reach 12%, which is 130 basis points higher than last year. We expect ROCE to further improve as we bring new projects on stream and continue to put the cash on our balance sheet to work.

Adjusting for cash our ROCE would have been 13.6% this quarter. Sequentially, favorable volume and price, net of variable costs drove improvements to the EBITDA and EBITDA margin. Lower energy cost pass-through also benefited EBITDA margin by about 200 basis points. Now please turn to slide 10 for a discussion of our earnings per share. Our third quarter GAAP earnings of $2.67 per share included two non-GAAP items that together negatively impacted EPS by $0.30 per share. First, we recorded a $0.23 charge for business and asset actions. Second, the non-service components of our defined benefit plan resulted in a $0.07 cost this year versus a $0.03 gain last year.

Excluding these non-GAAP items, our third quarter adjusted earnings was $2.98 per share up $0.40 or 60% compared to last year, driven by strong pricing and higher equity affiliate income. Price and volume, and cost added $0.34 to our third quarter adjusted earnings. Price, net of variable costs contributed $0.52 this quarter, and volume improved -- improvements contributed an additional $0.09. Costs were unfavorable $0.27 driven by inflation as well as our ongoing efforts to support our growth strategy, including bringing new assets onstream. Equity affiliates income was $0.18 higher due to the contribution of the second phase of Jazan project and good results from our other unconsolidated joint ventures in the Americas and Europe.

The remaining items, including noncontrolling interest, interest expense and nonoperating income and expense together had a modest negative $0.06 impact. We expect our fiscal year 2023 effective tax rate to be approximately 19% to 20%. Now please turn to slide 11. Our ability to steadily grow distributable cash flow, especially in challenging conditions is a hallmark of the strength and stability of our businesses and underpins our dividend and capital deployment programs. Over the last 12 months, we have generated about $3.2 billion of distributable cash flow or over $14 per share. We prioritized over 45% of -- or about $1.5 billion as dividends to our shareholders while still having roughly $1.8 billion to invest for growth.

Now please turn to slide 12. We have made significant progress in developing or deploying our capital since 2018. Committing most of our estimated investable capacity available in 2018 to the 2027 time frame as our strategy related to the energy transition extends well beyond 2027, we have revised this slide to show a rolling 10-year time horizon. We have not changed any other assumptions or calculation. We remain committed to maintaining our current targeted AA2 rating. With our strong cash flow and additional debt leverage we estimate that we can put more than $30 billion to work over the next 10 years.

Today, we have an $18 billion backlog and with $11 billion of projects focused on the energy transition. We believe that investing in these high-return projects is the best way to create long-term shareholder value. Now to begin the review of our business segment results, I'll turn the call over to Dr. Serhan.

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

Thank you, Melissa. During our fiscal third quarter, we again saw broad-based improvements across our businesses, extending the positive trend from previous quarters. Results improved in each of our regional segments versus last year, driven by strong price, strong volume, productivity actions, despite the challenging operating conditions around the world. Before I discuss the results of each region, I would like to provide a brief update on our major projects. First, turning to slide 13. You will see that we have enhanced how we present our major projects clarifying the project investment amounts, specifying the long-term nature of the related offtake agreements, and highlighting energy transition projects.

We believe this new format provides a clear overview of key projects in our backlog and provide near-term and long-term visibility. Now please turn to slide 14. I I'm pleased to say that the Jiutai Gasification project is in operation. Our team executed the project in the midst of COVID lockdown and supply chain disruption, including several months of severe lockdowns during the start-up period. We were able to complete this complex project with outstanding safety performance and come in under budget. The team of over 3,300 workers during peak construction completed nearly 13 million hours without a lost time incident.

I would like to thank the team for a job well done. Our team in the Americas has also overcome many challenges to execute the Gulf Coast ammonia project which had nearly 1,300 workers during peak construction and completed over three million hours without a lost time incident. The facility is currently in a start-up, and we expect to begin delivering hydrogen to our pipeline system this month. Finally, following many years of hard work, we announced the $1 billion acquisition of the natural gas-to-syngas plant in Uzbekistan, as part of one of the most advanced energy plans in the world. This acquisition includes the two largest autothermal reformer in the world, in short ATR.

This is the same ATR technology we're deploying in our net zero energy complex in Edmonton, Canada. This will further enhance our industry-leading hydrogen production capabilities, driven by our own partial oxidation technology, in short POX, P-O-X. This is the technology we have acquired from GE several years ago. The POX technology, which we are deploying in our clean energy complex in Louisiana has been a proven main stay for efficient syngas generation for many decades. We will elaborate multiple box units at the Louisiana facility, each of which will be the world's largest. POX and ATR are the two leading processes for the production of blue hydrogen, having the capability and the flexibility to use both leading technology to produce a blue hydrogen at word scale, will further extend our leadership in low carbon hydrogen production.

Now please turn to slide 15 for a review of our Americas segment results. Compared to last year, Americas EBITDA was up 18%, driven by higher price and volume. Merchant price improved 11%, which corresponded to 4% improvement for the region overall. Volume grew 6%, driven by on-site, including strong demand for hydrogen. EBITDA margin jumped more than 1,100 basis points, driven by strong price, lower energy pass-through, which drove about 3/4 of the margin improvement. Sequentially, EBITDA increased 10%, mainly on better hydrogen volume and lower variable costs. Lower energy cost pass-through also drove roughly around 2/3 of the margin improvement.

Now please turn to slide 16 for a review of our Asia segment results. Our results in Asia improved despite the currency headwinds through recovery in China and higher energy costs across the region. Compared to last year, EBITDA was up 10%, despite a 5% negative currency impact. Positive price and volume more than offset higher costs. Merchant price increased 9%, which more than offset higher variable costs. Volume improved 8% primarily to better on site, including the addition of over 30 new assets in the past year. Our activities in the electronics sector were rather robust accounting for many of the new projects.

We also added projects in the chemicals, glass and other applications. Sequentially, volume was up 2% following the Lunar New Year holidays. Please now turn to slide 17 for a review of our Europe segment results. Our team in Europe has worked hard to maintain positive momentum. Compared to last year, EBITDA increased more than 20%, driven by the impact of our pricing actions. Merchant price improved 10%, which equates to a 6% gain for the overall region. This is the second -- 7th consecutive quarter of double-digit merchant price gains for the region. Volume was up modestly on better on site. This is particularly driven by improvement in hydrogen.

This more than offset weaker demand for merchant products. EBITDA margin was about 800 basis points higher and included the impact of lower energy cost pass-through, which benefited margin by around 300 basis points. Sequentially, the region's EBITDA held steady as favorable energy costs offset the lower price. Lower energy cost pass-through also benefited EBITDA margin by about 150 basis points. Now please turn to slide 18 for a review of our Middle East and India segment results. Compared to last year for our merchant volume and the price push sales higher, but increased costs negatively impacted operating income.

The second phase of the Jazan project, which closed in mid-January of this year added to our equity affiliate income, and it drove the region's overall results. The Jazan project has contributed as we expected consistent with our commitment. Please now turn to slide 19 for our Corporate and Other segment results. This segment includes our sale of equipment businesses, as well as our centrally managed function and corporate costs. The sales and profit for this segment were lower this quarter due to lower sale of equipment activities, and higher costs resulting from ongoing support for our growth strategy. We do, however, continue to have robust discussions with customers interested in our LNG technology and equipment.

We're pleased to announce two significant sale of equipment project wins with Qatargas and NextDecade. This is in addition to the two project wins announced in May. We plan to expand our production facility in Florida again and expect increasing LNG project activities to improve the segment results. Echoing what Seifi and Melissa have mentioned earlier, the outstanding results this quarter again showed the resilience of our people and our businesses. I also would like to acknowledge the hard work and commitment of our teams around the world. I would like now to turn the call back to Seifi to provide his closing remarks.

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

Thank you, Dr. Serhan. Now please turn to slide number 20. Our third quarter results exceeded our previous guidance. However, the outlook for economic conditions around the world remain uncertain. We have again raised our fiscal year 2023 guidance by 5% at the midpoint of $11.40 to $11.50 earnings per share for the year versus the $11.30 to $11.50 we had provided last quarter. For the fourth quarter of fiscal year 2023, our earnings per share guidance is $3.04 to $3.14, up 7% to 10% over last year. We still see our capex for the year to be about $5 billion to $5.5 billion. Now please turn to slide number 21. The people of Air Products are passionate about helping to solve the world's significant energy and environmental challenges.

Their commitment and motivation continues to drive our performance. In our core industrial gases business, we are demonstrating continued strength and resiliency even against a soft economic backdrop. And we continue to bring plants online and enter a new phase where we will bring additional large-scale projects on the stream. As a result of that, we see a great future for Air Products and that is what makes all of us very excited about working here and being part of the global energy transition movement. At this time, we will be delighted to answer your questions.

Questions and Answers

[Operator]

[Operator Instructions] We'll take our first question from Christopher Parkinson with Mizuho. Please go ahead.

[Christopher Parkinson, Analyst at Mizuho]

Great, thank you so much. Seifi, one of my emerging and favorite slides is slide 12 for, specifically the estimated future capacity in terms of what you can allocate to projects in the coming years. Can you -- I understand this is a very fluid situation, but can you just kind of help us with a thought process around how much you believe could or will be allocated to projects oriented to the U.S. IRA or something along those lines? Just to help us really think about the next few years on that capital allocation process.

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

Thank you very much, Chris. You are asking a very good question. We provided this slide to give you a 10-year view because we are -- had a long-term strategy and we wanted investors to get as clear view of the future as we can provide right now. You obviously appreciate that there is a very dynamic situation about different projects in different parts of the world.

So I'd like to say that the comment that I make is based on what we know today. Based on that, I think a significant part of that investment is going to be in the United States as a result of the IRA and the opportunities that creates for us. But obviously, the Board is developing different people are coming up with different projects and all of that and we participate in those.

But right now, I would say that the significant part of that $30 billion will be investments in the United States that we have already committed to and we will commit as we go forward. Okay, Chris?

[Christopher Parkinson, Analyst at Mizuho]

That's fantastic. And just as a very quick follow-up, can you just give us just a very, very brief overview. There are three questions, I think, the buy side inclusive of, obviously, longer-term holders. Just the update on the Jazan II ramp. Obviously, I believe that's started in January, between that Gulf Coast ammonia and Jiutai. Are those all trending basically in line with your expectations and just trying to compartmentalize those names as we're thinking about fiscal year 2024?

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

I'm just trying to make sure that I understood your question because the sound wasn't that good.

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

Yes, is Jazan performing as expected?

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

I would like to have Dr. Serhan is the Chairman of the company that we have form to run Jazan. So I'd like to turn it over to him to answer the question.

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

Yes, everything is going as planned really since we took over the group to assets. We've been commissioning them, putting them on stream and really supplying the product to power to the grid and supplying also products like hydrogen to the refinery and stream. So things are really going well with that project. I mean we're really fortunate to have a very strong 800 people doing this -- running that facility.

[Christopher Parkinson, Analyst at Mizuho]

Thank you.

[Operator]

We'll move to our next question from David Huang with Deutsche Bank. Please go ahead.

[David Huang, Analyst at Deutsche Bank Aktiengesellschaft]

Hi, I guess you have very strong margins this quarter in Europe. How sustainable are those margin levels? And how should we think about those going forward?

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

Well, thank you for the question. Obviously, from my point of view, I hope it is sustainable for a very long time. But obviously, time will tell. We, as you know very well, as a matter of policy, do not comment on forward pricing. We comment on what's the pricing that we have achieved, but we don't comment on forward pricing.

So our goal is to maintain our margins as high as possible and create as much value for our shareholders. But it is -- I don't want to make any predictions. Dr. Serhan, do you have any additional comments on that?

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

I mean really, the team in Europe has been doing an outstanding job. I mean, to -- we deal with all of the challenges in Europe about the world, about energy cost fluctuation. But no doubt about it, the industrial output in Europe is not growing at all. I mean -- and that is definitely a challenge that we're monitoring, automotive. I mean, some of the segments we support is better than last year.

We see gradual improvement in electronics with some of the customers there. The low natural gas pricing, we see some of the chemical refining, fertilizer business are picking up activity. Construction is still challenging there, which helps our package business that's still really down compared to previous years. So again, measured costs.

[David Huang, Analyst at Deutsche Bank Aktiengesellschaft]

And then your corporate costs for this quarter, how much was the increased loss from lower equipment sales? And then how much was from increased investment spending?

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

I'd like to turn that over to Melissa to answer. Melissa?

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

So thank you very much, Seifi. So just to make sure I understood your question, you're asking what was the additional contribution from our sale of equipment?

[David Huang, Analyst at Deutsche Bank Aktiengesellschaft]

Just your corporate cost overall is higher than the prior year. I guess how much was from lower equipment sales? And then how much was from increased investment spending this quarter?

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

So I think you asked a great question, and I will focus on cost, not just within our corporate segment, but perhaps across our organization. So a portion of our costs are really associated with our good results, right? We increased our variable pay program across our organization as our results come in positively. Additionally, like most organizations, we continue to feel the burden of the wage inflation across the organization.

Finally, another notable contribution is a fact that we have several plants that are pre onstream or commissioning phases. This obviously adds to our headcount in preparation to the onstream of those plants, which will add to our cost stack for a period, without support from the program, or from the invoicing of those plants. So those three combined is really where you see the cost increase across the organization.

[David Huang, Analyst at Deutsche Bank Aktiengesellschaft]

Okay, thanks.

[Operator]

We'll move to our next question from Steve Byrne with Bank of America. Please go ahead.

[Steve Byrne, Analyst at Bank of America]

Yes, thank you. Your increased demand that you're seeing in hydrogen, just curious which of your pipelines are you seeing that from? And are these your legacy refining customers? Or is this from renewable fuel? And would any of those customers justify your installing some carbon capture in the near term to generate some blue hydrogen for those customers.

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

Dr. Serhan, do you want to answer that?

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

Yes, Steve, good question. We really see the demand for hydrogen, it's really significant. I mean the main driver for us for our business is because you know that, mean -- we have the biggest network in the world and the U.S. Gulf Coast. That's really fully utilized. I mean we have there more demand than we can really supply. And definitely, there is also demand for lower carbon hydrogen for the renewable diesel refinery.

So it has been really very robust. We see some activity also picking up the hydrogen also in our Rotterdam pipeline system there. The same thing we see is in Canada, California. So it's overall really been robust, that means the demand for hydrogen with also some pockets for low-carbon hydrogen.

[Steve Byrne, Analyst at Bank of America]

Okay. And just curious -- yes, thank you. With respect to NEOM, have you reassessed whether or not you need to invest downstream in distribution? It's been three years since you announced that project and you -- at that time, you were thinking you would need to build some downstream pipeline capacity for green ammonia. Do you have a view now of where you might be able to sell that green hydrogen from NEOM?

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

Yes, we do. And we have announced some of it, and I can elaborate on that right now. We see a significant demand for that product in Europe because it has been very clear with the policies that has been finalized in Europe that they were not finalized even two years ago. Europe, basically, most of Europe, especially Germany, have decided to go green. As a result of that, we plan to build at least three terminals in Europe, one in Hamburg, one in Rotterdam and one in Immingham, England to bring the product ammonia into those ports associated and then sell it for mobility and for industrial applications.

We might add additional terminals. In addition to that, there is a demand -- potential demand for that green hydrogen and other green hydrogen that we might make in the United States. And we are making in the United States in the state of California because of the regulations that have been put in place in terms of conversion to very low emission vehicles. Therefore, we possibly see another terminal also in California.

That is our current plan, but this is a dynamic situation. The regulations around the world is continuously changing. And as that develops, we will obviously update you. There is significant demand being generated and being discussed in Korea. It is obviously the demand for blue hydrogen in Japan and all of that. But we will update you as we go forward. But that is how we see it today.

[Steve Byrne, Analyst at Bank of America]

Yes, thank you.

[Operator]

We'll move to our next question from John Roberts with Credit Suisse. Please go ahead.

[John Roberts, Analyst at Credit Suisse Group]

Thank you. Hi Seifi. I just ask one question here. When do you think we'll get the first conversion of an existing U.S. hydrogen plant from gray to blue?

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

John, that is an excellent question. I can definitely confirm that we are working on that. I do not want to predict an exact time schedule because we are talking to customers and it is sensitive, and they don't really want us to talk about these things too much. We -- as you know better than anybody else, have a significant number of SMRs in the United States that generate CO2, and we are very interested in capturing the CO2 from as many of them as possible.

And with the help of the IRA and the demand and the higher prices that are willing to pay for blue hydrogen, we have a significant opportunity on that, and we will do that. Dr. Serhan, do you want to make any additional comments on that?

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

No Seifi, nothing to add.

[John Roberts, Analyst at Credit Suisse Group]

Yup. Thank you.

[Operator]

Our next question comes from John McNulty with BMO Capital Markets. Please go ahead.

[John McNulty, Analyst at BMO Capital Markets]

Good morning, Seifi. I wanted to ask on the Uzbek project that you're bringing on, I guess a couple of questions on that. Can you help us to understand because it looks like it comes on at some point relatively early in 2024. But so can you help us to understand the timing of it and also the EPS contribution that you expected to give as you look to 2024? And then I guess, also tied to that project, how do you think about the returns for it?

I know you look for a 10% plus return, but I also know you risk adjust those as well. So I guess, how should we be thinking about that for the Uzbek project?

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

Well, I will -- I'll make some general comments and then I turn it over to Dr. Serhan to kind of elaborate even more in detail. But we expect that project, which is a very good project, as Dr. Serhan mentioned, that project has the largest ATRs in the world, and we are very happy to own it now. We expect contribution from that project in our bottom line for sure in 2020 -- in our fiscal year 2024.

In terms of the exact number, obviously, I can't give you the exact number -- but order of magnitude, order of magnitude, we expect a contribution of about $0.35 per share at least. So Dr. Serhan, would you like to comment.

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

To start really with what is really included in this acquisition. So this is really the two largest world-scale ATRs in the world. There is also a hydrogen unit, two large air separation units, around 4,000 tonnes per day. The plant is already built. It's in the process being commissioned right now, and that's why we see it's going to be assertive to our earnings next year 2024, and it will be fully in the numbers for 2025.

Again, we're very proud of the project and really operating those ATRs with how software technology is really going to give us lots of know-how about how to really optimize our positioning in a blue hydrogen in the future.

[John McNulty, Analyst at BMO Capital Markets]

Got it. Perfect. And then maybe just as the follow-up. You've got the Alberta project or Edmonton project coming on next year. It does seem like the demand for clean hydrogen is picking up in the region. Is that project sold out at this point based on the contracts that you've locked up?

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

John, on that one, we have announced what the signing of a long-term contract with Imperial Oil, which is part of Exxon, and we have given you the details of that. The rest of it we have very clear visibility to where we are going to sell it. So I think it's a matter of semantics when you say sold out, that means contracts that have been signed and finalized or the fact that we feel that it is going to be sold out.

So we feel very strongly that we will sell out of that product, and we might actually need more than that. I'd like to have Dr. Serhan make some comments about where we are on this thing and any additional color.

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

Thanks, Seifi. IOL is the anchor customer for this project. We're working together with them to bring our respective facilities on stream. Please note the products out of this project will go into our existing pipeline system, which we have a system in Edmonton, Canada, and this will be feeding IOL, other customers and also hydrogen for mobility because we are building a fueling station also they are to use low carbon hydrogen for mobility. It's going very well. I mean working very closely with IOL as the anchor customer.

[John McNulty, Analyst at BMO Capital Markets]

Thanks very much for the color.

[Operator]

Our next question comes from Mike Sison with Wells Fargo. Please go ahead.

[Mike Sison, Analyst at Wells Fargo & Company]

Good morning guys, Yes, just one question. When you think about 2024 -- or next year, how much earnings growth you get from projects that are coming on stream? And does capex go up next year because of you have such a big backlog of growth projects.

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

In terms of 2024 and what comes from there, I would appreciate if you have some patience and we will disclose that to you in -- at the end of October, obviously. I don't want to get ahead of ourselves. But in terms of our capex, our expectation today is that our capex next year will be approximately 5% to 5.5%, the same as this year. That is based on what we know today.

[Mike Sison, Analyst at Wells Fargo & Company]

Yup thank you.

[Operator]

Our next question comes from Josh Spector with UBS. Please go ahead.

[Josh Spector, Analyst at UBS Group]

Hi, thanks for taking my question. Just first on the Canada blue hydrogen project. Just the slide that you updated on the backlog maybe has a little bit less of the discrete timing elements of there. Do you still expect that in 2024, and I guess, fiscal 2024 for you guys? Or has anything changed there? And same thing with the SAF project has that moved from 2025 to 2026 or is the timing relatively unchanged?

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

Well, I'd just like to -- with respect to the project in Canada. As Dr. Serhan said, that project when it comes on stream, we are committed to process and supply hydrogen to IOL. So we can only do that when their plant comes on stream. But in addition to that, we do have our pipeline. We do have existing customers who do use hydrogen, and they are increasing their demand for hydrogen.

So we have the option of putting that into our pipeline. So we have a lot of different options in terms of how we're going to deal with that. Dr Serhan, do you want to make any additional comments?

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

No, we talked about it before only?

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

Yes, you are okay with this?

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

Yes.

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

So that's where we are with that.

[Josh Spector, Analyst at UBS Group]

Yes. I guess how about the SAF plant? And just my follow-up, I guess, on Canada would just be, are we looking about the returns there as being the three year post grant number. So the $1.2 billion or $1.6 billion. What are you basically returns are.

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

The project costs that we have disclosed includes the grant, correct. That means the net is -- that number that we have given you minus the CAD475 million that we will get from the Canadian government. We have given you the gross number.

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

The CAD1.6 billion minus the CAD400 million.

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

Exactly. And then with respect to the plant, the SAF plant, we are working on that. It is in California and we are at the mercy of exactly when the permit will get issued. We have the air permit and all of that, but now we are working on getting the actual construction permit so that then we can start working on that project.

The dates that we have given you is the best estimate that we have at this time, but that is subject to the issuance of the permit by the state of California or when we can actually start construction. Again, Dr. Serhan, any additional comments on that?

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

The visibility we have, and we expect that by the end of the year that we will get the construction permits. But again, it really will depend on the officials and the state of California.

[Josh Spector, Analyst at UBS Group]

Yes. But just what I was asking on the Canada project was more the basis of what the returns are off. So the 10% pretax return, is that based on the net number or the gross number?

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

It's -- Melissa, you want to answer that?

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

Absolutely. So yes, thank you for the question. So there's two components of the grant. The first component is a capital grant that we are getting from the government. The second component is around a production credit. But for your specific question around where you should expect to take our normal run rate of return, it's associated to the net number, the CAD1.1 billion that we have listed on the project slide.

[Josh Spector, Analyst at UBS Group]

Okay, yes. Thank you.

[Operator]

Our next question comes from Mike Leithead with Barclays. Please go ahead.

[Mike Leithead, Analyst at Barclays]

Great, thanks. Good morning guys. Seifi, just one question on your blue ammonia facility, a large fertilizer company last night paused their clean ammonia project, basically saying the costs are coming in higher and they're not seeing downstream applications develop as fast as they thought. I was hoping if you could speak to those two factors, cost and offtake agreements as related to your projects.

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

Well, Mike, obviously, I cannot comment on what other people are saying. The blue ammonia project that we are building in Louisiana, there are many different options that we are considering in terms of the exact final scope of that project, as things develop with the markets and all of that. You know very well that, that project, we are going to make 750 million standard cubic feet a day of hydrogen.

One of the issues for us is finalizing how much of that hydrogen we are going to put in our pipeline, and how much of that hydrogen we are going to put and convert to ammonia. That obviously makes a difference in terms of our total capital cost and all of that. I do not want to dispute the general statement that, obviously, the cost of these projects are going to be probably higher than people expected because of inflation, because of labor shortages and all of that.

But we have not finalized anything yet that is at this stage that we would want to talk about that. But because our scope is still under definition, the sequestration, how do we do the sequestration. It will make a difference whether we do the sequestration ourselves or be subcontracted to somebody. So there is a lot of moving parts. But I'd like to turn it over to Dr. Serhan to make some additional comments.

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

Thanks, Seifi. I mean, definitely in the context of the SAF global economy, global COVID pandemic, shortages in labor materials, supply chain disruptions, record inflation rate, I think we definitely thereabout sure that we can deliver. I mean, we show that on Jazan, we showed it on Jiutai. We showed that on Gulf Coast ammonia and projects that you don't really hear too many about 160 of them were closed and brought on stream during the COVID.

So I think, again, we managed to show that we are walking the talk basically and we delivered on these things. With the challenges that exist, we do see something like the inflation subsiding, slowing down but it's not going any, but we're really having the execution, basically where managing these challenges and deliver on our commitment, which is the 10% EBITDA during the contractual life of these assets.

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

I'd just like to make one additional comment. I can't help but make the comment. As I said, I don't want to comment on what others are saying. But I do like to make a general comment that a lot of people sometimes start on this journey of blue ammonia and green ammonia, based on back of the envelope things without really understanding what they're talking about because they have never done it before.

As a result, they come up with numbers that looks pretty attractive. Then when they start actually doing the project, defining their scope and finding out the complexities, then they get surprised. So I wouldn't be surprised if in the future, many of the people who have embarked on this energy transition would come up with realization, that some of these projects that are a lot more complex than they think.

It takes a lot more. And not everybody who has never made a pound of hydrogen in their life can become a supplier of blue or green hydrogen and participate in the energy transition. We have been in this business for 60 years. We think we know what we are talking about. But anyway, I just couldn't help but make that general comment.

[Mike Leithead, Analyst at Barclays]

Fair enough. Thank you so much.

[Operator]

Our next question comes from Duffy Fischer with Goldman Sachs. Please go ahead.

[Duffy Fischer, Analyst at The Goldman Sachs Group]

Yes. Good morning, Seifi, maybe if you could, you've seen quite a few business cycles -- so I'd be interested if you'd pontificate a little bit how you see Europe and China, in particular, playing out kind of the rest of this year into next year from a macro standpoint?

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

Thank you for the question, and I really appreciate the fact that you use the adjective pontificate because that is what I continue to be doing because it's very difficult to see the future. But right now, the way that we are seeing right now, things developing in China and in Europe. China, we have seen some slowdown. It is not affecting our business in a significant -- in a material way, but it is affecting our business.

But the future is very much dependent on what the Chinese government decides to do in terms of any kind of a stimulus or not. That is very hard to predict. And obviously, we will react to that. The good thing is that a significant part of our business in China, something like 65% of it, is on-site business. So there is a lot of stability there. In terms of Europe, I hate to put it this way, but it really depends on the weather and the energy cost because if the weather becomes significantly cold and energy costs go up, it will have a significant effect.

If they become lucky like they were last year, then the effect will be less and the energy cost will stay low. But overall, it is a little bit of an unpredictable situation. That is why we, as a company, the way we deal with this, is we are very focused on productivity. And as you saw and as you heard Melissa explained, we have taken actions in terms of productivity, and we are taking a charge for that in order to make sure that we are prepared just in case things do not turn out to be as rosy as some people are predicting. Dr. Serhan and Melissa, any additional color on this?

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

Europe is the one business or one region we have where we have significant amount of merchant, I mean, versus the other regions. So definitely, the industrial out, but not growing in Europe is a concern. I mean we see some signs of picking up, but it's still there. We don't really see it picking up full steam. China, again, we saw some recovery, but it is slowing down.

I mean, we're keeping an eye on this and what type of incentives they're going to have there to really incentivize the economy.

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

Yes. So I'll just add one comment specific to Europe. So we are in a situation where we have now lapped the strong pricing momentum. So that although we are seeing a slight decrease sequentially, we still have very strong pricing in Europe. And so I think we just need to remember that lapping, the comps are tougher, but it's still very strong pricing in Europe. So we need to hold on to that to continue to show the strong returns in Europe.

[Duffy Fischer, Analyst at The Goldman Sachs Group]

And maybe we stay and kind of switch back to the hydrogen question. Obviously, you're talking to a lot of folks there you have both blue and green hydrogen to offer. How do you see Europe playing out? How much do you think will be mandated kind of at the green level -- and how much will just care? Is it CO2 reduced so you can use blue hydrogen. How do you see that playing out over the next three, four, five years?

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

Duffy, that is a very good question. Right now, our best information based on discussions with customers is that Europe is very much committed to green, that they are -- their argument is that blue hydrogen is a transitional thing. So go to blue and then go to green. We know we are going to go to green. Therefore, let's make the leap. And therefore, I'm sure you have seen some of the announcements with respect to, for example, the EUR2.2 billion that the European Commission approved for, that is clearly was approved for use of green hydrogen.

So that is the direction we see in Europe. In Korea, in Japan, I think it will be more oriented at the beginning towards blue because that is going to be used for decarbonizing the power plants. And in the United States, we have to see. But the good news for us, is that we are seeing significant discussion on both that it is not as people predicted that in the U.S., it will all be blue hydrogen right now, we are talking to companies who are very interested in green hydrogen in the United States to make their products in the United States, whether it's a seed or chemical.

[Duffy Fischer, Analyst at The Goldman Sachs Group]

Great, thank you guys.

[Operator]

Our next question comes from Jeff Zekauskas with JPMorgan. Please go ahead.

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

Thanks very much. I have one question with two parts. The first is when I look at your results, your volumes are up three, your prices are up four. When I look at your competitor in Danbury, I think its volumes are maybe down one, and its prices are up seven. And in the different regions, it seems like your volumes are growing at a higher rate than theirs and their prices are growing at a higher rate than yours.

Can you reflect on that general phenomenon? And then secondly, Air Products claims to dissociate hydrogen at a 10% loss rate rather than 20%, which is sort of the general view that people have because of the energy you need to crack the ammonia. Can you just quickly explain to us in layman's terms how you're able to have a more efficient process.

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

Very good, Jeff. With respect to comparison, you are comparing us to a company which has a different strategy and a different -- so I don't want to comment on their results. You are comparing year-to-year because last year, our pricing was significantly better than the other people. So year-to-year, we are not going to show as much as an increase, because if they had a very low performance last year, this year, year-to-year, it looks better.

I think that is the main reason for the price increase. And so that is my general comment on that. But overall, we are very much focused on being a green energy growth company. We are an industrial gas company and at the same time -- so we are pursuing a totally different strategy, as you know I have talked before. The fact that our volumes are up, and I think this will continue to be the trend that we will beat other people on volume growth is because we are investing in the future, and we are winning our share or even better than our share of the smaller projects than people have been talking about.

So as a result, volume growth is obviously the key thing we're focused on. Pricing, we are holding our own. There is no significant difference in the pricing because if it was, the market shares will change. And the market shares are staying stable. So that is the question that I have, first one. On the second question that you have in terms of the efficiency of the crackers that we think we have versus the conventional wisdom that you use 20% to 30% of that, we have talked about this thing.

It is a technology we have been developing but the person who is doing that on a day-to-day basis is Dr. Serhan and I like him to make some comments about that. Samir?

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

I mean it really goes safely to what you mentioned before. I mean it's that know-how we developed over the last 60 years in producing hydrogen. I mean this is really what -- we had this challenge a few years ago. We looked at the market, we saw that there are ammonia crackers, but the efficiency is really not acceptable. You end up wasting lots of the valuable product.

And again, we put our team of expert on this. And basically, we developed a product where we feel is very, very efficient. I mean, to a single-digit loss. And that's really what we have without giving too more details.

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

Well, Dr. Serhan just gave you more information, but you were saying 10% and he's not talking single digits, which is good news. But Jeff, if I may just summarize, I'm very proud of our team. We do have very good people, and they have developed this technology. And this is going to be a competitive advantage that we will end up having as we go forward on this conversion of ammonia to hydrogen. We have time for one more question, please go ahead.

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

Thank you very much.

[Operator]

Our last question comes from Vincent Andrews with Morgan Stanley. Please go ahead.

[Steve Haynes, Analyst at Morgan Stanley]

Thanks for squeezing me in. This is Steve Haynes on for Vincent. Maybe just a quick one on the fourth quarter guide. I think 4Q usually steps up a bit more seasonally than what you have baked in? I know you just kind of talked about some macro uncertainty in China and in Europe, but is there anything else in there that's causing a little bit of the more muted 4Q ramp?

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

Well, thank you for your question. When we give you guidance, we put touch together about what it is that we can see in terms of our best judgment of what we think we can deliver. When you look at our fourth quarter, I do agree with you that compared to seasonally adjusted results in the previous years, it seems that there is not as much of a jump as you would expect.

So on that front, maybe you can tell us that we are being a little bit cautious, but we are being cautious because we are totally uncertain about some of the economies. But that is our best judgment at this time. And obviously, I certainly hope that we can do better than that. Well, thank you very much. That concludes our session. And I would like to again thank everyone for joining our call today.

We really appreciate your interest and your good questions. And we look forward to discussing our results with you again next quarter. Stay safe. Have a great summer and talk to you soon. Take care. Thank you.

[Operator]

[Operator Closing Remarks]