Air Products and Chemicals, Inc. (NYSE:APD) Q2 2024 Earnings Call Transcript

Air Products and Chemicals, Inc. (NYSE:APD) Q2 2024 Earnings Call Transcript April 30, 2024

Air Products and Chemicals, Inc. misses on earnings expectations. Reported EPS is $2.57 EPS, expectations were $2.72. Air Products and Chemicals, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning and welcome to Air Products’ Second Quarter Earnings Release Conference Call. Today’s call is being recorded at the request of Air Products. Please note that this presentation and the comments made on behalf of Air Products are subject to copyright by Air Products and all rights are reserved. Beginning today’s call is Mr. Sidd Manjeshwar, please go ahead.

Sidd Manjeshwar: Thank you, Katie. Good morning, everyone. Welcome to Air Products’ second quarter 2024 earnings results teleconference. This is Sidd Manjeshwar, Vice President of Investor Relations. 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 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 2. 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 with that, I’m pleased to turn the call over to Seifi.

Seifi Ghasemi: Thank you, Sidd and good day to everyone. Thank you for taking time from your busy schedule to be on our call today. As you know, I always start with safety which is our top priority at Air Products. Slide number 3 includes our employee lost time injury rate and recordable injury rates in the first half of fiscal year 2024. Both of these rates were at their lowest levels since 2014 and the best in the industry. This is great progress but our ultimate goal will always be zero accidents and zero incidents. Slide number 4 outlines our management philosophy. We believe strongly in these principles and they will continue to guide us as we move Air Products forward like we have done in the past 10 years. Now please turn to Slide number 5.

Our second quarter adjusted earnings per share of $2.85 exceeded the upper end of our previous guidance range and improved 4% compared to last year on strong results in Americas and Europe. We continue to effectively manage our current business while simultaneously executing our growth projects. We are focused on reducing costs and improving pricing in this inflationary environment. Our industrial gases business and broad scale low-carbon hydrogen projects are driving sustainability, enabling customers to decarbonize and generating a cleaner future for our world. Now please turn to Slide number 6 for a review of our third quarter and full year guidance. For the third quarter of fiscal year 2024, our adjusted earnings per share guidance is $3 to $3.05.

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Q&A Session

Our earnings are generally higher in the second half of our fiscal year. We are maintaining our full year guidance of $12.20 to $12.50 per share as we continue to monitor economic uncertainties, including China’s economy and activities in the electronic industry throughout Asia. We continue to expect our CapEx to be in the range of $5 billion to $5.5 billion in fiscal year 2024. Now please turn to Slide number 7. Our adjusted earnings per share has improved an average of more than 10% annually since 2014, a trend we are committed to continue. Now please turn to Slide number 8. We take a balanced approach to determine our dividend, considering various factors including yield, payout and peer benchmarks while investing for growth and maintaining our A/A2 credit rating.

In January, we again increased our dividend to $1.77 per share per quarter, extending our record of 42 consecutive years of dividend increase. We expect to return approximately $1.6 billion to our shareholders through dividends in 2024. Slide number 9 shows our EBITDA margin trend, always my favorite slide. Our margins have again climbed above 40%, leading the industry and reflecting our commitment to creating shareholder value. At this point, I would like to remind our shareholders that almost 10 years ago, on my first call as Chairman and CEO of Air Products, I promised you that we would make Air Products the safest and most profitable industrial gas company in the world and we have delivered on that. On the same call 10 years ago, I also promised we would increase our earnings per share on the average by 10% every year.

And as you see on Slide 7, we have delivered on that too for the last 10 years. So today, I want to set the goal for the next 10 years. Air Products will continue to be the safest, most diverse and most profitable industrial gas company in the world and, as we have done before, deliver earnings per share growth of at least 10% per year on the average for the next 10 years. We have done it before and we will do it again. I have total confidence and I want to stress this, I have total confidence in the ability of the talented, dedicated, motivated and committed people of Air Products to execute our bold and forward-looking strategy and deliver significant value to our shareholders. I want to thank every one of them for their hard work, commitment and dedication.

I’m very proud to be part of this team. Now I would like to turn the call over to Melissa, our Chief Financial Officer, to make remarks about the second quarter. Melissa?

Melissa Schaeffer: Thank you, Seifi. Now, please turn to Slide 10 for a review of our second quarter results. Compared to last year, on-site activities were robust driven by higher demand for hydrogen and contributions from new assets. The volume was down 2% primarily due to lower demand for merchant products. Price contributed 1%. The combined impact of pricing and lower power costs across most regions resulted in strong contribution margins. The declining natural gas prices in Europe and North America resulted in lower energy cost pass-through which has no impact on profit but contributed to higher margins. EBITDA improved 4% as higher contribution margin and lower costs more than offset lower affiliate income. EBITDA margin exceeded 40%, with lower energy cost pass-through contributing about half of the nearly 500 basis point improvement.

ROCE of 11% was relatively flat. Adjusted for cash, our ROCE would have been about 13%. Sequentially, results improved driven primarily by favorable pricing and lower costs despite the seasonal slowdown due to the Lunar New Year in Asia and planned maintenance outages. Now please turn to Slide 11 for a discussion of our earnings per share. Our second quarter GAAP earnings per share was $2.57 which included a $0.20 charge for productivity actions. Our adjusted earnings per share was $2.85, up $0.11 or 4% compared to last year, primarily due to favorable pricing and costs, partially offset by unfavorable volume and equity affiliate income. Overall, volume was down $0.07 on lower merchant demand and planned maintenance outages. Price, net of variable cost contributed $0.16 this quarter driven by both pricing actions and lower power costs.

Other costs were $0.12 favorable, demonstrating the team’s commitment to managing costs, while we continue to support our growth strategy. Currency impact was negative $0.03, mainly due to a weaker Chinese RMB. Equity affiliate income was $0.08 unfavorable, driven by lower contributions from affiliates in Europe and the Middle East, partially offset by higher income in America. We successfully issued $2.5 billion of green bonds in February to help fund our growth projects. This additional debt contributed to higher interest expense of $0.07. The remaining items, including favorable noncontrolling interests, the tax rate and nonoperating expense together had a positive $0.08 impact. To echo Seifi’s statement, I would like to express my appreciation to the entire Air Products team for their commitment to our company.

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

Samir Serhan: Thank you, Melissa. Please turn to Slide 12 for a review of our Americas segment results. Compared to last year, underlying sales were positive with price and volume together up 4%. Merchant pricing was 6% higher which corresponded to a 3% overall price improvement for the region. Volumes grew 1% as a strong demand for hydrogen more than offset weaker merchant volume. EBITDA was up 15% driven by higher price, volume and equity affiliates’ income. Of the 1,000 basis point improvement to the EBITDA margin, roughly half was attributable to lower energy cost pass-through. Sequentially, EBITDA was 5% higher, mainly due to higher price and equity affiliate income. Now please turn to Slide 13 for a review of our Asia segment results.

Compared to last year, volumes were roughly flat as higher on-site volumes, including new assets were offset by lower demand for merchant products while price remained stable. As Seifi mentioned, we continue to see challenging economic conditions in China. However, we are beginning to see some potential improvement in the electronics market. Currencies were up — were 4% unfavorable, primarily attributable to the weaker Chinese RMB. EBITDA and EBITDA margin were unfavorable, primarily driven by business mix. Sequentially, volume was 2% lower due to the Lunar New Year slowdown. However, EBITDA was flat as a result of lower cost and higher equity affiliate income. Please turn to Slide 14 for a review of our Europe segment results. Sales declined 11% compared to last year with lower energy cost pass-through and volume shortfall each contributing about half of the total.

Weaker merchant demand and planned maintenance outage drove lower volume, partially offset by contribution from our Uzbekistan project. Merchant pricing was stable and combined with declining power cost, it drove improved contribution margin. EBITDA was up 5% as the improved contribution margin and lower cost more than compensated for lower equity affiliate income. EBITDA margin improved over 600 basis points. Approximately half of this was due to the impact of lower energy cost pass-through. Sequentially, results were stable as favorable contribution margin and cost offset the planned maintenance volume impacts and lower equity affiliate income. Now please turn to Slide 15 for a review of our Middle East and India segment results. Despite lower sales volume, operating income improved compared to last year due to lower costs.

Equity affiliate income from the Jazan joint venture was lower due to higher interest and other operating costs. Please now turn to Slide 16 for our Corporate and Other segment results. This segment includes our sale of equipment businesses as well as our centrally managed functions and corporate costs. Sales were down primarily due to lower non-LNG sale of equipment activities. However, lower cost and contribution from LNG resulted in a stable EBITDA. Our activities related to the LNG equipment and technology business are robust and we expect our LNG-related projects to improve the results of this segment moving forward. Before I turn the call back to Seifi, I also would like to say thanks to our teams around the world. We’re continuing to improve our results.

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

Seifi Ghasemi: Thank you, Dr. Serhan. Now please turn to Slide number 17, Air Products has a great business model and continues to operate from a position of financial strength. While we execute our bold growth strategy in this challenging and continuously changing macroeconomic and geopolitical environment, our organization must remain flexible and agile. On a daily basis, our employees are committed to taking action that improves our safety performance, simplifies work and reduces costs so that together we can deliver productivity to the bottom line and continue to earn the right to grow as we pursue our strategy. We appreciate the dedicated service of all the people who are contributing to Air Products’ success and the people in our leadership who continue motivating and developing our people.

As I always say, our real competitive advantage is the degree of motivation and commitment of the people in the company. I am honored every day to be working alongside this team as we focus on delivering near-term results while executing our long-term growth strategy. At this point, we obviously will be delighted to answer your questions. Operator, we are ready for questions.

Operator: [Operator Instructions] We’ll go first to John McNulty with BMO Capital Markets.

John McNulty: So I think the first one is just on how you’re thinking about the cadence of the earnings as it progresses through the year. Obviously, 2Q came in pretty solidly, 3Q, maybe a little bit below what we and the Street were looking for which kind of makes for a really steep ramp in the fourth quarter. I guess, can you help us to think about what drives that ramp, whether it’s some of the projects or the Corporate line coming off, I guess, can you help us to think about the cadence for the year?

Seifi Ghasemi: John, excellent question. I would like to answer it in the following way. First of all, there is a question about the — our guidance for the quarter. The guidance for the quarter is a little bit lower than what people expect. And that is because we have some major turnarounds that we have to do on our plants in Europe and in the United States that is driving our maintenance costs for the quarter and that is why we have given a lower guidance than what we would have liked to do. So that is the — for the third quarter. As far as — we are committed to the year, because in the fourth quarter, although it looks like — hardly a stake [ph], we expect to bring significant number of smaller plants onstream. We’ve brought in about 20 of them in the last — in the first half and we expect to have a number of clients coming onstream that will contribute.

Secondly, we have taken significantly productivity actions that should result in better numbers for the fourth quarter. In addition, as you know, our business is seasonal and the fourth quarter is just about every year our strongest quarter. And the fourth thing is that we are seeing a very strong performance by our LNG business and a lot of that will ramp up in the fourth quarter. So those are the fundamental reasons, John, I hope that answers your question.

John McNulty: Yes. No, that’s hugely helpful. Yes, it definitely helps to bridge in a reasonable amount. And I guess, maybe to that, as the follow-up or my second question, you had alluded to in some of the prepared remarks cost reduction actions and things that were starting to help on the margin side. And then — and actually just in your last answer, you gave maybe — you intimated that there’s there is some help there. I guess can you help us to think about some of the actions that you’re taking and if it’s any specific division or how we should be thinking about that.

Seifi Ghasemi: We look at the company across the board. And by productivity we mean that we try to do things in a more efficient and more simplified way which means that we don’t have as many costs. That is the action that is normal for productivity. It just means that you are trying to do more with less — with the same number of people you have or with less people. So those are the specific actions we have taken.

Operator: We’ll go next to Jeff Zekauskas with JPMorgan.

Jeff Zekauskas: In the Louisiana project, you’ll bring on 3.5 million tons of ammonia. Some consultants think that the Japanese market is only 3 million tons of ammonia by 2030. Your competitors have begun to have memorandum of understanding and procuring volume. When your plant comes on in 2027, is there 3.5 million tons of demand for blue ammonia? And where might it come from?

Seifi Ghasemi: Jeff, very good question as usual. Jeff, first of all, the number that you’re saying, 3.5 million tons of ammonia, that assumes that we will take all of the hydrogen that we produce at that plant, all of the deep blue hydrogen that we produce will be turned into ammonia. That is not necessarily the case. As you know, we have a huge pipeline that goes all the way across the Gulf Coast of the United States. There is significant demand for blue hydrogen, for real blue hydrogen, not fake blue hydrogen. And therefore, we expect that a significant amount of the hydrogen we produce will be used as hydrogen through our pipeline to serve the customers that we have because they would be in need of that. So the breakdown of the ammonia and hydrogen is not finalized yet.

We are installing 2.8 million tons of capacity to make ammonia. So that is the maximum amount of ammonia that we will be making. But we might make less than that depending on what we do with the hydrogen. So then the question that you have is, okay, even at 2.8 million, whatever you make, where is it going to be used? I understand that people are making — announcing letters of intent and all of that. But that is people who don’t have a product, selling it to people who don’t have a use for it. There is — we are making real blue ammonia, real blue ammonia, 95% of the CO2 taken. We have a place to sequester that. Therefore, our project is real. We are not having an imaginary or a fake project here. And therefore, we believe strongly that there will be demand for the product.

Where it is going to go, we have always said that it is going to go mainly for decarbonization of the power plants in Japan and in Korea. But another significant demand that is being developed and I think there are significant signs that, that is real, is ammonia as a fuel for ships. I’m sure you’re familiar that starting January of 2025, in 6 months, every ship that goes to Europe, no matter where it starts from, if it gets to a port in Europe, they have to pay a tax on this carbon emissions that they released since they left their port of origin. We believe this will generate significant amounts of interest in ammonia as a direct fuel for ships. And you can check that people have already ordered ships that will use ammonia as a fuel and some of them will actually be on the water in 2026.

And the other thing that I’d like to just stress, we have not said that our Louisiana plant in terms of timing is going to be fully commissioned and onstream in 2028. Okay, Jeff?

Jeff Zekauskas: Okay. And then for my follow-up, the — in the quarter, what seems surprising was the weakness in equity affiliates’ income in Europe and in the Mid-East. And in the script, there was some talk of higher interest costs in the Mid-East. And it’s difficult to know if that’s a onetime event or if that’s a sustainable event. Could you comment on that? And I think European volume was down 6% in the quarter and maybe in the previous quarter, it was up 9%. And maybe if you can touch on what caused that change.

Seifi Ghasemi: Okay. I will try to have Melissa answer the — I got excited, I lost my voice, Jeff. But I’d like Melissa to answer the first question and Dr. Serhan to answer the second question. Melissa?

Melissa Schaeffer: Yes. Thank you, Seifi. So Jeff, what you’re seeing in equity affiliate income is a little bit of timing but we did see a bit of a decline in our Jazan joint venture. This is really a onetime item from the previous year and some higher interest expense for this quarter. So again, it’s primarily timing, not an underlying business issue and a prior year onetime issue.

Samir Serhan: And just following up on Jazan, I mean, again, Jazan is delivering $1.35 for earnings per share and we expect really the project to continue to deliver this amount on an annual basis. I mean, there will be some seasonality depending on operating cost, maintenance. When it comes to the volume in Europe, the volume is lower because of the planned maintenance outage we had in the second quarter and a significant outage for our air separation units and SMR in the Rotterdam area. So that really drove the volume down and also what we highlighted before, the weaker merchant volumes in general, especially the liquids. The Uzbekistan project continue to ramp up and that definitely helped in this area.

Operator: We’ll go next to Vincent Andrews with Morgan Stanley. I’m sorry. We’ll go next to Steve Byrne with Bank of America.