Air Products and Chemicals, Inc. (NYSE:APD) Q3 2023 Earnings Call Transcript

Air Products and Chemicals, Inc. (NYSE:APD) Q3 2023 Earnings Call Transcript August 3, 2023

Air Products and Chemicals, Inc. beats earnings expectations. Reported EPS is $2.98, expectations were $2.91.

Operator: Good morning, and welcome to Air Products’ Third 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, Sharon. Good morning, everyone. Welcome to Air Products’ third quarter 2023 earnings results teleconference. This is Sidd Manjeshwar, Vice President of Investor Relations and Corporate Treasurer. I’m 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 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, 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. The committed and dedicated people of Air Products, delivered another set of outstanding results this quarter driven by a strong organic sales growth, demonstrating the strength and 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 would 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 Board, 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 Board’s leading supplier of hydrogen. We’ll implement our low and zero-carbon hydrogen megaprojects 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 larger 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 hardworking and talented team at Air Products, we make all of this possible. Now please turn to Slide number 3, 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 zero incidents and zero accidents. Now, please turn to Slide number 4, which summarizes our management philosophy. We have shown you this slide every time that we have an earning 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 5. 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 continued to demonstrate significant pricing strength while our volume improved for the ninth consecutive quarter, driven by strong onsite performance, including improved hydrogen demand in Americas and over 30 new assets that we have brought onstream.

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 6. 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 7, which shows our EBITDA margin. This continues to be my favorite chart. This graph is self-explanatory and clearly demonstrates the significant improve 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 efficiency 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 green hydrogen project 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: 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, at 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 successively secured over $6 billion of non-recourse financing from over 20 global project finance leaders. The project was two times over-subscribed, a clear demonstration of confidence in this project.

Now please turn to Slide 9, for our 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 reduce 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 passthrough, accounting for two-thirds of the margin improvement. ROCE progressed steadily to reach 12%, which is a 130 basis points higher than last year. We expect ROCE to further improve as we bring new projects onstream 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 improvement 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 action. 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 costs added $0.34 to our third quarter adjusted earnings. Price, net of variable costs contributed $0.52 this quarter, and volume – improvement 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 bringing new assets on stream. 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 non-controlling interest, interest expense, and non-operating income and expense together had a minus 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 divided 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 timeframe. Because 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 calculations. 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 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.

Samir Serhan: 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’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 America has also overcome many challenges to execute the Gulf Coast ammonia project, which had nearly 1,300 workers during peak construction and completed over a 3 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 plants in the world. This acquisition include the two largest auto-thermal reformer in the world in short ATR. This is the same ATR technology, we’re deploying in our net zero energy complex 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. This POX technology which we are deploying in our clean energy complex in Louisiana has been a proven mainstay for efficient syngas generation for many decades.

We will operate multiple POX 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 a blue hydrogen. Having the capability and the flexibility to use both leading technology to produce a blue hydrogen at world scale will further extend our leadership in low carbon hydrogen production. Now please turn to Slide 15. For a review of our Americas segment’s 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 costs pass through, which drove about three quarters of the margin improvement.

Sequentially, EBITDA increased 10%, mainly on better hydrogen volume and lower variable costs. Lower energy costs pass through also drove roughly around two-thirds of the margin improvement. Now please turn to Slide 16 for a review of our Asia’s segment results. Our results in Asia improved despite the currency headwinds for 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 onsite, including the addition of over 30 new assets in the past year. Our activities in the electronics sector [indiscernible] calendar robust accounting for many of the new projects.

We also added projects in the chemical, 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 for a – towards 6% gain for the overall region. This is the seventh consecutive quarter of double-digit merchant price gains for the region. Volume was up modestly, on better onsite. 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 costs pass-through, which benefited margin by around 300 basis points.

Sequentially, the region’s EBITDA held is 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, our merchant volume and price pushed sales higher, but the increased costs negatively impacted operating income. The second phase of the Jazan project, which we 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 functions and corporate costs.

The sales and profit for this segment were lower this quarter due to lower sale of equipment activities and higher cost 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. But I’m 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: 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 $0.05 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 $5.5 billion. Now please turn to Slide number 21. The people of Air Products are passionate about helping to solve the more 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 larger-scale projects onstream. This 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. Operator?

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Q&A Session

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

Christopher Parkinson: Great. Thank you so much. Seifi, one of my emerging favorite slides is Slide 12 for what it’s worth. Specifically the estimated future capacity in terms of what you can allocate the projects in the coming years. Can you – I understand this is a very fluid situation, but can you just kind of help us with the 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? Thank you so much.

Seifi Ghasemi: 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 at a long-term strategy and we wanted investors to get as clear a view of the future as we can provide right now. We 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 that creates for us. But obviously, the Board is developing different people or coming up with different projects and all of that, and we participate in those. But right now I would say that a 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: That’s fantastic. Thank you so much. And just a very quick – as a very quick follow-up, can you just give us just a very brief overview, there is three questions. I’ll take – the buy side inclusive of obviously longer-term holders, just the update on the Jazan 2 ramp, obviously, I think, I believe that started in January between that Gulf Coast Ammonia and Jiutai, those all trending basically in-line with your expectations. Just trying to compartmentalize those names as we’re thinking about fiscal year ’24. Thank you so much.

Seifi Ghasemi: I’m just trying to make sure I understood your question because the sound wasn’t that good.

Christopher Parkinson: Yes. Is Jazan performing as expected?

Seifi Ghasemi: I would like to have – Dr. Serhan is the Chairman of the Company, that we have formed to run Jazan, so I’d like to turn it over to him to answer the question.

Samir Serhan: Yes, Chris, everything is going as it 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 steam. 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: Thank you.

Seifi Ghasemi: Thank you, Dr. Serhan.

Christopher Parkinson: Thank you.

Operator: We’ll move to our next question from David Wong with Deutsche Bank. Please go ahead.

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

Seifi Ghasemi: 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 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 that – I don’t want to make any predictions. Dr. Serhan, do you have any additional comments on that?