Air Products and Chemicals, Inc. (NYSE:APD) Q4 2023 Earnings Call Transcript

Air Products and Chemicals, Inc. (NYSE:APD) Q4 2023 Earnings Call Transcript November 7, 2023

Air Products and Chemicals, Inc. beats earnings expectations. Reported EPS is $3.15, expectations were $3.11.

Operator: Good morning, and welcome to the Air Products’ Fourth 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 sir.

Sidd Manjeshwar: Thank you, Annette. Good morning, everyone. Welcome to Air Products’ fourth 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 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 #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. I would like to begin with the Slide #3, our safety performance which is our number one priority at Air Products. I’m pleased to share that our safety record has improved compared to last year continuing the significant progress we have made since 2014. Our ultimate goal will always be zero incidents and zero accidents. Now please turn to Slide #4, which summarizes our management philosophy. We reiterate these principles every quarter because they are fundamental to how we manage the company and continue to profitably grow our earnings per share. Now pleased to turn to Slide #5. Air Products has a very strong business model and a long-term strategy to deliver consistent earnings growth for the short and the long-term and I stress the long-term.

Projects in our onsite business where we have long-term take or pay contracts with our customers drove our volume growth this year despite economic weakness across the regions. Our onsite business generates stable cash flow and consistently contributes about half of our total sales. Also noteworthy is that strong pricing action in our merchant business as well as our ability to contractually pass through energy costs in our onsite business, helped us mitigate inflation as well as higher power and energy costs, which we experienced last year. We also continue to successfully execute our long-term strategy to be the leader in blue and green hydrogen for the future with a significant number of clean hydrogen mega projects and their execution. Nobody in the world is matching what we are doing.

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Q&A Session

Finally, our backlog of over $19 billion sets up a multiyear framework for double digit earnings per share growth, which has been our goal since 2014 and remains our goal for the future. Now please turn to Slide #6. Our fourth quarter adjusted earnings of $3.15 per share exceeded the top end of our guidance for the quarter and improved $0.30 or 11% versus last year. For the full year fiscal 2023, our adjusted earnings per share of 11.51 one improved $1.26 or 12% over prior year, continuing our strong track record of consistently delivering double digit average earnings growth per share since 2014.

NEOM: Before I go any further, I want to take time to thank all of our employees around the world, every one of the 23,000 of them, for their dedication and hard work, which has made it possible for us to deliver these impressive results despite significant economic and geopolitical headwinds. Now please turn to Slide #7. We are continuing to deliver on one we promised to our shareholders in 2014 executing to deliver an average of at least 10% growth in earnings per share each year as we move forward. We believe our two-pillar strategy of focusing on our base business while extending our leadership in the growing demand for clean hydrogen, that enable us to continue to deliver double digit growth in our EPS as we go forward.

Now please turn to Slide #8. We are proud again of our accomplishment of more than 40 consecutive years of dividend increases. As you can see on this slide since 2014 we have increased our dividend on an average of 10% every year. Slide #9 shows our EBITDA margin trend continuing to be my favorite slide. Our margins have increased to nearly 40% in the second half of fiscal year 2023 confirming the strength of our business model and the significant cash flow that we generate. Now please turn to Slide #10 for our fiscal year 2024 outlook and guidance. Although there will continue to be challenging economic conditions in the near-term. I remain very optimistic about Air Products future. Our capital deployment strategy and strong business model will sustain our double digit average earnings growth rate.

Therefore fiscal year 2024, we expect adjusted earnings per share in the range of $12:80 to $13.10 per share, up 13% at the midpoint over last year. We expect new projects, many of which are already on stream, to drive our earnings per share growth next year. Additionally, we also expect improved LNG sale of equipment activities to add to our favorable results in 2024. And for the first quarter of 2024, our adjusted earnings per share guidance is $2.90 to $3.05, up 10% to 16% over last year. We also see our CapEx for next year somewhere between $5 billion $5.5 billion. Now please turn to Slide #11. I know that some of our investors refer to our major project commitments slide to track our projects. However, the size and scale of these projects, which all have multiyear execution time frames, certainly now warrant more than time and attention than we can give them in a single line on a single slide.

Therefore, we remain committed to providing investors visibility and meaningful update to a scheduled capital and off taker status as we continue to progress our major projects. So from time to time, we will give you a more depth look into our projects. Today we have decided to give you an update on our blue hydrogen and blue ammonia clean energy complex in Louisiana, which is one of the largest projects that we are executing. Please turn to Slide #12. We announced our intent to build this broader scale facility in Louisiana in October 2021. As we moved forward with detailed planning to execute this project, a significant positive event happened in August of 2022 when the United States Congress passed the RRA legislation which created tax incentives for the production of blue and green hydrogen.

In addition, by 2022 it was becoming more and more evident that the future demand for blue hydrogen and blue ammonia is improving significantly supported by positive developments in other regions of the world, particularly in Europe and Japan. Not only is there growing need to decarbonize the heavy transportation and industrial sector such as a seed, but also other growing applications including using low carbon intensity blue ammonia to fuel ships, reduce emissions from power plants and more. These events, especially the passage of the RRA legislation, LED us to consider that now rather than later is the best time to build the infrastructure for this project to accommodate future expansion. It is important that we pre-invest in the infrastructure needed for future expansion now, so that when the demand increases rapidly, as we expect it to, we will be able to bring the next phase of this project on stream as fast as possible.

In addition to the increased cost to build the infrastructure, obviously the project cost has gone up due to inflation that we are seeing in the past three years since we announced the project and anticipate in the future to build this facility. In addition to all of this, we have included in the $7 billion funds to cover the interest on capital that we will be using as we build this plant. This facility is a huge facility. We are very excited about its future. We remain totally committed to this project and its profitability. It is a unique one-of-a-kind project that will put us significantly ahead of anybody else in the world in the production of this product. We see significant demand for the product that this plant will produce. As a result, I am very pleased to announce today that our Board of Directors has given us final investment approval to proceed with the project at the new capital estimate of $7 billion.

We expect this project will deliver double digit returns to our investors when it is fully on stream. As you know, this project will produce hydrogen and ammonia at very low carbon intensity. As the first company to make these unique low carbon hydrogen and ammonia products at a large scale, we expect to get a premium for the product which will allow us to achieve double digit returns on capital. Additionally, the scale of our activities will provide a cost advantage over other similar projects in development at this time. We are really excited about the future of low carbon hydrogen and ammonia that is by this project in Louisiana is well underway and we are laying the groundwork to meet the expected additional demand in the future. The additional infrastructure we are building now will continue to be a competitive advantage for Air Products in the future.

Now it is my pleasure to turn the call over to Melissa Schaeffer, our Chief Financial Officer, to give you a summary of the fourth quarter 2023 results. Melissa?

Melissa Schaeffer: Thank you, Seifi. And my thanks to the people of Air Products who have again delivered double digit average earnings growth in a difficult environment, an impressive trend that we have achieved in nine of the past 10 quarters. Now please turn to Slide 13 for a review of our fourth quarter results. In comparison to last year, we have again achieved underlying sales growth despite ongoing economic weakness. Merchant price was 4% higher compared to last year with positive pricing in most regions. This corresponds to a 2% price improvement for the whole company. Higher onsite volume, including strong demand for hydrogen and higher LNG sale of equipment activities, were offset by one-time opportunities in the prior year, resulting in flat volumes for the company overall.

Declining natural gas costs in Europe and the Americas reduced energy cost pass-through to our onsite customers. This 14% decline in sales has no impact on profit, but was a significant contributor to our higher margin. The overall impact of currency was minimal as a strengthening of the euro and British pound against the U.S. dollar was mostly offset by a weak Chinese RMB. EBITDA of $1.3 billion improved 10% as favorable price, variable costs and equity affiliate income more than offset higher other costs. EBITDA was up in four of our five reporting segments. EBITDA margin jumped more than 700 basis points with lower energy cost pass-through contributing to about two thirds of the improvement. ROCE progressed steadily to reach 12%, which is 90 basis points higher than last year.

We expect to maintain this steady progression as we continue bringing new projects on stream and put the cash on our balance sheet to work. Adjusting for cash, our ROCE would have been relatively flat at 13.4%. Sequentially, results improved primarily due to increased LNG sale of equipment activities as well as onsite. Now please turn to Slide 14 for a discussion of our earnings per share. Our fourth quarter adjusted earnings were $3.15 per share, up $0.30 or 11% compared to last year, due to strong pricing and higher equity affiliate income, partially offset by unfavorable costs. Price, net of variable costs, contributed $0.44 this quarter, benefiting from both price actions and lower power costs. Cost has been unfavorable impact of $0.28 driven by higher inflation and higher maintenance as well as our ongoing efforts to support our growth strategy, including bringing new assets on stream.