Good morning, and welcome to the Air Products third quarter earnings release conference call. Today's call is being recorded and 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. Simon Moore.
Thank you, Cecilia. Good morning, everyone. Welcome to Air Products third quarter 2022 earnings results teleconference. This is Simon Moore, Vice President of Investor Relations, Corporate Relations, and Sustainability. I'm pleased to be joined today by Seifi Ghasemi, our Chairman, President, and CEO, Dr. Samir Serhan, our Chief Operating Officer, Melissa Schaefer, 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. This discussion contains forward-looking statements. Please refer to the forward-looking statement disclosure that can be found in our earnings release and on slide number two. In addition, throughout today's discussion, we will refer to various financial measures.
Unless we specifically state otherwise, when we refer to earnings per share, EBITDA margin, the effective tax rate, and ROCE both on a total company and segment basis, we are referring to our adjusted non-GAAP financial measures, adjusted earnings per share, adjusted EBITDA, adjusted EBITDA margin, adjusted effective tax rate, and adjusted return on capital employed. Reconciliations of these measures to our most directly comparable GAAP financial measures can be found on our website in the relevant earnings release section. Now, I'm pleased to turn the call over to Seifi.
Thank you, Simon, and good day to everyone. Thank you for taking time from your very, very busy schedule to be on our call today. Our fiscal year 2022 third quarter results are the latest demonstration of the strength and resilience of our business portfolio. Despite all the well-known and visible headwinds on the global stage, such as rampant inflation, supply chain constraints, currency headwinds, COVID-related shutdowns in China, the war in Ukraine, and the significant rise in energy prices in Europe, the people of Air Products delivered excellent results with earnings per share up 13% versus last year. In addition, as you can see, we delivered very strong cash flow that will support our energy transition growth projects. I do want to thank all of the people at Air Products for their total commitment to excellence and service to our customers.
Now please turn to slide number three, our safety performance. Our highest priority at Air Products is the safety and well-being of our employees. We have made significant progress to improve our safety performance in the last few years, but we are working even harder to achieve our ultimate goal of zero incidents and accidents. Now, please turn to slide number four. This is our historical performance over the last eight years and the best indication of our commitment and the resilience of our business portfolio. We have increased our earnings per share by an average of 11% per year over the last eight years, despite all of the ups and downs in the world economy, geopolitical tensions, and COVID. This performance is better than what we promised investors eight years ago.
Now please to slide number five, which clearly indicates that we have shared this success with our investors by increasing our dividend per share by an average of 10% per year also. Now please go to slide number six, my favorite slide that shows our EBITDA margins. You note the significant improvement over the years, and please also note that about three-quarters of the recent decline is due to higher pass-through energy costs that increase our sales but not our profits. I have, as usual, included slides number seven, eight, nine, and 10 to emphasize our continued commitment to the basic management principles that have guided our performance up to now and will continue to be the key principles that we will follow in the future. The slides number 11, 12, and 13 represent our new sustainability commitments that we shared on Monday, July 25th, at a conference call.
The transcript of that call explains all of these slides in detail, so I do not plan to go through that again today. I do want to reiterate that sustainability is our growth strategy at Air Products, and we are committed to improving our performance and enabling our customers to do the same. We are proud to have set additional ESG goals and increased our total capital expenditure for projects driving the energy transition to $15 billion or more. Now it's my pleasure to turn the call over to Melissa Schaeffer, our Chief Financial Officer, to go through the details of the fiscal year third quarter results. Melissa.
Thank you, Seifi. As mentioned earlier, the resilience of our business is once again demonstrated in our results this quarter. Our on-site business, which generates approximately half of our total company sales, is stable and has contractual protection to pass through higher energy costs. Our merchant business also performed very well. Price stayed ahead of variable cost increases for the second consecutive quarter and has now more than offset the higher variable costs for the year to date. I'm also pleased to announce that we received a cash distribution of approximately $100 million from the Jazan joint venture in June. Another example of this project meeting our commitments. I also would like to echo Seifi's comments and thank all of our people at Air Products for their outstanding effort to overcome the significant energy cost challenges and achieve key project milestones.
Now please turn to slide 14 for our third quarter results. Underlying sales were strong. Price and volume combined were up 12%. Though energy costs have fallen slightly in recent weeks, they remain significantly higher than in prior quarters, and our team stepped up our pricing efforts across the region in response to the escalating energy costs. Our third quarter merchant price was 17% higher than last year, which resulted in a 7% gain for the total company. Merchant price has improved double- digits for three consecutive quarters and increased sequentially each quarter. Volumes were up 5% overall and better in most segments. New assets, recovery in hydrogen in the Americas, better merchant demand, and increased sale of equipment activities more than offset the negative COVID impacts in Asia and lower hydrogen volumes in Europe.
Currency translation from a strengthening U.S. dollar was a significant headwind this quarter, reducing sales and EBITDA by 5%. Despite this headwind, EBITDA increased 11% as favorable volumes, prices, and equity affiliate income more than offset higher costs. EBITDA margin of 33.9% decreased 360 basis points compared to the prior year. As positive contributions from price, equity affiliate income was more than offset by higher energy pass-through, which lowered EBITDA margin by 500 basis points. Sequentially, volumes were up 4%, supported by Lunar New Year recovery in Asia and higher hydrogen volumes in the Americas, while partially offset by lower merchant demand due to the COVID restrictions in China. EBITDA was up 6% sequentially, absorbing 2% of currency headwind as favorable price and volume more than offset higher cost.
ROCE has climbed steadily the last four quarters to reach 10.8%. We anticipate ROCE to further improve as we bring new projects on stream and continue to put the abundant cash on our balance sheet to work. Adjusting for this cash, our ROCE would have been 13.5% this quarter. Now please turn to slide 15. Our third quarter adjusted EPS of $2.62 increased $0.31 or 13% from the prior year, representing our fifth consecutive quarter of double-digit year-over-year earnings growth. Price, volume, and costs together contributed $0.27. Volume was favorable $0.11, and price net of variable costs was favorable $0.32. Asia, Europe, and Americas all showed positive price results. Our costs were higher, primarily due to inflation, supply chain related issues, and higher planned maintenance.
We also remain steadfast in our support for the long-term growth of our company, hiring the necessary people to bring projects on stream and investing in facilities, including our new helium storage cavern, which will generate significant value in the future. We keep a close eye on all of our costs and continue to focus on productivity actions across all of our businesses. Weaker foreign currency versus the U.S. dollar lowered our EPS $0.08. The euro, British pound, Korean won, and RMB were the biggest contributors. This was about $0.05 worse than we expected for the quarter. The Jazan joint venture continues to deliver as expected and drove the improved equity affiliate income versus prior year. Non-controlling interest was unfavorable as higher earnings from consolidated joint ventures is attributed to our partners. Non-operating income was $0.04 lower, driven by higher pension expense.
Our third quarter effective tax rate of 18.6% was slightly higher than last year, as the favorable impact of Jazan in the current year was offset by prior year impact of favorable one-time items. We expect our tax rate to be approximately 19% next quarter. Now please turn to slide 16. The stability of our business allows us to generate strong cash flow despite the challenging geopolitical energy environment. Over the last 12 months, we generated more than $2.9 billion of distributable cash flow, over $13 per share. From our EBITDA of over $4 billion, we paid interest, taxes, and maintenance capital. From the distributable cash flow, we paid over 45% or roughly $1.4 billion as dividends to our shareholders and still have over $1.5 billion available for high return projects.
This strong cash flow, even in uncertain times, enables us to continue to create shareholder value through increasing dividends and capital deployment for our high return projects. Slide 17 provides an update to our capital deployment. As you can see, our capital deployment potential is $35 billion through fiscal 2027. The $35 billion includes about $8 billion of cash and additional debt capacity available today. Almost $17 billion we expect to be available by 2027, and more than $10 billion already spent. We still believe this capacity is conservative given the potential for additional EBITDA growth, which would generate additional cash flow and additional borrowing capacity. As always, we continue to focus on managing our debt balance to maintain our current and targeted Aa2 rating.
You can see we have already spent 30% and have already committed 73% of the updated capacity we show here. We've made great progress and still have substantial investment capacity remaining to invest in high return projects. As Seifi mentioned, we have committed an additional $4 billion to the future energy transition projects, or about half of the remaining $9.5 billion to be committed. We are developing a significant number of exciting projects. As a result, I think we have a good chance to exceed this target. We continually evaluate our capital deployment options and determine the best way to use the available cash entrusted to us by our shareholders. We believe that investing in these high return projects is the best way to create shareholder value for the long run. Now to begin the review of our segment results, I'll turn the call back over to Seifi.
Thank you, Melissa. Now, please turn to slide number 18 for our Asia results. As I mentioned earlier, currency was a major headwind for Asia this quarter. Sales were flat as positive volume and price that offset by weaker currency. Volume was up 2% as we continue to successfully bring on stream small to medium-sized traditional industrial gas plants in our on-site business across the region, which more than offset the reduced merchant volumes caused by COVID restrictions in certain parts of China in the last quarter. Our merchant price was up 5% compared to last year, which resulted in the 2% overall price improvement for the region. Costs were unfavorable, primarily due to higher plant maintenance, inflation, and supply chain inefficiencies caused by COVID restrictions.
EBITDA was 5% lower, mostly due to currency, and EBITDA margin decreased to 230 basis points as better price and volume only partially offset the higher costs. Now, I would like to turn the call over to Simon to talk about our Europe results. Simon?
Thank you, Seifi. Now please turn to slide 19. Energy costs in Europe remained very high. Had no profit impact on our on-site business since we are contractually able to pass the costs on to our customers. Since almost all of our natural gas usage is for on-site hydrogen production, we have very little cost exposure to natural gas and no cost exposure to the power used for our on-site ASUs. In our merchant business, our team continues to implement price increases to compensate for higher power costs, highlighting the strength of our business model.
You can see the power costs for Europe this quarter were still 3x the level at the beginning of 2021. Although we have now fully recovered the higher power costs for the year- to- date, we remain mindful of the dynamic nature of the situation, and we are continuing to work hard on pricing. Now please turn to slide 20 for a review of our Europe results. Negative currency had a significant impact on Europe. All major local currencies were weaker versus the dollar by double digits. Compared to prior year, underlying sales were stable, supported by a sizable step-up in merchant pricing. Price increased 17% over last year for the region, which translates to a 25% gain for the merchant business. Prices were higher across all major product lines and sub-regions, and this is the fourth consecutive quarter of sequential price increases.
Volume was 3% weaker. Merchant volume was up, but hydrogen volume was negatively impacted by a planned customer turnaround and another customer reducing volume from us due to high natural gas costs. EBITDA improved 4% due to strong price net of variable costs and better equity affiliate income, which were partially offset by unfavorable currency and weaker volume. EBITDA margin decreased 500 basis points compared to prior year as better pricing net of variable costs only partially offset higher energy costs pass-through, which lowered margin more than 700 basis points. Compared to the prior quarter, merchant volume improved and price continued to gain strength across all key product lines and sub-regions. EBITDA was up 9% as better price net of variable costs more than offset weaker currency. EBITDA margin improved 230 basis points, primarily due to the strong price.
Compared to Q1 of this year, Europe's operating income has improved $40 million or 40%, and EBITDA margin has increased by over 600 basis points, owing much to our team's successful pricing effort. Now, I would like to turn the call over to Dr. Serhan for a discussion of our other segments.
Thank you, Simon. Now please turn to slide 21 for a review of our Americas results. Energy cost pass-through was a significant factor this quarter, accounting for 2/3 of the 33% sales increase over last year, but contributing no profit. However, it does negatively impact our margins. Underlying sales were strong. Volume and price together were up 12%, similar to the last two quarters. Volume grew 4%, primarily due to recovery in hydrogen despite the planned outages in this quarter, as well as in new onsites coming online. We expect hydrogen to continue its path to recovery as we move into 2023. Our third quarter volume growth was partially offset by continued weakness in our South America merchant business due to lower demand for medical oxygen, as well as the favorable impact from our one-time items in the previous year.
As mentioned, the positive price momentum continued. Our team in the Americas did an excellent job again by raising prices to more than cover the higher energy costs. Prices improved in all key product lines over last year and were also up sequentially. The 8% gain for the region compared to last year is equivalent to an 18% increase in our merchant business. As we indicated previously, the planned maintenance was still elevated in the third quarter, but it's expected to decrease in this fourth quarter. Costs were also unfavorable, primarily due to inflation and supply chain related challenges, including driver shortages that continued to impact the industry. EBITDA grew 3%, driven by higher price and volume, partially offset by higher costs.
EBITDA margin declined 980 basis points from the previous year due to higher energy costs pass-through, which accounted for around 800 basis points, with most of the rest driven by one-time gains in the previous year. Sequentially, better hydrogen volume and continued price gains helped drive EBITDA higher despite higher supply chain related costs. EBITDA margin was lower, primarily due to higher energy costs pass-through. Now please turn to slide 22 for review of our Middle East and India segment. Sales and operating income in this segment are modest since our Middle East and India wholly owned operations are smaller in size. However, the segment's EBITDA is significant since it includes the equity affiliate income related to the Jazan joint venture and our India joint venture, INOX Air Products. For the quarter, sales were higher versus the previous year and the previous quarter due to acquisitions.
The $50 million increase in equity affiliate income included our share of the Jazan joint venture net profit. As Melissa indicated earlier, we received a distribution of about $100 million from the joint venture during third quarter. I'm also happy to report that the planned commissioning activities continue to make good progress. Please turn to slide 23 for our corporate segment. This segment includes our sale of equipment businesses, as well as our centrally managed functions and corporate costs. Over the past few years, our non-LNG sale of equipment businesses have grown considerably and have become major contributors for this segment. For this quarter, sales and profit increased, driven by strong activities in non-LNG projects and also supported by favorable profit recognition upon the recent completion of an LNG sale of equipment project. As expected, inquiries for potential LNG projects have increased significantly.
These projects take time to develop. We're working hard to sign new projects in order to maintain our momentum. At this point, I would like to return the call back over to Seifi to provide his closing comments.
Thank you, Dr. Serhan. As I have mentioned previously, our strategy for the company is fundamentally based on doing two things at the same time, two pillars. Number one is to operate our base industrial gas business in the most efficient way and continue to invest and grow that business, something that we have been doing and we will continue to do. The second pillar of our strategy is to focus on zero and low carbon hydrogen projects that produce the hydrogen energy of the future. Air Products today is the leader in the production of gray hydrogen worldwide. Our strategy is to have a natural extension of that leadership position and to be the leader in the production of green hydrogen based on renewable resources and blue hydrogen, which is the production of hydrogen from hydrocarbons combined with CO₂ capture. That is our growth strategy for the future.
We are very much committed to this strategy. These two pillars are part of the same thing. They fit together. They align with our core competencies as a company, and they give us the potential to grow significantly. As the world's largest hydrogen supplier, with over 60 years of experience with hydrogen, we are uniquely positioned to be successful in implementing this strategy. We have the know-how to carry out our mega projects and implement them successfully, as demonstrated by the successful completion of several major projects recently, including the more than $2 billion air separation project, the largest in the world, which was completed on time and under budget recently. We can also leverage our existing assets, as many of our energy transition projects are connected to our own pipelines, which can readily supply the low carbon hydrogen to our existing customers.
Now please turn to slide number 24. Like everyone else, we see significant economic challenges as we go forward. COVID restrictions in China remain uncertain, and we expect inflation, currency, and supply chain constraints to continue to be headwinds. Although we have only a very small business in Germany, the fear of energy supply disruptions is weighing on all of Europe. Despite all of these headwinds, I remain confident in the strength and stability of Air Products business. We will push for price increases to compensate for additional costs, pursue additional volume opportunity, and pay very close attention to our costs.
As a result, for the fiscal year 2022, we have kept our guidance unchanged, despite not only all of these headwinds, but also the more than $0.10 of negative currency impact that we see, which is different, which is higher than when we gave you the guidance last quarter. Our range of $10.20-$10.40 represents a 14% increase at midpoint over last year. We expect to see our CapEx in 2022 to be slightly above $4.5 billion, including the approximately $1.5 billion previously invested for phase one of the Jazan project. Now please turn to slide number 25. To make this energy transition a reality, we need people who share the same vision for this important undertaking. Recently, I've been hosting strategy discussions with our employees around the world.
These are extensive, thoughtful dialogues with small groups of people at a time that allow me to share our strategy with our people and as always, to answer their questions and get input from them. I have already met with approximately 2,000 of our employees in the last two months, and I plan to talk to all of our 20,000 employees in a small groups in the next year or so. I'm happy to say that our employees are excited, motivated, and confident to take on the bold challenges ahead of us. Their commitment and motivation is our long-term competitive advantage, which is going to make us successful in implementing our strategy. I am, and have been, and continue to be very excited about the future of Air Products. Now, before we answer your questions, I do have an announcement to make.
As all of you on this call know my friend and colleague, Mr. Simon Moore, very well. He has been responsible for investor relations for the last 12 years. He has been a significant contributor to the success of Air Products over the last 33 years. Recently, Simon informed me that he plans to spend more time with his family, and therefore he wishes to retire from Air Products at the end of March 2023. We have decided to announce his decision early so that we can go about finding a successor in an open and public manner, and also to give his successor plenty of time for the transition.
I do want to publicly acknowledge and thank Simon for the outstanding and valuable contribution he has made to Air Products, and also acknowledge the key role he has played in developing our sustainability program. All of us at Air Products wish Simon the best in his retirement and look forward to working with him over the next eight months to identify and transition to a strong successor. Simon, thank you again for all you have done for Air Products, and I invite you to make any comments you would like to make at this time.
Thank you, Seifi. I have been honored to enjoy the challenges, the opportunities, the people, and the teamwork at Air Products over the last 30+ years. As they say, no one joins a company planning to stay for 30 years, but I have been lucky to be challenged with a wide variety of opportunities that always made Air Products a great place to be. Seifi, as we discussed when I first shared my decision with you, I remain fully supportive of Air Products' growth strategy. Continuing to focus on our very strong base business while we further advance our unique first-mover advantages, driving the sustainability-focused energy transition for the world, will no doubt create significant value for our investors, employees, customers, and other stakeholders. Seifi, I wanna specifically thank you for leading the team to transform Air Products into this great company with an incredible future.
I'm looking forward to continuing to drive our critical work, support the search for an outstanding successor, and ensure a smooth transition. Thanks again, Seifi.
Thank you very much, Simon, for your kind remarks. I do appreciate that. Now we are pleased to answer your questions.
Thank you. If you wish to ask a question at this time, please press star one on your telephone keypad. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. Again, please press star one to ask a question. We will now take our first question from Christopher Parkinson from Mizuho. Please go ahead.
Great. Thank you so much for taking my question. Your team has done a very good job over the last several quarters, obviously from a pretty tough place last October to getting ahead on price costs in both Europe and also the U.S., you know, per your PowerPoint slides. Can you just discuss those efforts in the context of the current macroeconomic environment? Obviously, there's some, you know, potential cracks in Europe and some other places. Just, you know, how are those discussions going on now? How should we think about your ability to hold price into the next fiscal year? Just any additional color on your updated thought process. Thank you so much.
Thank you, Chris, and good morning to you.
Good morning.
Chris, thanks for your comments. I appreciate that. We are very confident that we will be able to continue doing what we have been doing in the last three quarters in order to deal with all of the headwinds that we are dealing with. You know, we have significant headwinds in currency, COVID, energy costs, and all of that. We believe that we have the capacity, the resilience, the strength, and the market position to continue to increase prices to compensate for energy costs and other inflationary factors. We are not going to fall behind on that as we have demonstrated in the last three quarters, and I expect those efforts to continue. The second thing is that our people are phenomenally focused on our cost, making sure that we really count for every penny.
Melissa, in her role as CFO, is playing a leading role in interacting with our businesses around the world to make sure they understand their costs and we keep our eyes on the ball in making sure that we are not spending any money that we don't have to spend on. Putting all of these together, that is why we have had, quite honestly, the courage, considering everything that is going to be thrown at us in the next quarter, not to change our forecast for the year and stick with the $10.20-$10.40, which means at midpoint, $10.30. Knowing full well that we are going to be hit with at least $0.10 of currency headwind. We are going to keep doing what we have been doing, and I'm very confident that we should be successful, Chris.
That's very helpful. Just a quick follow-up. In your last slide presentation for the last quarter, you had slide 11, just kind of the update of the fiscal year 2023 major project considerations. I mean, Jubail, Jazan, Debang, GCA, so on and so forth. Can you just give us a quick update on any incremental thoughts you have on those, kind of that second stage of getting Lu'an, you know, back to prior levels? Just any color you could offer would be greatly appreciated. Thank you.
Sure. We fully expect Lu'an to go back to the original contract starting October first. All of those other projects that you mentioned, we expect them to come on stream in 2023 and contribute to our increased EPS versus this year. We look forward to having a good year in 2023. Sure.
Thank you.
We will now take our next question from Vincent Andrews from Morgan Stanley. Please go ahead.
Thank you, and good morning, everyone, and congratulations in advance, Simon.
Thank you.
Could you talk about, you know, you mentioned you had $0.10 incremental FX headwinds versus, I guess, the middle of your fiscal year. Obviously, the raw material environment, the macro environment hasn't gotten any easier either. What is it that's happening in the business that's better than what you expected that's allowing you to maintain the guidance?
Our ability, two things. Number one, our ability to make sure that we increase prices to keep up with inflation. The second thing is that, there are pockets of our business which are doing better than we expected. To be very specific, the hydrogen pipeline in the Gulf Coast, because of what you know very well about the increased activity for refineries. That is helping us.
And a follow-up-
Yeah, sure. Go ahead.
No, no, go ahead, Seifi. You finish off.
No, I was done. Thank you, Vincent.
Oh. Okay, thank you. Just a follow-up, was just wondering, you know, as we think about the potential for, you know, energy or electricity issues, possibly in the fourth quarter, maybe the first calendar quarter of this year, depending on what happens, what are your mitigation plans in terms of, you know, do you have the capability to shift volume to certain plants to serve the merchant market if you have to reduce production? Or are customers proactively, maybe global customers proactively maybe shifting some volume to other geographies? Or what are your contingency plans?
Look, we have a lot of flexibility to deal with that if that is what the customers want to do. Because we have many operations, you know, we do that all the time in order to manage our electricity costs. Because, you know, when electricity costs go up significantly during the night or during the day, depending on where you are, we maybe slow down some facilities and ramp it later. We have a lot of flexibility to deal with that. You must be referring specifically to any possible electricity shortages in Europe as a result of the cutoff of the natural gas to that region. If that happens, then we just we'll adjust our operations to what the customers wish to do.
Thank you very much.
Thank you.
We will now take our next question from David Begleiter from Deutsche Bank. Please go ahead.
Thank you. Good morning. Seifi
Good morning, David.
Good morning. On the Jazan dividend, will this be a ongoing quarterly dividend or semi-annual? How should we think about the dividend going forward?
Well, obviously, the dividend is at the discretion of the board of directors of the company, but we expect to be getting a regular dividend. That's the expectation, and we got the dividend this quarter, and I expect, you know, I don't want to say it is every single quarter, but in general, over the course of a year, we expect to get the dividend that is necessary or expected as, you know, per our investment agreement.
Understood.
The good news, as Dr. Serhan mentioned, is that the plant is operating, the commissioning is going well, and we have an outstanding customer in Saudi Aramco, which happens to be generating a lot of cash themselves.
No, very good. Now that we're almost through this current year, any early thoughts on fiscal 2023 earnings?
David, I would not want to venture into that. You have to give me until beginning of November to give you guidance for that. I don't really want to comment too much on that, but I am optimistic because we do have significant plans coming on stream, and therefore, I am expecting a good 2023. In terms of exactly where we will be, it depends on the world economy and all of that. We will obviously give you a forecast for that when we announce our results at the end of October or early November.
Very good. Thank you very much.
Thank you, David.
We will now take our next question from John Roberts from Credit Suisse. Please go ahead.
Thank you. Best wishes, Simon. I'm gonna ask just one question. Seifi, the press release mentions the potential green hydrogen project in Oman, which you've talked about before, but it also mentions the Netherlands and the U.K. for green hydrogen. I don't think you've talked about that before. Could you give us a little bit more information there?
John, first of all, good morning. You're asking a very good question. Give us a little bit of time to sort out the details of that before I make any public comments. Yes, we are looking at possibility of a green hydrogen project in the Netherlands using the wind energy that they have. We haven't finalized everything. We just wanted to let people know that we are working on those. Once we have finalized the details, we will make an appropriate announcement.
Okay. Thank you.
Thank you, John.
We will now take our next question from Kevin McCarthy from Vertical Research Partners. Please go ahead.
Yes, good morning. Seifi, as you look a few years into the future, do you think that demand for clean hydrogen projects around the world will begin to exceed the industrial gas industry's practical ability to fund them? In other words, I look at slide 12, you have a yellow box there. Obviously, you've inked a lot of projects already. You have perhaps Oman and the other ones that John just asked about. The $4 billion number toward the right of the slide is not especially large relative to your balance sheet or relative to the market opportunity for clean hydrogen. What happens as the demand for these projects continues to rise and the capital is expended? Do you think that will exert upward tension on future returns, or how might the industry respond?
Well, first of all, good morning, Kevin. You're asking a very excellent question. I think as the demand goes up, the ability to finance these projects become easier. I think, you know, in time, we will obviously tell you, for example, how we are going to do the project in NEOM and so on in detail. I think as the board and all of the infrastructure funds and everybody sees that the demand is real and it is going, then you'll be able to finance these projects, project finance these projects. Therefore, I think we will. We certainly at Air Products are confident that we will be able to keep up in terms of capital with the demands. We don't think we will be capital constrained.
I think the rest of the industry, those who wish to play on this thing, will participate. I think there is a lot of cash, as you know better than I do, significant amount of cash available around the world who is looking for investing in green projects. The issue is lack of projects or lack of credible projects. That is why I think, in time you will see that the sum of our projects, when we want to finance them, there will be a lot of demand for people to project finance them. I don't expect, at least speaking for Air Products, I cannot speak for the industry, but speaking for Air Products, I don't think we will have the problem of lack of cash.
Okay. Thank you for that, and, congratulations to you, Simon. It's been a pleasure.
Thanks.
We will now take our next question from Jeff Zekauskas from J.P. Morgan. Please go ahead.
Thanks very much. There's an inflation reduction bill before the Congress. Previously there was a 45Q tax credit, which I think was really $50 a ton for sequestering carbon dioxide. They're proposing in the current draft that it's $85 a ton, you know, maybe up $35 a ton. By my calculation, maybe that would increase your tax credit by $175 million. You know, that is, it would take it from about $250 a year to $425 that you would receive annually over a ten-year period. Does that math make sense to you?
Jeff, overall, that math makes sense. Actually, that math, if you take the $25, the $35, that applies to significantly more than the $5.5 million that you're talking about for the Darrow project, because we also have a lot of CO₂ in other places. Jeff, the bill that is in front of Congress is about 750 pages. I do not want to claim that I know that everything that is in all the 750 pages, but we have been involved significantly in the details of that bill. The bill is not passed yet, so it will be premature to comment on it.
Once the bill becomes law, I promise you that we will have a conference call, and we as Air Products will delineate for you all of the aspects of that bill that would affect our business. Because it's not just only the CO₂ , there are things in there about hydrogen and other things. I just like to wait. We know a lot about that bill, but I like to wait until the bill becomes law. The President signs it, hopefully in the next few weeks, and then we will, as I said, I promise you we will have a detailed conference call where we will delineate the effect of that across our business.
Thank you for that.
Is that okay?
Thanks for that. In terms of the amount of CO₂ you can sequester, if it's, you know, if that project is 5 million tons a year for 20 years, that would be 100 million tons. In the answer to my previous question, you said you could put other carbon dioxide down that shaft. How big is the well? Is it 100 million tons, 200 million tons? Can you roughly size how much carbon dioxide you'll be able to sequester or what your design idea is?
That is a little bit of a secret that we have, but order of magnitude, let me tell you that the agreement that we have with the state of Louisiana allows us to put in and store significantly higher CO₂ than the 100 million tons that you quoted. Significantly higher.
Okay, great.
I don't want to give the exact number because we are under confidentiality, but it is significantly higher than 100 million tons.
Okay, good. Thank you very much.
Thank you, sir.
We will now take our next question from Mike Leithead from Barclays. Please go ahead.
Great. Thanks. Good morning, guys.
Good morning.
First question, I was hoping you could provide us just additional thoughts around how you're seeing business trend in China and Europe, as we go into the fiscal fourth quarter.
Well, in China, I think as we mentioned before, the impact of the COVID shutdowns, we were able to deal with that. Actually, with all of the rest of our business growing, the effect was not that material. In terms of what is going to happen in the fourth quarter, it all depends on what would be the Chinese government's reaction to any additional outbreak of COVID and how many massive shutdowns they would implement or they would not implement. I cannot predict that, but we are prepared for that. We understand what that involves, and obviously we have taken some of that into consideration in terms of our guidance. That is totally unpredictable in terms of what will happen.
Otherwise, our business in China has been doing fine, especially the major customers that we have are running very well. Some of the coal gasification projects are running at full capacity because of the price of oil. Overall, as I said, except for the unknown in terms of dealing with COVID, otherwise it seems to be fine in terms of China. In terms of Europe, energy costs are obviously soaring, but much to our surprise, the economy has not suddenly tanked. The economy is still. Our volumes have not significantly dropped, which is a little bit of a surprise. It can as we go forward, but we are optimistic that that will continue to be the case. Is that enough, Michael?
That's perfect. Thank you.
Thank you.
Our next question comes from Steve Byrne from Bank of America. Please go ahead.
Yes, thank you. Simon, we're gonna try to disrupt your retirement plans. We're not quite ready for that.
Thanks, Steve.
Wanted to drill in a little bit about this climate bill that Geoff mentioned. If that does go through, do you think that it would encourage you to implement more CO₂ capture from all your existing SMRs in your Gulf Coast pipeline?
That is exactly what will happen. Yes. If the bill getting enacted in the form that it is being talked about right now.
I suppose it might also.
As I said, wait until it becomes law.
Okay.
Yeah.
Understood. Just one about Asia. Seifi, you mentioned, you know, higher costs in Asia affecting the margin, but essentially no CPI pass-through, energy pass-through in the 60% of your Asia businesses on-site and pipeline. Is that just reflecting a reliance on, you know, coal-based energy, and so you haven't seen much of an increase in that in your costs?
In China, electricity cost has not been a major factor, and in China, about 69% of our business is on-site. Up to now, energy cost, electricity cost in China has not been a major factor for us. Obviously, that is regulated by the government. A little bit more control there.
Okay, thank you.
Sure, sir.
Our next question is from John Spector from UBS. Please go ahead.
Yeah, hi. Thanks for taking my question. First, I guess just a bit of a nitpick on the guide. You left the range wider than you normally do. Obviously, there's a lot of uncertainty out there. Just curious if, based on current business conditions, are you tracking towards the midpoint of that guide at this point, or are you assuming some worsening, kind of in response to your prior comment around Europe and China? Just curious, what gets you to the midpoint versus the high or low end here?
Well, we kept, you know, you're very right. We usually have a tighter range when we get to this stage, more like $0.10. We kept it at $0.20 because of the uncertainty that we are facing, because we cannot obviously predict the future. Obviously, our goal is to at least get to the midpoint. That is our goal. We just didn't want to pretend as if we know more than we do. We do have the uncertainty in terms of what is going to happen, not only in China, but also in Europe, energy costs, what will happen to the supply of natural gas. Is Russia going to squeeze natural gas supply to Europe so that they cannot store it for the winter? I don't know. Some of those things are very big unknowns.
Also the U.S. economy. The U.S. economy, nobody talks about it, but they just increased their interest rates. What effect is that going to have on consumer spending? Are we going to see a contraction? We did see the GDP has slowed down. So all of those are unknowns, and that is why we kept the range. But obviously, our goal is to at least get to the midpoint at this stage. But you know, we just wanted to make sure we are very, don't pretend as if we know more than we do.
Okay, thanks. If I could just ask a longer term one, I guess. Just on your base project backlog, curious if you could provide any visibility and if that's higher or lower versus normal. We have a lot of visibility on your mega projects, but the base, you know, a bit less so. You announced that, what sounds like a larger project in India. Curious kind of what your outlook is over the next year or two. Is that above average, below average? Where is that on the scale? Thanks.
On the large projects and so on, we are very optimistic, and I think we will be developing and announcing a lot of new projects because we are in a good position. We have technologies that people need, and we are focused on the right sector in terms of green and blue hydrogen and on gasification. I think you'll hear a lot from us in the years to come.
Okay, thank you.
Thank you.
We will now take our next question from John McNulty from BMO Capital Markets. Please go ahead.
Yeah, good morning. Thanks for taking my question. Congratulations, Simon. Well deserved. So, Seifi, there's a lot of interest or growing interest on the LNG area, and you have a really strong platform there. I guess, can you help us to understand what the current kind of EBITDA run rate is for that business and where you think it could go? Like, what's the maximum level just based on your capacity, your flexibility, you know, around your manufacturing process that how big could that number get if LNG materializes the way some bulls in the energy market are actually thinking it will?
Well, John, Dr. Serhan, in his comments, mentioned that we are seeing a lot of inquiries about our LNG business. What I can tell you is that historically, the peak performance of that business was approximately $200 million a year of contribution in EBITDA. Today it is. I don't want to quote the exact number, but it is obviously not there. It is a lot lower than that. We expect that business to do better. But it is in the context of the $4 billion or $4.5 billion of Air Products EBITDA. It's, you know, it's not going to double our EBITDA, but it is a good business, it is an excellent business, and it could significantly increase its EBITDA contribution as we go forward.
We are looking forward to that. There is, as you said, a lot of interest, and we are in a very, very good position. We have a very good management team there, and we have very good SMR technology, which is sought after by everybody. Something like, I think 85% of all of the major LNG facilities around the world use our technology. That's our. On a day-to-day basis, Dr. Serhan runs that business. Samir, do you want to make any additional comments?
I think, Seifi, you've covered it. I mean, solid projects we have executing now, 60 projects, I mean, in our manufacturing facility. Again, significant amount of opportunities now we're developing with our customers. Again, the high natural gas pricing is driving this. The energy challenges in Europe is also driving this. Again, we have added last year 60% capacity to our manufacturing in Florida, Port Manatee, Florida. We are very well positioned to really capture that business and build up on the momentum.
Got it. Thanks for the color. Appreciate it. You know, Seifi, you have a really big project backlog at this point. There's been a lot of inflationary pressures, whether it's labor or, you know, or different commodities. Some are starting to come off, some are continuing to push higher. Can you help us to understand the inflationary impact on the capital that you're putting to work on the projects and the backlog and how we should be thinking about that?
Well, John, there is obviously no question that there is inflation and that inflation will impact the capital cost of some of the projects that we are doing. The point that we are making is that with significant amount of the capital that we are putting in the ground, we have not committed to the price of product out of those facilities, especially our blue hydrogen and green hydrogen projects. Therefore, in case inflation drives up the capital, that automatically means that product out of those plants will be more expensive than we sell it. So I'm not worried about losing the margins that we expected on those projects, which is most of our investment. There is significant amount of our projects are almost at the end.
I mean, Jazan phase two is fixed price because we are purchasing something, we are not building. That is a significant amount of money that we're going to deploy. Projects like Gulf Coast Ammonia and some of the other projects are almost done. What we are left is we have quoted a number publicly, I think, that approximately $3 billion of our projects are projects that we already have a fixed price contract with our customers. If you take that $3 billion and you say that, well, inflation is going to cost you 10%, yeah, we might have to spend $300 million more on those projects. Going by the rule of thumb, that would be effect on our bottom line of about $30 million in terms of operating income. That can happen.
Obviously, the team at Air Products is very, very focused to minimize the effect of inflation and also to go back to some of those customers and try to increase the price to get any compensation for that. That is order of magnitude, the extent of our exposure, John.
Got it. Thanks very much for the color, Seifi. Appreciate it.
Sure.
Thank you. As there are no further questions in the queue, I would like to turn the call back to Seifi for any additional or closing remarks.
Well, thank you very much. I would like to thank every one of you for listening to our presentation, and also thank you very much for your good questions. I would like to once again thank Simon for his outstanding contribution and Vishen Bell. He is obviously going to be with us for a few more calls as we go forward. We look forward to talking to you, sometime at the end of October or early November when we announce our results. In the meantime, have a safe, healthy, and enjoyable summer. Thank you.
Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may