Okay, we'll go ahead and get started. Appreciate everybody joining us today. Again, my name is Mike Leithead. I head up the U.S. Chemicals and Packaging efforts here at Barclays. We're really appreciative to have Air Products here. I mean, CFO, representatives from the IR team, Simon Moore, who was with us one more month ago. Appreciate him coming down. Mun Shieh and then Sidd Manjeshwar, who's the incoming IR guy, been with Air Products for a long time. Again, really smart guy, Sidd. Before we start off, again, everybody can hit the clicker. I want to run through these questions fairly quickly. First question, do you currently own this stock? 1, overweight. 2, market weight. 3, underweight. 4, no. Fortunately, Seifi, you don't get a clicker because you can't be hammering the one button.
I assume it's a big-.
Okay. There's some opportunity there. Next question. What is your general bias towards the stock right now? Positive, negative, neutral.
Mostly positive. Next question.
That's good.
In your opinion, through cycle EPS growth for Air Products will be above peers, in line with peers, below peers?
Most say above peers.
Yes. Thank you for that.
Next question. In your opinion, what should Air Products do with the excess cash? Bolt on M&A, larger M&A, repurchases, dividend, debt pay down, internal investment.
Well, there's not a lot of larger M&A. Okay. Mostly internal investment. I think you guys would agree. Next question. In your opinion, what multiple of 2023 earnings EPS should Air Products trade at? Less than 10, 12, all the way through higher than 21.
Seven.
This is why we don't give you a clicker.
Yeah, we have no clicker. Yeah.
Option seven.
Okay. Towards the higher end. Next question. What do you think is the most significant share for headline Air Products? Core growth, margin, capital deployment, or execution?
I think there's one more ESG question after this, and then we can dive in. Okay. I think mostly execution strategy.
Last question. Does ESG play an active role in your investment decision relating to the company?
One, it's a positive factor. Two, yes, but it's a negative consideration. Three, no, it does not play a current role in our assessment. Four, no, but we do plan to incorporate ESG in the near future.
Yes, positive factor is the overwhelming
I like the real-time feedback. This is so awesome.
Yes. Yes.
Great. Again, Seifi, Melissa, I really appreciate you guys being here. Maybe just to start off big picture to kind of level set for everyone in the room. Air Products helping a lot of end markets in all regions. Seifi, can you just do a quick tour around the world, what you're seeing in terms of growth, demand, and we'll kind of go from there?
Sure. First of all, it's just a pleasure to be here. I know a lot of people in the audience. Always good to see you. Quite honestly, thank you very much for the feedback you just gave us. We could very much align with our strategy. That is really positive for us. With respect to your question, we obviously don't have a habit of giving an update of what is going on in the middle of the quarter. Frankly, sitting here in front of you after two months in the quarter, if I just say no comment, it doesn't sound so critical because I have an idea what the quarter looks like. I'll give you some general comments, if you don't mind.
Now, number one, if we start from the eastern part of the world, the center of gravity of our business is obviously in China. In China, we did have a weak first quarter, both in volumes and prices. But in China, the key thing to watch is how does the economy bounce after the Chinese New Year. That is positive. We are seeing the economy come back pretty well. The opening with the COVID has helped. We are a little bit more optimistic about China now than we were two months ago, and we hope that the bounce back in economic activity will help with getting some pricing strength that we lacked in the first quarter. In Europe, volumes are not that exciting, as you would expect, considering what's going on.
The only, as they say, silver lining out there is that the energy prices have started to go down. If that trend continues and we do a good job in holding on to the pricing levels that we have achieved already, which were pretty robust in the first quarter, as I'm sure you saw, then we have a chance of improving our margins in Europe in the second quarter, which would be a good positive development for us. In the Americas, nothing has really changed from first quarter. We are having strong pricing and the economy is just moving along okay. You know that better than I do. That's general what you see.
Great. On China specifically, there's obviously been a lot of debate or focus around the country's COVID policy shift. I mean, just kind of how do you kind of sift through the tea leaves there? Obviously, you've seen fairly good recovery, it sounds like so far. How do you think about the progress or the potential for China over, say, the rest of this year?
Well, obviously right now, what is going on in the world and the dynamics of what is going on in terms of support or not support with Ukraine and so on, it's very difficult to predict the geopolitical thing, and we don't know enough about it to have any opinion about that. The one thing that, I mean, barring any significant change, we do remain continuous to remain optimistic about China. The potential is 1.2 billion people. Their middle class is getting stronger. Our company in China, we don't import anything into China, and we don't export anything from China. We are looked at as a Chinese company. Their political situation is not affecting our operations or our customer reactions to us that somebody said, this is an American company, we don't want to do business with them.
There's none of that. We continue to remain optimistic about what China is doing and what it will do in the future.
Great. I think Air Products obviously just reported first quarter results. The base business remains, I'd say, fairly strong and steady overall. There was a lot of investor questions on the call around NEOM and your update there. Give me a kind of level set for folks what the change for NEOM means and how you think people should interpret that.
I'm very happy you're asking that question because, quite frankly, I don't think we did a good job on our earnings call to explain the NEOM situation. I think we should have had a separate call and dedicated to going through that project. We did it at our earnings call because at the time we expected that two days later we will have the dry close with the banks. We said, well, the news is going to come out, we might as well talk about it. Obviously the dry close doesn't happen yet. Hopefully it will happen next week. I think the NEOM thing deserves better discussion. We thought the situation in NEOM is actually a lot better than what it was in the past. Obviously, the investors interpreted it the other way.
The reason that I say it is better is that let's please take a second and focus on this. In 2020, we said that we are going to build a plant that will cost $5 billion to produce green hydrogen. That's one piece. That was going to be one-third Air Products, one-third ACWA Power, because they got a power company and they need to build the wind and the solar piece, they can add value. One-third, basically the government of Saudi Arabia through their city of NEOM, because we need hundreds of acres, thousands of acres of land for building the wind and the solar, and they need to be part of it, otherwise we don't have a project. Each party was going to put in $1.7 billion to do that.
That is one piece, that was going to have a certain return. The next piece is that the hydrogen that is produced is going to be in the form of ammonia. Air Products will be the 100% offtaker and marketer of that product to sell it. That is very important that we are the sole offtaker at a certain price that we negotiated in 2020. We had made some assumptions about that we are going to take that product, then extract it at different locations in the world, sell it, and make a return on that, which was most of the return on the entire project. Today, what are we saying? The part we are saying that the price for the ammonia is the same price we negotiated in 2020.
That piece and the profitability of the downstream has not changed at all. Actually, from our point of view, the situation is a lot better than 2020 because we see a lot more interest and demand for green hydrogen. Nothing in what we announced changes the profitability on that part of the equation. On the production side, you're saying that the $5 billion has gone to $8.5 billion total cost because it now includes some inflation, additional scope, because we don't want to buy the services from other people, we want to build it ourselves, and the cost of project financing. Why are we project financing it? It's because there's a lot of interest on green projects. People are willing to give us the, we announced the interest rate next week. You'll see why we want to do project financing.
As a result of this, on the production side, instead of Air Products investing $1.7 billion, now we are investing $700 million. We are actually saving $1 billion of our money that we are going to put in other projects and get a good return like the Jazan thing that we did last month. That profitability hasn't changed. The only thing that has changed is the return on the $700 million. Sure, the return on the production side now is less than it used to be, expected to be expected in 2020. How much has it changed? It cannot be zero because people are giving us $6 billion to finance this project, so it cannot be a non-profitable project. These banks do their due diligence.
Assume that instead of 10% on the $700 million, we are going to make 5%. In total, we have the worst case situation that you can see in the entire thing. We have, talking about $35 million of operating profit after tax divided by number of shares, is $0.13 a share. There's the times that we are trading. That can be a maximum hit if anybody wants to think of the worst situation of $2-$4 a share, not $35 a share that we experienced. That is the way it came out. I think people on the call when I was talking about the price of ammonia hasn't changed, they didn't fully appreciate that I'm talking about price of ammonia that we pay, not the price of ammonia that we are going to sell.
They kind of said, "Well, they are losing the profitability on $1.7 billion," without realizing that, well, we are not spending $1.7. We are spending $700,000. As I said, I think it would have been better if you had a separate call, but I'm glad you're giving me an opportunity to explain that.
Thank you for that. That was a very detailed and articulate way to kind of lay that out.
Thank you.
I guess the natural follow on question I get from investors though is, again, there's $700 million there, and we can talk about what the rate is of return there. You guys are also spending $15 billion plus on other projects. I hear concerns from investors sometimes around what. Is there any movement on those returns or what have you. Can you speak to your confidence around your cost estimates, your potential for more project financing, just as we think about the rest of the backlog that you have today?
The bank, when you say $15 billion, a lot of those projects are half built, or I almost said then. It would be not credible for me to sit down here and say there is no effect on inflation on us. There will be an effect because there is inflation and we are building facilities. The biggest projects that we are doing, let's say, take the project in Indiana, where we are going to build a blue hydrogen facility. Over there, we have not yet solved the problem. We do not have a long-term contract that we are saying, you're saying that the revenue is fixed. If your cost goes up, you're paying for that. If it turns out that it costs us more to build the plant, and then the plant comes, we charge more for the product.
Our project that we announced in Texas, we just announced that last month. We are fully aware of inflation, and we know what the costs are. Sure, there will be some inflation. We have to deal with that. Our record is pretty good. We just, please know that we announced 2 and a half years ago that we are going to build a billion-dollar facility in the US Gulf Coast, which is going to be hydrogens to supply hydrogen to ammonia. We call Gulf Coast Ammonia. That thing was an investment of about $1 billion. That plant is going to come on stream in the next 2 months. We have finished that project on the schedule and below budget, despite the fact that we were executing it with the inflation. We have a decent record on that.
We need to be aware of it, constantly work on it, but that's part of our job.
Great. And an important part of the Neom update, and you talked about it just now, is the fact you're so enthusiastic about the downstream ammonia and hydrogen offtake and opportunities. If you maybe just talk a bit more about what you're seeing in terms of customer engagement and downstream opportunities to ultimately market a lot of this hydrogen or ammonia hydrogen?
Well, let me just put it in following context. you know, if you want to look at the barometer of what is going to drive our profitability on all of these green energy projects that we are doing, Neom, Darrow, and everything else, what is the transition you're talking about? 150 years ago, when there was several energy transitions that we have had, from wood to coal, from coal to oil, they were all driven by economics. It was cheaper to go to coal than wood, and more efficient, cheaper to go to oil. Therefore, economics was driving that. Therefore, if you had a case that I have a source of energy which is cheaper, you would win. The energy transition that we are going through right now has nothing to do with economics.
Nobody can sit down and claim that they are going to make green hydrogen or blue hydrogen that will be cheaper than using hydrocarbons. That is not again, it's not eco-economics, it is policy. If you want to track whether we are on the right track or not, look at what is the policy that are being implemented in the different parts of the world to promote, basically climate change. Sitting here, we got into this journey seven years ago. Sitting here with the IRA, that is the best thing that could have ever happened in terms of in the biggest economy in the world, the biggest country in the world, the strongest country, making that kind of a commitment long-term, it's a $450 billion commitment. That is policy. Europe. I...
The reason we are optimists is because we see a trend toward push for the energy transition becoming more and more and more at the highest levels of all of these governments. Quite honestly, on a personal basis, I think they are over-committing in the sense that some of these things that by 2030 this is going to happen, the amount of green energy that we need is just not going to be there, which is good for us because then the product will be in great demand. That is what you should follow, and that is the basis that we are very optimistic. It's not that we have found a way to beat gasoline or anything.
That's great. I think this also brings us to a good question about Air Products' view, I would say, participating in the whole value chain for blue or green hydrogen. Obviously, one of your main competitors has publicly taken the approach, only focusing on the ASU or the ATR and outsourcing some of the carbon sequestration or some of the ammonia sale. Again, without talking about them, can you just talk about Air Products and why you see great value in owning, I would say, the entire value chain in that sense?
I don't understand the argument that somebody is saying that, Look, I don't think blue hydrogen is going to have a future, but I'm protected because I'm going to sell the hydrogen to somebody who's making blue ammonia. How does that make sense? If the guy that you are selling the hydrogen to is not going to make money on blue ammonia, he doesn't have money to pay you. To make the argument that that is how I'm de-risking my project is kind of stupid. The entire chain needs to work, otherwise you are selling to somebody who's going to go bankrupt. That doesn't make sense. What we think is that by controlling the total chain, it will be more profitable.
That doesn't mean that we are not going to sell to other people. The best example of it is that we are way ahead of what these people are saying. As I said, a plant is going to come on stream 2 months from now, where we are making the hydrogen, which is we are going to make it blue, and sending it to somebody who's going to make ammonia, 1 million ton of it, in the US Gulf Coast to sell to the outside world. Wherever we can, we want to go all the way because we think we will end up making more money. Somebody is going to make the margin, why wouldn't it be us?
Especially if it is green, because there we think we have the know-how for the hydrogen refueling stations, and therefore, we can take this thing all the way. Fundamentally, the other model, fine, we do that. I take significant issue with anybody who's saying, "By doing what I'm doing, I'm taking less risk than Air Products." The risk at the end of the day is the product has to be sold. If the product cannot be sold, then everybody is at risk.
Got it. Okay. It does bring us to a good point because we've talked a lot about green hydrogen, but there's a lot of opportunities for you as well in blue hydrogen. Can you maybe just update us on the offtake opportunities from installing carbon capture and what you're seeing right now on your pipelines?
On that one, why blue hydrogen? Because the amount of energy that you need in order to address climate change, if you want to go all green, it will be just so gigantic that it is almost next to impossible in the short run. In the short term, you can do a lot of good for the environment if you can capture the CO2. It makes sense to use the hydrocarbons, make hydrogen, still hydrogen, but capture the CO2 and so-called make blue hydrogen. We want to participate in that. It's just no different than to me, you go to a gas station, you buy either leaded gasoline, which is gray hydrogen, unleaded, blue hydrogen, or super, which is green, right? We want to be in a position to supply all of that.
Blue hydrogen does have a future, significant future, and that will be in the application to take the blue hydrogen, convert it to ammonia, and then use the ammonia as it is to blow into a power plant so that you don't have to crack it again. Because if you want to crack it again, if it is not green, you are not going to get enough back.
Got it. Great. We'll pause here to see if there's any questions in the audience. I could be up here and ask you questions for hours. We already had dinner for 2 hours last time. I still have a laundry list of questions to pick your brain. Is there anybody in the room who has any questions?
Any quick question.
Going once, going twice. All right. If anybody has any questions, feel free to raise your hand at some point, because again, I can keep going forever. Europe, can you just talk about, obviously, we have the IRA here in the U.S., but it seems like Europe is obviously making a lot more progress on the regulatory front. How do you think that hydrogen economy kind of ultimately shakes out? Do you see it as an incremental opportunity? To that point, what progress has Air Products specifically made to help advance that in Europe?
In Europe is actually in a very interesting dilemma here now. First of all, they thought they will be the first, and then the U.S. ended up to be the first. Now they are faced with the absolute prospect that a significant number of people are going to move their operations in the U.S., not just the hydrogen production, but also the downstream of that. Let's say you are a chemical company, and you need hydrogen to feed your next plant, or you're a steel company that need hydrogen to produce decarbonized steel. If it is going to be very economical to produce green hydrogen in the U.S., which it will be, why wouldn't you just move your steel making to the U.S. also and put it next to the hydrogen, you don't have to transport the hydrogen.
You put it in there, and then you transport the semi-finished. They are really worried about that. If they put in incentives the same as IRA, it's not going to do them a lot of good because they don't have any sun, and they don't have any wind of that kind. What I've been telling them is they need to do an equivalent of IRA, but focus on the customer, not focus on the producer. Incentivize the truck drivers, incentivize the company to use the product and then import the product. Then like that, you make people stay in Europe. That is I think what they're going to do. They are very focused on that.
They are very concerned, as they should be, because otherwise a lot of people will just move their entire manufacturing facility to the U.S. so that they are next to a source of... I mean, you have a great pipeline. You're going to make green hydrogen, put into the pipeline, a very economic way. Why not put a chemical plant right there, and you use it. You don't have to transport it anywhere.
Maybe switching back to the base business. We've probably spent 25 of the 30 minutes talking about the project backlog. When I look at the base business, I mean, the industrial gas market is still very healthy. This has done a very good job of driving merchant pricing. Can you just talk about broadly how the merchant business is trending today, and then recognizing you can always compare products, but just how sustainable you think this pricing discipline is to offset some of the cost inflation you've seen there?
Sure. You know, I have been associated with the industrial gases business now for 44 years. I've always said that industrial gas business, whether it is Air Products or whether it's other people, is a golden business. It's a great business. Why? Because fundamentally, you are dealing with basic molecules that people need on a daily basis. You're making oxygen, nitrogen, argon, hydrogen, helium. These are molecules that are not replicable. It is very difficult to make them. It requires massive amount of capital. Not everybody and their cousin can get up in the morning and get into that business. Therefore, it is a great business for everybody, as long as you manage it properly on a day-to-day basis. That is the basis, the base business of Air Products. That is the strength of Air Products.
You look at the charts and graphs that we shared with you. In the last 8 years, we have increased the earnings per share of Air Products 10% every year, cumulative average growth rate based on our base business. None of the green projects that you're talking about is on a stream. All of that has been delivered by the base business. It's a great business. You need to be focused on productivity, focused on pricing, and get away from this really negative thinking of cost pricing. Well, we are making molecules that people need. You have to price based on what the market needs, rather than, okay, I'm making costs, I'll put 10% on it, and that's what I'm going to sell it.
You have pricing power, as has been demonstrated in the last... The business is stable because when the economy tanks, the industrial gas business doesn't tank because people still need the basic products. Fundamentally, our base business, great business. We are very focused on it. We have a lot of our people very focused on running the day-to-day business, most efficient day. We invest in it. We are not losing market share with the plant business. It's going to go on, whether we succeed with NEOM or Darrow or anything else. The other projects are on top of that. We are not distracted by that. As I said on the earnings call, I mean, we are bringing in 22 industrial gas day-to-day plants on operation in Asia last year.
We are doing what we need to do there, and that's will continue to be a great business for us.
Great. Well, Seifi, Melissa, really appreciate you and the Air Products team being here. Thank you everybody in the audience for your attendance and listening.
Thank you very much. Thanks, everybody. Thank you.