Good morning, and welcome to the Air Products and Chemicals Second Quarter Earnings Release Conference Call. 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, Vice President of Investor Relations. Please go ahead, sir.
Thank you, Rochelle. Good morning, everyone. Welcome to Air Products' 2nd quarter 2021 earnings results teleconference. This is Simon Moore, Vice President of Investor Relations, Corporate Relations and Sustainability. I am pleased to be joined today by Seifi Ghasemi, our Chairman, President and CEO Scott Crocco, our Executive 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 2. 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, EBITDA margin, the effective tax rate and ROCE both on a company wide 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 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. We thank you for taking time from your very busy schedule to be on our call today. To start, I want to acknowledge the united and extraordinary efforts of all of the talented, committed and resilient people of Air Products around the world. They work hard every day to provide critical products and services to our customers. Our people working in solidarity and in a determined way Throughout this unprecedented crisis, and I want to particularly thank our team who worked through the very challenging Our people are the ones who are making it possible Our people are the ones who make our higher purpose real every day.
That is to help humanity and Environmental Challenges. Now please turn to Slide number 3. As always, Safety is the most important focus for all of us at Air Products. It is a moral responsibility Despite the challenging COVID-nineteen conditions, our team continues to focus on working safely, following our I also want to emphasize that sustainability is at the core of our DNA and it drives our growth opportunities. We will be issuing our annual sustainability report later this month, Now please turn to Slides 4, 5 and 6.
You can again see our goal, Our management curiosity and our 5 point plan for moving forward. These are the guiding principles that we follow every day and that will continue to guide us in the future. Now please turn to Slide 7. We remain committed to delivering superior financial performance. And as I said, our people also know They are supporting a higher purpose in the work they do every day.
Our industrial gas expertise In many areas is critical to the success of dozens of industries and the scope and complexity Of our megaprojects require talented people with a variety of skills and backgrounds challenging energy and environmental problems in the world. That is our higher purpose Now please turn to Slide number 8, which highlights our gasification projects. We are committed to our gas education strategy and are pursuing exciting projects around the world. We continue to see countries and large companies driving to convert low value feeder stock into high value finished products. They have identified gasification as the best way and we are in the best position to work with them and help them deliver better, more sustainable solutions that benefit their economies and their people.
Consistent with our strategy, We are pleased to have completed the acquisition of the remaining 50% share of our gasification technology joint venture in China. Now that this team will be 100% part of Air Products, We are confident this will make us even more successful to pursue and win new larger scale gasification projects. We do expect to announce additional gasification projects in the future. Now specifically, I would like to give you an update on the 2 large gasification projects, Our $12,000,000,000 acquisition of the Jazan Gasifier and Power Plant from Saudi Aramco. We have continued to make significant progress working with our partners and the lenders since our last update.
The team has worked hard to bring the project to the final stage of project financing. Barring any unforeseen circumstances, We expect this project to reach financial close in this fiscal year. I also want to provide you an update on Luan. During our Q2, We continue to recognize a reduced monthly fee under our interim agreement while our customers' plans were shut down. But I am very pleased to announce that our customer has requested the start up of our facility, and we are proceeding with the commissioning of our plant.
Since our equipment has been idle for several quarters, But for your information, as of this morning, the first gasifier So we are encouraged by this development. Now please turn to Slide number 9, EPS growth since 2014 despite the adversities presented by the recent external challenges. This is a testament to the hard work of our people and the stability of our business. This year, again, we expect to achieve nearly 10% EPS growth in challenging conditions. I will discuss our expectation for this year in more detail later in the call.
Now please turn to Slide 10. A reminder that we share our earnings and its growth with our investors. Both our EPS and dividend have grown double digits since 2014. While we continue to develop our exciting growth opportunities, we have significant cash flow that supports our substantial dividend that we have increased for the last 39 consecutive years. And finally, Slide number 11 shows our EBITDA margin.
As always, my favorite slide, where it shows that the margin is up over 1200 basis points since 2014. Margin is down slightly, primarily due to the significantly higher energy pass through for natural gas, which increases our sales but doesn't impact profits. I'm very proud of our team who delivered EBITDA margin over 37% for the quarter despite the challenges of the pandemic and the winter storm affecting the U. S. Gulf Coast.
Now I would like to turn the call over to Mr. Scott Procko, our Executive Vice President and Chief Financial Officer to provide a financial review. Scott?
Thank you, Seifi. We continue to demonstrate the resilience of our company, our business and most importantly, our people. EPS increased despite the ongoing COVID impact, lower earnings from the yuan and the extreme U. S. Gulf Coast weather during the quarter.
Our business, which is about half on-site, Now, please turn to Slide 12 for a brief discussion of our 2nd quarter results. Sales topped $2,500,000,000 up 13% compared to prior year, driven by strong prices, higher energy pass through and favorable currencies. Volume was flat as the additions of new plants, Acquisitions and increased sales equipment activities were offset by reduced Luan contributions, COVID-nineteen impacts and the winter storm. Prices were again up versus prior year with improvements in all three regions. This is the 15th consecutive quarter of year over year pricing gains.
Overall, prices were up 2% in total, which represents a 5% increase for the merchant business. COVID-nineteen continued to negatively impact our business. We estimate the pandemic reduced overall sales by about 3% and EPS by about $0.10 to $0.15 The U. S. Gulf Coast winter storm disrupted our customers, interfered with our operations and caused a sharp spike and local energy prices.
However, we were able to mitigate much of the negative impact through operational actions and contractual pass through to customers. Our people worked tirelessly overcoming these challenges during this time, restarting our plants quickly and restoring supply to our customers as they also recovered from the weather impacts. I want to extend my sincere gratitude to our people for a job well done. The adverse weather in addition to having a modest negative impact on Sales and profits also reduced our margin. Higher energy cost pass through primarily due to the storm decreased EBITDA margin by about 300 basis points this quarter.
As a reminder, this contractual pass through increases sales, but not profits. EBITDA of $934,000,000 improved 5% as favorable price, Currency and equity affiliate income more than offset the negative impact of volume, the winter storm in the U. S. And higher development costs. Operating income was 2% lower, while EBITDA was higher compared to last year, largely due to depreciation on new plants, particularly the PBF Hydrogen Plants that we acquired last year.
ROCE was 320 basis points lower, primarily due to the increase in the denominator from the additional $5,000,000,000 of debt. Sequentially, sales were up 5%, primarily driven by 4% higher energy cost pass through. Price was up 1%, but volume was down 1%, driven primarily by the Lunar New Year slowdown in Asia. Now please turn to Slide 13. Our 2nd quarter GAAP EPS was $2.13 which included 2 non GAAP items, a $0.12 gain on an exchange with a joint venture partner in Europe and an $0.08 loss from a facility closure.
Excluding the non GAAP items in both periods, Our Q2 adjusted EPS of $2.08 was $0.04 above last year despite the negative $0.10 to $0.15 impact COVID-nineteen and lower Luan contribution. Volume was unfavorable $0.19 The negative impacts of COVID-nineteen and Lwan more than offset gains from the PBF acquisition, as well as a number of small new plants, particularly in Asia. Volume was flat in sales, but unfavorable in EPS due to business mix. It is important to recognize that as the 60% majority owner of the Luan joint venture, 100% of the negative impact from the line is included in this volume line because we consolidate the operating results. However, this is partially offset by the positive impact reflected in the non controlling interest line as the net income shared by our partner is also reduced.
In other words, the negative $0.19 volume overstates the overall EPS impact to Air Products from the lawn. Price, net of variable costs contributed $0.09 demonstrating the value we deliver to customer and includes the higher energy costs associated with the winter storm. Cost was modestly unfavorable as we continue to add new resources for future growth and incur additional development costs. Currency and foreign exchange contributed 7 sense, primarily due to appreciation of the Chinese RMB, euro, British pound and the South Korea won relative to the U. S.
Dollar. Equity affiliate income added $0.05 on strong underlying business results, while non controlling interest was also favorable $0.04 on lower profits in our consolidated joint ventures, primarily LON, as I mentioned previously. Interest expense was $0.06 unfavorable due to the costs associated with the additional $5,000,000,000 of debt. The remaining $0.04 includes a favorable $0.03 non operating income impact and a favorable $0.01 impact from a lower tax rate. The effective tax rate of 20.2 percent was 30 basis points lower than last year.
We still expect our effective tax rate to be around 20% to 21% in fiscal year 2021. Now please turn to Slide 14. The stability of our business allows us to continue to generate strong cash flow. Over the last 12 months, we generated almost $2,600,000,000 of distributable cash flow or about $11.60 per share. From our EBITDA of almost $3,700,000,000 we paid interest, taxes and maintenance capital.
Note that our maintenance CapEx is a little higher than usual, driven in part by spending on our new global headquarters. From the distributable cash flow, we paid over 45 percent or almost $1,200,000,000 as dividends to our shareholders and still have about $1,400,000,000 available for high return industrial gas investments. This strong cash flow even in uncertain times Enables us to continue to create shareholder value through increasing dividends and capital deployment. Slide number 15 provides additional details on our capital deployment. As I said last Air Products.
Our next question comes from the line of Chris Worthington. Please go ahead. As you can see, we expect about $18,000,000,000 of investment capacity available over the 5 year period from FY 2018 through FY 2022. The $18,000,000,000 includes over $9,000,000,000 of cash and additional debt capacity available today, over $2,000,000,000 of investable cash flow between now and the end of FY 'twenty two and over $6,000,000,000 already spent. Additionally, we anticipate generating more cash and borrowing capacity Air Products as projects come on stream and contribute to the growth in our results.
And some of the spending in our backlog extends beyond FY 'twenty two. We expect to reframe this potential for you later this year. We continue to focus on managing our debt balance to maintain our current targeted AA2 rating. With a few smaller new projects signed and some coming on stream, Our total project and M and A commitments remained about $12,700,000,000
with about
$10,500,000,000 remaining to spend on them. So you can see, we've already spent over 35% and have already committed 95% of the capacity we show here. Now to begin the review of our business segment results, I'll turn the call back over to Seifi.
Thank you, Scott. Now please turn to Slide 16 for our Asia results. Sales increased 6% compared to last year as favorable currency and price more than offset weaker volume. Pricing up in all countries added 1%, consecutive quarter of year on year price improvement. Sequentially, price was also positive but rounded to 0.
Volumes are down 2% As higher merchant volumes and new plants partially offset the impact But the recovery is not consistent across all product lines. Additionally, we brought on the stream a number of new smaller plans that contributed to our results. EBITDA was similar to last year EBITDA margin of 46.4 percent was 3 30 basis points lower than last year, primarily due to lower volume driven volume. Sales and profit were down sequentially, primarily due to Lunar New Year. Now I would like to turn the call back to Scott to talk about our Americas results.
Scott?
Thank you, Seifi. Please turn to Slide 17 for a review of our Americas results. Sales increased 13% compared to last year, as strong price and significantly higher energy pass through more than offset lower volumes. Volume was down 6%, primarily due to the continuing negative impact of COVID-nineteen and the winter storm in the U. S.
Gulf Coast. Although there are signs of overall economic improvements in the U. S, The operating results for U. S. Refineries remained low.
The winter storm this quarter further reduced the demand for hydrogen in the Gulf Coast, in addition to pressuring the merchant products. We have also seen some transitory contractual reduction in our hydrogen business recently, as some refineries are reconfiguring their operations to produce renewable fuels. However, such production will use hydrogen once the process is completed. The uses of hydrogen Price is again better across most major product lines. The 3% increase for the region was equivalent to a 7% increase the Merchant Business.
This is the 11th consecutive quarter of year on year price improvement. Higher energy pass through increased sales by 15%. The higher energy prices through the rest of the quarter were exacerbated by the record high prices during the winter storm was much of this contractually passed through to customers. EBITDA reached nearly $450,000,000 a 6% increase over last year as better price, Higher equity affiliate income and the PBF acquisition more than offset the volume shortfall, including the adverse impact of the winter storm. EBITDA margin declined 310 basis points.
Higher energy pass through, which increased sales, but not profits, reduced margin by 6.50 basis points. In other words, margins were up over 300 basis points, excluding the energy cost pass through impact. Compared to last quarter, Americas volumes increased 2% following the holiday season and continued the gradual COVID recovery. Price also improved 1%. EBITDA improved double digits sequentially, supported by improved volume, lower maintenance and higher equity affiliate income.
EBITDA margin was almost flat sequentially, which included a negative 4.50 basis point impact from Hyre Energy pass through. Now, I'd like to turn the call back over to Simon to discuss our other statements. Simon?
Thank you, Scott. Now please turn to Slide 18 for a review of our Europe, Middle East and Africa region results. Our EMEA team delivered another set of outstanding results this quarter. Sales and EBITDA both improved nearly 20% versus last year. Volume plus price was up 7% as volume grew 5%, principally due to acquisitions and higher on-site volumes, price increased for the 13th consecutive quarter and was higher across most major product lines and subregions.
The 2% price gain for the region corresponds to a 3% improvement for the merchant business. Currencies were favorable 9%, Primarily due to the strong euro and British pound, EBITDA jumped 17% to nearly $220,000,000 supported by favorable price, Air Products. Volume, currencies and equity affiliate income. EBITDA margin dipped 50 basis points, primarily due to a negative 100 basis point impact from higher energy cost pass through. EBITDA was down 2% compared to last quarter, primarily due to seasonally lower equity affiliate income, while margin decreased 220 basis points, including a 70 basis Now please turn to Slide 19.
Global Gases, which includes our non LNG sale of equipment businesses as well as central costs. Sales increased due to higher sale of equipment project activity, which includes LNG and other businesses as well as our corporate costs. Sales were higher this quarter driven by Now to provide some additional thoughts, I'll turn the call back over to Seifi.
Thank you, Simon. Now please go to Slide number 21. Unfortunately, as everybody knows, The Board continues to struggle with the COVID-nineteen pandemic. With widespread vaccination efforts, Some regions have been able to reduce the spread of the virus, while others are experiencing an increase in number of cases. Against this backdrop, we take pride in our ability to deliver consistent earnings and cash flow.
Our on-site business, roughly half of our total sales, remained stable and our price continued to be strong. We have also seen signs of improvement in merchant volumes. As we look forward, Although we still see uncertainties ahead, our confidence in major economies around the world Is growing, particularly in light of the increasing pace of vaccination. Therefore, We have resumed providing EPS guidance this quarter. As I mentioned earlier, Luann has asked us to restart our facilities, and we expect Jazan to close during this fiscal year.
However, there remains some uncertainty to the exact timing of these events. Therefore, We are providing our EPS and CapEx guidance excluding the ZAN and Luan restart. In other words, the restart of Luan and the financial close of Jazan, if If they happen within this fiscal year, they will be accretive to the guidance that I'm giving you. For quarter 3 of fiscal year 2021, our earnings per share guidance is 2.30 And the guidance for our fiscal year 2021 is $8.95 to $9.10 We see our CapEx at approximately $2,500,000,000 for this year, again excluding Jazan. We are committed to the capital deployment strategy and to growing our pipeline of projects.
Please turn to Slide 22. As always, the success of our strategy Air Products. We believe strongly that our only Sustainable, long term competitive advantage is the degree of commitment and motivation of our people, The people who work hard every day to bring our strategy to life. I am very proud to be working with this team. Our deep commitment to sustainability creates exciting growth opportunities driven by the energy transition to a lower carbon volume.
Our gasification, Carbon capture and hydrogen growth platforms are at the core of this transition. In the past 5 years, our differentiated strategy and our core competencies We are very pleased to answer any of your questions.
Thank you. The question and answer session will be conducted electronically. And our first question today will be from Kevin McCarthy with Vertical Research Partners. Please go ahead.
Good morning. Saphy, wanted to get your updated thoughts on capital allocation. If you were to look out Over the medium to longer term, let's say, 5 years, how would you expect to allocate capital among 3 buckets? The first would be green hydrogen, the second gasification and the third, traditional projects such as ASUs and SMRs.
Good morning, Kevin. Thank you for your question. I see that We are focused on gas education, cabin capture and hydrogen. With all of these smaller plants and generators and all of that to grow with the overall economy in the world. Then in terms of the other three opportunities in terms of capital allocation, I don't want to kind of In some of the more developed core gasification in, for example, Europe or the U.
S, but there will be coal gasification projects In India and Indonesia and the other and China, in carbon capture, it is going to require a lot of capital and that will be very, very prevalent I foresee in Europe and in the United States specifically. And then obviously green hydrogen, we are all green hydrogen And Blue Origin, it will be all over the world. So I would have a balance with them. But since these are all mega projects For a year or 2, one of them might be higher than the other one. But in the course of 5 to 10 years, if you take all of the capital allocation, I think that most of the capital will go to carbon capture, then hydrogen and then gasification.
Thank you for that.
Yes, thank you. And secondly, if I may, Seifi, you mentioned that Some of your hydrogen customers are reconfiguring to produce renewable fuels. How much of that Do you expect to occur and what is the net benefit? It sounds like the reconfigured refineries would consume a lot more hydrogen. So just trying to get a sense of what that benefit could be to you over time?
The benefit could actually be very positive. The only caveat over here is that there is a lot of talk about this thing. There is a lot of interest in it. But I'm a conservative person. I want to wait and see how many of these projects actually do materialize.
But As I think Scott mentioned when he was talking about the Americas, the intensity of hydrogen requirement Per bearer of renewable diesel versus per bearer of ordinary diesel is almost 4 to 5 times. So if these refineries In a major way, compared to renewable, these are the demand for hydrogen will actually go up. But again, I just don't want to get ahead of Because there is a lot of talk, but we'll see how many of these projects will actually materialize.
Thank you so much.
Thank you very much, Kevin.
And next we'll move to David Begleiter with Deutsche Bank.
Thank you. Good morning.
Good morning, David. How are you? I'm well. Thank you. Seifi, just on Jazan, once the financing is complete, should The projects start up immediately?
And also, has your expected return on the project come down during this period of discussion and negotiation?
You're talking about Jazana? Yes. Okay. First of all, If I may answer the second part of your question, we had given some general guidance about the profitability of this project To the investors almost 2 years ago, during the period of the negotiations and so on, that expectation is still correct. Secondly, the first part of your question, once we close on this thing, the day we close, The next day, we will get our fixed fee, and therefore, it will be accretive to our EPS.
Very good. And just on Lou Anne, do you expect the same level of earnings post this current restart as you had prior to the project Going down back, I think, last June?
No. I think we explained to you that when we renegotiated the contract, We renegotiated that we have a structure for if the plant is down, but we get paid. We have a structure for when the plant is up and running for a period of time and then we get back to form Payment for the original contract. So there's kind of 3 levels.
Thank you.
Thank you, David.
And we'll move on to Vincent Andrews with Morgan Stanley.
Thank you and good morning. I'm very well. Thank you. I hope the same with you. You mentioned that
the purchase of the other 50%
of the Chinese JV that you didn't own, you made it sound like that was going to be sort of a trigger presented that therefore maybe allows you to do some other projects.
Because then we don't have to consult with somebody else In terms of what we do and what we don't do. Because when you are fifty-fifty percent joint venture, you have to have Consensus when you are going through different projects in different parts of the world and different people have different preferences. But when it is 100% owned, then we can decide on our own. Okay?
And if I could also ask you on the guidance for the back half of the year, maybe specific to the Americas, Are you assuming any meaningful improvement for your refinery customers and or for helium volumes?
Not particularly, no, for neither one. We are assuming that things will be Approximately, there might be some improvement, but that is not the driver for their forecast. We are taking a conservative approach there. Very good. Thank you very much.
Thank you.
And we'll move on to Jeff Zekauskas with JPMorgan.
Hi, good morning.
Good morning, Jeff.
Good. I was hoping you could clarify some of the dynamics in the Americas business. There was some kind of penalty from the storm and there was some order of magnitude benefit from the acquisitions that you've made. If you look at the volume exclusive of the storm and the acquisitions, what might it have been during the quarter?
The volumes would have been down?
Yes, I know that.
You are referring to our hydrogen business, Jeff, right?
No, I'm referring to the consolidated volumes in the Americas. That is what would they have been exclusive of acquisitions and exclusive of the store?
I think our merchant business, I mean, our locksmith business would have been kind of flat And then our hydrogen business would have been lower because, as you know, we have some refineries, like To Shell Refineries, which was a customer shutdown. And then out of the 100% volume, some of the volume on the pipeline It's not contracted long term. It is a spot sale. And the refineries, considering their level of operation being low, they had cut back on their spot sales. So the hydrogen volumes would have been lower, especially on the golf course.
The equity income in that division was $32,000,000 in the quarter and maybe it was up $10,000,000 year over year and $10,000,000 sequentially. Why was the equity income so high? And is that an unusual number?
The equity income is so high, Jeff, because I explained that last Because our equity affiliate in Americas is Mexico. And Mexico, unfortunately, because of COVID, The demand for oxygen was phenomenal, just the way it is right now in India and the way it is for in Brazil. Quite frankly, that is why some of our competitors are having very good results because of that. It's a very unfortunate situation. But I mentioned last quarter that if you are the medical business right now, Mexico, Brazil, India will make you a lot of money.
And we saw that benefit in our joint venture in Mexico.
Okay, good. Thank you so much.
Thank you.
And we'll move on to Bob Koort with Goldman Sachs.
Yes, good morning. It's Mike Harris actually sitting in for Bob. Hi Mike. If we go to your favorite slide number 11. Notice that the EBITDA margins appear to have declined like 3 consecutive quarters.
And you seem to be gaining price. So just Trying to reconcile how you're gaining price, losing margin. So how should I think about the margin going forward?
Well, I
think you should you are on the very right track and let's look at the causes. Number 1, the margin comes down when Luan is shut down because Luan is a very, very high margin business. So that Luan by itself has Significant effect when it is down. The second thing is that when natural gas prices go up, The customer reimburses us for that, but it shows us higher sales, but it doesn't affect the profit line. So if natural gas, every dollar of natural gas going up affects our sales by $350,000,000 immediately.
So if natural gas prices continue to go up, then our margins Air Products. For our hydrogen business looks lower because the profit doesn't change, but the sales go up. So those are the two effects that you need to think about. So as we go forward, if natural gas prices I come back to the levels they were and if Luan starts up, then you are going to see our margins go up. So I still feel very good about our margin.
We haven't seen a fundamental change in the profitability of our business.
Okay. Thanks for that color. And just as a follow-up. Looking at Lou Anne, When we think about commissioning, is that a process that you think about in terms of weeks or months? And once that facility is back online, Is there some type of break in period that they have to run at reduced rates?
Or can they ramp that facility up fairly quick?
Well, the thing is that with a plan that has been shut down and you start it up, you never know which pump works, which pump doesn't work. But As I mentioned in my comments, as of this morning, we do have one of the gasifiers online trying their product to our customers. And I'm hoping that the other 3 will come on stream in the next few months. We don't want to be too specific because We can start up and one pump can have a failure and then you have to recommission or change the pump and all of that. But Overall, it's not going to take years.
It's going to be a relatively short period of time.
Markets.
Yes. Thanks for taking my question. Hey, Safie.
Good morning, John.
How are you doing today?
Good, good. Yes. And hopefully you are as well. So I guess a little bit of a follow-up on Lou Anne. This year has been a lumpy year with it kind of not getting paid full out like the contract being rejiggered a little bit while it was down.
I guess is there a
way to think about How the total payout in fiscal 2021 versus fiscal 2022 will look out in terms of overall earnings contribution?
Fiscal 2021, which is the one we are in right now versus fiscal 2022, right? Yes, that's right. But this year, I mean, we haven't made a lot of money in Luwara because the plant has been shut down for 6 months and now we are Starting it up. So I think that fiscal year 2022 will be significantly better than 2021 barring any plant breakdown or anything.
Okay. So it should be back
to kind of the $0.25 contribution or something in that range. Is that the right way to think about
I don't want to confirm that because it depends on how much we run and all of that. But John, the biggest issue over here Was the fact that people thought that gasification is there to plan to be shut down forever. That We always said that's not the case. We always said that this is due to change in management and so on, and that has proven to be correct. So the fact is that the customer wants the plants running, the plant is viable, it is going to produce product.
And now how much is our Profitability in 2022, I'm sure it's better than 2021, but it also depends on how well we run the plant and how many times we can keep the gas supplies on the stream and all of that. So I don't want to give you a definite prediction. Obviously, we will give you a much more accurate prediction in October when we give you
Got it. Fair enough. And then maybe just as a follow-up, You spoke to merchant business starting to pick up and seeing signs of the macro kind of having some pull there. Can you speak to what that means For bidding activity around either the gasification side or some of the traditional on-site business, are you starting to see increases in bidding activity or Demand and interest from kind of the larger scale customers at this point? And how should we think about that in terms of filling up the backlog and contract announcement as we look through the rest of
John, the demand for those kind of projects never slowed down during the COVID. It continues to be very strong. It continues to be very strong and we are optimistic about very optimistic About the deployment targets, Scott mentioned that we have almost 95% delivered 2 years in advance and we are very bullish on that. We see a lot of very large projects that we are working on, and I think those will bear fruit as we go forward.
And we'll move on to Mike Harrison with Seaport Global Securities.
Hi, good morning.
Good morning, Mike. How are you?
Doing well. Thanks, Seifi. Wanted to ask you about the Asia business. It sounds like you saw a strong recovery Following the typical Lunar New Year shutdowns, but I believe you said that markets are recovering at different rates or maybe that the recovery has been a little bit So can you give us a little bit more color on what you saw in Asia coming out of Lunar New Year?
That's a very good question actually, Itmann. What I said was that we saw a very strong recovery in China and other places after the Lunar New Year. The thing that I said is that the recovery is not even across all product lines. That specifically means that our Roxlyn business is coming on strong, our argon business is coming strong, But that is not necessarily true about our helium business in that part of the board. And that is because some of our Because we have the as you know, we are holding very firm
All right. And then within the electronics market, it seems like that is set up to see very strong demand over the next couple of years. But as I look at the on-site facilities that you're going to be starting up in the coming years, Really just looks like the Samsung plant in Korea. Can you talk about your activity within the electronics market And whether there are some additional on-site opportunities that maybe aren't listed there on that slide or That you plan to book over the coming months or years?
The demand for electronics and the electronics on-site business for high purity nitrogen is very strong. We are participating in that. We have won a lot of contracts. Some of that we cannot announce because the customer doesn't want to announce it Because they want to keep their clients kind of confidential, but we are not losing any market share in that area. We have their products, which are actually very competitive, and we remain very bullish in that area.
All right. Thank you very much. Thank you.
And next we'll hear from Mike Sison with Wells Fargo.
Hey guys, good morning.
Hi, good morning. How are you?
Good. I was looking at your capital deployment scorecard going back a couple of years and Yes, that remaining to be spent is just goes up every year, which is good. It shows that you're growing the business obviously. But when do you think We start to see that come down, meaning that you have more meaningful projects coming in and do you envision that it actually gets to 0 at some point?
You're talking about our capital expenditure?
Yes, the remaining to be spent line item.
That is going to grow my friend. It's not going to come down. We are going to continue to invest heavily for the next 10, 15 years because the opportunities are huge. Our financial capacity is there, and we are not going to be buying shares. We will maintain our dividend and increase it, but we are not going to waste our money buying shares.
We are going to invest in I'll return projects, which there are plenty of them for us. And what we will do is that in a few months, We are going to give you a plan for the next 5 years, the same day that we did in 2018. In 2018, we said between 2018 and 23, we will spend about $15,000,000,000 We are way ahead of that. And in a few months, we will give you a plan for 20 for a 10 year plan 2018 to 2028. Got it.
That's a question. Yes.
Yes, I understand. Just I understand for 2022, I know it's early to give specific guidance, but do you Do you think investors should be adding Jazan and Luan back to their 2022 outlook, particularly as they look to value the company Yes, going forward.
Well, if everything goes fine and we are totally successful in bringing Llan online and We signed all of the final contracts and finished the financing. 2022 will be a good year Because the Jazzan and the lion will be there compared to this year. Got it. Thank you. That's not a bad assumption.
Thank you.
We'll move on to Duffy Fischer with Barclays.
Yes. Good morning, fellows.
Good morning.
Just a question. Last weekend, Wall Street Journal had an article talking about delays at the Greater Neom project, and I get Your project can be separate from the city itself. But just wanted to see if you guys are seeing any of those types of delays as you're moving forward, Kind of where are you with purchasing long lead time equipment? And when will we start to see that capital from Neom actually rolling through your cash
1st of all, I don't want to make any comment about the Pierre Nium project because I don't know enough about it, and that's not something that we are involved in. The one thing that I can confirm is that our project Has nothing to do with the city. Whether the city is delayed or built or not built, it doesn't affect our project at all. We are self contained. We are going to prepare desalinating our own water.
We are going to produce our own power. And So we are totally self contained. So that any kind of any issues with the city will not affect our project. In terms of our project, we have placed orders for some of the long term items, and we are making progress. And in terms of cash flow, it is already we are spending money on that project right now.
Great. Thanks. And then maybe if we could jump to Helium. I know there's Notionally, some new capacity coming online, but it seems like demand for helium is picking up strongly. Can you walk us through how you would view kind of the next 1, 2, 3 years Just supply demand in the helium market globally?
But on that one, I think You know the number of sources of helium and all of that. The biggest question about supply demand in helium It's not a secret. It is what is going to happen to the project that Russia is doing, the so called Amur project. That project will produce a lot of helium when it is online. The issue is when is it going to be online?
Is it going to be End of 2021, 2022, 2023, at what rate that is in Siberia and all of that. So I don't want to make any predictions on that, but that is the only other major project that is underway. Great. Thank you, guys. Thank you.
And next we'll hear from John Roberts with UBS.
Thank you. You mentioned some temporary hydrogen headwinds as those refiners reconfigure the biodiesel. Do the hydrogen contracts allow for suspension of volume If they have extended downtime to reconfigure?
Good morning, John. No, it does not allow for that. Our contracts are take or pay. So while people contemplate different things, that doesn't affect our contracts, John.
Okay. And then could you give us a very short quick update on the other 3 gasification projects, Jutai, Debang and Indonesia?
They are on schedule, on plan. Okay, that's good. Thank you. Thank you.
We'll move on to Steve Byrne with Bank of America.
Yes, thank you. Safie, I found your response to Kevin's capital allocation question interesting where You highlighted carbon recapture as being potentially the largest bucket. And I wanted to just drill into that a little bit. Would you say that is potentially the largest because of the interest in it as from customers that See it as a way to meet some carbon reduction targets in a relatively inexpensive way? Or would you say that you have something to bring that's really somewhat differentiated in the Capacity of either your technology or your access to these CO2 rich streams Coming out of the SMRs that you could target and just anything that you might have To add on that, with perspective of any limitations to where you can sequester the CO2.
Well, thank you for the question and also thank you for providing the answer because you kind of Answer the question by saying that we are in a unique position. We are operating the largest carbon capture facility in the world right now, operational. We have been running it for several years. We captured 1,000,000 ton a year of CO2 from the SMRs that we have in Port Arthur. So we know how to do this thing.
Secondly is that we have many, many SMRs that put out CO2. Therefore, The CO2 is there that can be captured. The other thing is the fact that there is significant focus on this Because by capturing CO2, you can make blue hydrogen. And therefore, the transition to the hydrogen economy can happen Very quickly using hydrocarbons and a lot of people are very interested in that. People who make hydrocarbons are very interested in Finding a way to produce hydrogen, capture the carbon and say here is hydrogen, which is almost It's not as good as green hydrogen, but it is hydrogen with significantly reduced carbon footprint.
So that is why I am I think that there will be a lot of big investments in that area, and we are very well positioned With our core competency, with the plans that we have around the world to be a major player on that and we intend to be a major player on that, Our goal is very simple. Gas Education, we have put ourselves in a position that we are the major The leading company for gasification. Any gasification project in the project in the world, Probably Air Products will do that. We plan to be the leader in blue hydrogen, which means CO2 capture And we plan to be the leader in green hydrogen, which you already are with the plant that we are building in
And Taffy, just one on your outlook for the Fuel cell buses, we talked about this tour of U. S. Cities and I just wanted to get your view on whether that opportunity It is potentially more attractive in the U. S. Because the cities can start with gray hydrogen that's Relatively less expensive than if it were sourced from natural gas in Europe at 3 times the price.
Is it The attraction starting gray
or do
you see longer term the fuel cell buses In regions like Europe is potentially larger in that green hydrogen could be more comparably cost And priced relative to gray.
But you're raising an excellent question. The issue is that In terms of the economics, you would expect that U. S. Will be ahead of Europe because of the cheap natural gas that you can convert and all of that. That you can capture the carbon and have blue hydrogen and all of that.
But then there is the fundamental element of the government interest. And what we are finding out is that the governments in Europe are a lot more committed to green hydrogen. They are really committed to green hydrogen, And as a result, I think our hydrogen business, our green hydrogen business, The biggest potential will be in Europe rather than in the U. S. Or any other part of the world.
That's the way it is developing right now. But things can change, government policies can change. I mean, if in the United States, all of the states or at least the majority of the states Adopt the LCFS plan that California has put in place, then you are going to see a boom in terms of hydrogen in the U. S. But I don't know whether that happens or if that happens.
But in Europe, we see that. And then in Japan, they are going with the idea of We're taking blue ammonia and putting it in their power plants to reduce their carbon footprint. So there are different parts of the world that are doing different things. But you are delineating is a very logical economic thing. But on top of that, you have to put the layer of where the government pressure is.
And I think for a project like Nuon, the biggest potential market will probably be Europe. Okay. Thank you. Thank you.
And next we'll hear from Marc Bianchi with Cowen.
Thank you. First question relates to the guidance. Just wanted to Confirm how you're handling the COVID impact, the $0.10 to $0.15 that you cited for the past two quarters for the remainder of the year?
We are expecting that the COVID impact would be a little bit less in the U. S. Because of the vaccination And an improvement in Europe because of the vaccination. And then in China and the rest of Asia, that COVID Impact is not that significant anyway. So we do we have kind of considered some improvement because of COVID impact, But still having in mind that there will be some.
Yes. Great. Thanks for that. And then I wanted to follow-up on the carbon capture. It would appear that you responded to the earlier question discussing blue hydrogen, But it would appear there's quite an opportunity for stacking some of these carbon capture credits for renewable diesel and obviously there's a higher hydrogen That's Ed there that you mentioned.
Why aren't we seeing that occur right now? You mentioned there's a lot of talk about projects, but maybe things aren't happening. I'm curious what bottlenecks might exist and if that involves perhaps some takeaway capacity for CO2 that maybe needs to be built by someone else
Well, let me just focus on making sure I understood your question correctly. You're saying how come these renewable diesel projects are not happening faster. I think the main reason is that right now, The only place that it makes sense to sell renewable diesel and still be profitable is in California. So people, I mean, Valero, when they are producing this thing in Texas, they don't sell it in Texas, they sell it in California, because if they sell it in Texas, they lose money because just the cost of the raw material for making renewable diesel is Probably $2.5 $3 a gallon. So right now, everybody is making things To go to California and sell it in California, and therefore people are sitting down and saying how many how much capacity does California have?
Because if you add all of these renewable diesels in 4 or 5 years, 100% of the diesels sold in California will be renewable, then what do you do? So people need to get themselves comfortable that this policy that California has will be picked up by Oregon and Colorado and New York Which I think it will be. But until it is done, I think you're not going to see a significant growth on this thing because people are going to say, Well, how am I going to when am I going to sell it?
And just following on to The other part of the question related to carbon capture opportunity. Is there a bit of a chicken and egg problem there where The infrastructure might not be in place to take the captured carbons wherever it's going to be stored or
sequestered. And how do you see the market sorting that out?
You're very right because then people talk about capturing carbon. So we can capture carbon for you Anywhere there is a plant which puts out CO2 out of an SMR or a chemical unit, we know how to capture that. That's the easy part. The question is that what do you do once you have captured it? You need to have a place to sequester it.
And the biggest question is that where is it possible to Where is it possible that there is enough water space to do that? That is the biggest that is the major question That will come into play in terms of how many of these projects can you do, where can they be done and all of that.
Thank you very much, JP.
Thank you.
We'll move on to Steven Richardson with Evercore Corp. ISI.
Hi, good morning. Just want to come back quickly on Lou Anne, if you might. I just want to confirm what we're hearing this morning, which Is that when you're fully through commissioning and when you're running the 4 gas fires, and I appreciate this product has run at a very, very high utilization rate historically, but Safi, is what you're saying that whenever you hit that run rate, will the contribution be substantially similar from Luen as what it's been historically, meaning There hasn't been any change to the commercial terms or the economics from Air Products perspective.
Well, that is the question I tried to answer before that when we renegotiated or reconsider The arrangements with LuAnne, I don't want to go through all of the details because the customer doesn't Just to disclose that, we said that we have come up with 3 stages. 1 is when the plant is shut down, what did we get? The second thing is that when the plant is up on stream, what do we get for a certain period of time And then we go back to the original contract. So I do not want to represent to you that if we come on stream percent in 2022, we will make as much money, the $0.25 as we did in 2019. It will be less than that.
How much less than that, I cannot disclose with you. But there is a period of time where we have agreed to reduce our fee
Okay. Thank you. Yes, that's clear. Thank you. And one follow-up, Safi, if I may.
I mean, you've been Through obviously a lot of conversations over the last 2 to 3 quarters, both on Jazan and Lu'An and it's clearly taken A lot of the markets focused. I was wondering if you could maybe just talk a little bit about lessons learned about how you'll talk about projects going forward. The way in which you're thinking about products in the backlog and kind of the best way to communicate These variabilities which will come up from time to time with the market and your investors going forward.
Well, the one lesson that I have learned all my life, and it's not just is that you always need to tell the people the truth At the time that you are talking to them. And therefore, maybe we overdid it, maybe it was Could have been handled differently, but I believe you handled the right way. In November of 2020, I was very concerned about Duane and I was very concerned about Jazan and I told the investors. Now I did explain to them, put the caveat in them that some people didn't listen to us that look, I don't think these this is what I know right now, But this doesn't mean it's the end of the world. This doesn't mean that it's the end of gasification.
This doesn't mean that you're not going to do Chezant, Some people took it like that and our stock got hit by $50 But quite honestly, if I had to do it again, I would always Tell the investors what we know at the time that we are talking to you, and we should be transparent. But I think maybe we can do a better job. We can always do a better job. Maybe we can do a better job on putting it in the right context, not to kind of create panic. But one other thing that I'm sure the investors appreciate is that as we go forward with all of these big projects and so on, These kind of things is normal that it happens.
It's just my request to the customers and to the investors is, Please just don't panic. I mean, we will tell you what it is and make a judgment based on the facts rather than Suddenly, other people who have always been saying that gasification doesn't work and then they say, Luan is shut down and they say, look, I told you so. This is it. This is the end of it. Nothing else is going to happen.
These guys are going to the wrong track. But again, as I said, We will always tell you exactly what we know at the time we talk to you. Thank you. Thank you, sir. We are significantly over time.
Can we say this is the last question, please? Yes. Fair enough. Did you have another question?
Now at this time, I will turn the call over to Mr. President.
No other questions. Then that's the right time to end this. Well, I'd just like to again thank everybody for being on our call and listening to our presentation. We sincerely appreciate your interest and we look forward to discussing our results with you again next quarter. And as I said earlier, please stay safe and healthy and all the best.
Take care. Thank you.