Air Products and Chemicals, Inc. (APD) Earnings

Management highlights

### Core Third Quarter Financial Performance - Reported a 9% year-over-year increase in total operating income, with an operating margin of 25.6% (up from the prior year), driven by volume and price improvements partially offset by higher costs. - Earnings per share (EPS) came in at $3.47, up 12% year-over-year, beating the previous guidance range due to better-than-expected volume and higher contributions from equity affiliates. - Return on capital (ROC) reached 11.7%, up year-over-year and improving sequentially. - Helium created a 2% headwind for the quarter, which was better than the previously guided 3% headwind, driven by improved volume and pricing for Asian electronics customers. - $75 million in year-to-date savings have been realized from the ongoing company-wide headcount reduction plan. ### Key 2026 Strategic Priorities Progress - **Earnings Growth**: Year-to-date EPS is up 14% year-over-year, driven by volume growth from new assets, pricing actions, and ongoing productivity improvements. - **Large Project Portfolio Optimization**: The company exited the Louisiana project, Casa Grande (Arizona) project, and other smaller clean energy distribution projects, recording a $2.9 billion pre-tax charge this quarter. The firm is currently working to redeploy industrial gas assets and sell the Louisiana project's ammonia production assets. The NEOM Green Hydrogen (NGHC) green ammonia project in Saudi Arabia has finalized a marketing and distribution agreement with IARA. - **Capital Discipline**: Cancellation of the large canceled projects allows for an overall reduction in capital expenditures. The company will maintain focus on investing in its backlog of traditional industrial gas projects, especially for the electronics end market, while continuing its track record of returning cash to shareholders. Year-to-date 2026, $1.2 billion has been returned to shareholders via dividends. ### Backlog and Capital Outlook Update - The company's backlog only includes projects that have reached Final Investment Decision (FID) after a robust review to confirm risk-adjusted returns, and mostly consists of long-term contracted projects. - Current traditional industrial gas backlog totals approximately $3 billion, with over $1.5 billion in new project wins won in the last six months, the majority of which serve electronics customers. - Going forward, the company targets ~$1.5 billion in annual capital investment for traditional industrial gas (air separation and hydrogen) projects. Including spending on remaining underperforming committed projects, total annual capital expenditures are expected to land between $2 billion and $2.5 billion, which supports ongoing growth and maintenance.

Guidance

- Full fiscal year 2026 EPS guidance is raised to $13.39 to $13.49, representing 11% to 12% year-over-year growth, up from the prior lower growth target. - Fourth quarter 2026 EPS is expected to be in the range of $3.55 to $3.65, which is 5% to 8% year-over-year growth, driven by contributions from new assets, pricing actions, and productivity gains. Helium is still expected to be a headwind due to ongoing lower pricing, even with volume and price improvements in Asia. - Full fiscal year 2026 capital expenditures guidance is reduced to ~$3.5 billion, reflecting payment timing adjustments, lower expected maintenance spending, and the cancellation of exited projects. - The NEOM green ammonia project is not expected to have a material financial impact (either positive or negative) on fiscal 2027 earnings. - Management forecasts line of sight to initiating a share buyback program towards the end of fiscal 2027 or the beginning of fiscal 2028, dependent on capital deployment for high-return projects.

Segment performance

1. Americas: Operating income improved 6% year-over-year. Growth was driven by higher on-site volume from contributions from the HICO existing facility and a new Gulf Coast hydrogen pipeline asset, as well as improved pricing. These gains were partially offset by higher costs including fixed cost inflation, distribution costs, and dislocation costs. Revenue contribution details were not explicitly provided in the call. 2. Asia: Operating income grew 18% year-over-year. Growth was driven by benefits from gasification assets held for sale, new assets coming on stream, and improved helium performance. Revenue contribution details were not explicitly provided. 3. Europe: Operating income increased 2% year-over-year. Pricing actions more than offset higher power costs, and a 2% currency tailwind further offset higher fixed cost inflation. Revenue contribution details were not explicitly provided. 4. Middle East and India: Operating income was relatively flat year-over-year, but income from equity affiliates in Saudi Arabian joint ventures increased. Revenue contribution details were not explicitly provided. 5. Corporate and Other: Operating results improved from ongoing corporate SG&A reduction productivity efforts, partially offset by lower equipment sales activity. Revenue contribution details were not explicitly provided.

Risks & headwinds

- Macroeconomic uncertainty persists globally, particularly in Europe and parts of Asia (including China), where weak industrial demand and overcapacity create headwinds for non-electronics merchant volume growth. - The NEOM green ammonia project is a first-of-a-kind facility using new technologies, so commissioning to full production capacity will take an extended period with uncertain timing. - Helium supply remains volatile, with limited supply from Qatar amid regional logistics disruptions, though the company's storage caverns allow it to buffer this impact for multiple quarters. - The company retains price risk for NEOM green ammonia output even after the IARA marketing agreement; only volume risk is eliminated via the agreement. - Ongoing fixed cost inflation continues to push up operating costs across all regions.

Analyst Q&A

• Q: An analyst asked for an update on the Gizan project following a recent site attack, including whether the original annual EPS contribution estimate of $1.35 is still accurate, if any impacts are reflected in Q4 guidance, and if there is third-party insurance coverage for impairment.

  A: Management stated that contractual obligations with the joint venture partner limit public comment, but the original contribution estimate is roughly in the correct ballpark (slightly lower than $1.35). They confirmed no injuries to employees, and do not expect any material financial impact from the event, with more details to come once the joint venture partner comments publicly.

• Q: An analyst asked about the nature of the recent upside in helium performance, any impact from supply issues in Qatar, and the company's mitigation efforts.

  A: The upside came from new long-term helium contracts for electronics projects primarily in Asia and the U.S. Supply out of Qatar has been very limited amid recent regional disruptions, so the company is drawing from its stored helium reserves to meet customer demand. The cavern storage strategy allows the firm to continue serving customers and stabilize the business through supply volatility, and the company has a diversified supply base across multiple regions.

• Q: An analyst asked about the status of monetizing assets from the canceled Louisiana project, including whether the prior estimated $1 billion recovery value still holds, and the expected timeline.

  A: Management noted that all prior recovery estimates are just preliminary. The team is focused on maximizing value by reusing industrial gas equipment (air separation units) in Air Products' own operations, and selling the full 4,000 ton-per-day ammonia unit as an intact asset, which is desirable in the current market. The process will take as much time as needed to hit maximum value, and the company will provide updates as progress is made.

• Q: An analyst asked how the Yara NEOM marketing agreement affects the company's offtake risk, whether it is full or partial hedging.

  A: The agreement eliminates all volume risk for Air Products, which was the key priority. Air Products is obligated to take all ammonia produced by the joint venture, and ammonia cannot be stored indefinitely to shut in production, so Yara's existing global distribution and shipping network solves this risk. Price risk remains with Air Products, and Yara has a variable commission structure that incentivizes them to sell the green ammonia at the highest possible price, aligning their incentives with Air Products'.

• Q: An analyst asked about the pipeline of future electronics projects and if continued incremental wins can be expected over the next 12-18 months.

  A: Most current project opportunities are skewed to electronics, making up roughly two-thirds of the total pipeline, driven by a market super cycle for semiconductor capacity expansion. One large multi-phase project in Taiwan began in 2022, with other large projects (in Korea and Taiwan) secured in the last 12 months, and additional new projects are expected to be announced in the near term. Traditional industrial opportunities (chemicals, steel) are limited mostly to replacement assets, so electronics is the primary source of growth today.