Air Products & Chemicals, Inc. Q4 FY2024 earnings call

• Safety: Safety is a top priority. Significant progress has been made in employee lost time injury rate and recordable injury rate since 2014, with the goal of achieving zero accidents and incidents.
• Fourth Quarter Results: Adjusted earnings per share for the fourth quarter was $3.56, at the upper end of the guidance range, up 13% year-over-year. Adjusted EBITDA margin increased 460 basis points and adjusted operating margin increased 350 basis points versus the prior year. The $1.8 billion sale of the LNG business to Honeywell was successfully completed.
• Fiscal Year 2025 Outlook: The ongoing business (excluding the LNG business) is expected to deliver adjusted earnings per share of $12.70 to $13, representing a 6% to 9% improvement over the previous year. The first quarter adjusted earnings per share is expected to be in the range of $2.75 to $2.85, flat to up to 4% when considering the LNG divestiture, with caution regarding economic activity in China.
• Growth Strategy: Consists of two pillars - the core industrial gases business, which is an industry leader, stable, and grows at GDP/industrial production levels, and the clean hydrogen business, which is an extension of the core business, with Air Products being a first mover in clean hydrogen, using the on-site business model for offtake and expecting attractive returns.
• Clean Hydrogen Projects: The NEOM project is 60% complete and on track to be operational at the end of 2026, with approximately 35% of the production contracted on a take-or-pay basis. The Canada Net-Zero Hydrogen Energy Project has 60% of the capacity committed on a long-term take-or-pay contract. The Louisiana Blue Hydrogen project has submitted for permits, is in discussions for offtake and equity partnership. Certain projects like the sustainable aviation fuel project in Paramount, California are on hold, and the proposed $4.5 billion joint venture to produce green hydrogen in Northern Texas was stopped.

Americas: Overall pricing was 3% higher, volume was flat. Adjusted EBITDA increased 11% and adjusted EBITDA margin improved over 650 basis points, mainly due to strong pricing, favorable mix, onetime asset sale, higher hydrogen demand, and lower energy cost pass-through. Asia: Volume was up 7% driven by on-site business, including new assets. Adjusted EBITDA increased 21% and adjusted EBITDA margin improved almost 500 basis points, primarily due to favorable on-site volumes and costs. Europe: Price was 2% higher with broad-based improvement, volume was flat as a new asset in Uzbekistan offset weaker merchant demand. Adjusted EBITDA improved 17% and adjusted EBITDA margin increased nearly 500 basis points, mainly due to improved price. Middle East and India: Lower merchant volume and unfavorable costs negatively impacted sales and adjusted EBITDA. Corporate and other: Sales and profit were lower this quarter, primarily due to lower sales and higher cost estimates related to equipment sale. Revenue contribution in absolute terms wasn't explicitly stated beyond the described performance changes for each segment.

• Fiscal Year 2025: The ongoing business (excluding the LNG business) is expected to deliver adjusted earnings per share of $12.70 to $13, showing a 6% to 9% improvement over the previous year.
• First Quarter 2025: Adjusted earnings per share is expected to be in the range of $2.75 to $2.85, flat to up to 4% considering the LNG divestiture, with caution due to concerns about economic activity in China.
• Long-Term: Air Products expects to continue achieving a 10% annual growth rate in adjusted earnings per share, with clean hydrogen projects expected to achieve higher returns than the core industrial gases business.

• Economic Uncertainty: Concerns about economic activity in China impact the first quarter guidance as growth is not included in the forecast.
• Permitting Challenges: The World Energy project's permits were challenged by environmentalists, causing delays.
• Project Execution Risks: Challenges in project financing, offtake negotiations, and ensuring the successful execution of clean hydrogen projects while meeting internal return targets.

Q: Good morning, Seifi. Maybe I can start with something on the more immediate term. You've got some growth despite a difficult environment, looking out to 2025 versus 2024, I guess. Can you help us to kind of basket that a bit? How much comes from price? How much comes from some of the new projects that you've been gradually ramping through '24, and how much comes from core growth?

A: Good morning, John. For fiscal 2025, the overall price increase is expected to be similar to last year, about 1% to 2%. Volume growth is adjusted to expected GDP and industrial production growth for different regions. There are not too many significant large projects coming on stream, but smaller projects contribute. The first quarter is very conservative due to immediate weakness in China.

Q: Thanks very much. I think that there are two prominent activists that seem to be involved in your products, and one of them published a large slide deck, maybe generally speaking, all about the de risking of various projects. When you listen or look at the activist approach to Air Products, how do you reflect on it? Is it something that leads you to change your behavior in any way or not change your behavior? How do you assess the different new owners and Air Products and their ideas about the company?

A: Jeff, thank you for your question. Air Products has many investors, and all investors' views are respected. Suggestions from investors are consistent, focusing on the core industrial gases business and responsible investment in clean hydrogen. All shareholders' views are taken seriously and considered, and actions are taken if necessary.

Q: Hi, good morning. I wanted to, with the LNG out of the business, what should we expect in terms of the corporate line for 2025? I know you've taken significant productivity actions. So what might be the offsets from cost reduction on the corporate line?

A: Melissa: LNG is about a 4% contributor, resulting in a about 4% headwind going into FY 2025. Seifi: During 2025, productivity actions will be taken, and it is hoped that strong economic activity in the US will continue, and there are opportunities in Europe for on-site businesses to perform better than last year.

Q: Hi, good morning. I wanted to ask a question on the NEOM offtake. There's just been some chatter I guess more recently around some finer details around that contract. So you highlighted take or pay. You mentioned you're comfortable with the returns. I guess some of the questions have been if there's any qualifying events, be it regulatory or credits, that need to be put in place before that contract goes into effect or whether you would say what you have today is more ironclad. There's nothing that needs to happen for that to hit your return targets?

A: Sean: We are generally comfortable with that contract. It is consistent with similar offtake agreements, and we are fully confident that it will be fully operational consistent with the terms of the agreement.

Q: Yes, good morning. First, Melissa -- good morning Seifi. You made a comment, Melissa, about a onetime asset sale benefit in America. Did I hear that correctly? And just how much of an impact was that?

A: Melissa: It was not material to the overall results. It is a normal cancellation of a project where the asset is then sold, which is very immaterial to the overall results and part of the normal course of quarter-to-quarter business.

Q: Hello, good morning and thank you for taking my questions. I have two please. Have first is on the Middle East segment. Jazan, I think, was a bit shy -- the whole Middle East and India line was a little bit shy of consensus expectations. And I think this is the second time this has happened, has anything happened at Jazan that makes that business less profitable in 2024 than in previous years, has anything shifted in the contract? Is there anything else within EBITDA on line for Middle East and India that would explain that? And my second question is more philosophical. The company has costed up significantly with a lot of personnel to in-house expertise across the hydrogen chain. Carbon capture probably some terminal and transport as well. If I take the target for net cash flow positive by 2027. To me, that implies, okay, we do Neon Louisiana, but we don't necessarily do any other projects in the meantime in a big way. How is it going to be able to continue to use the expertise of all of these people? Or are they still focused on those two projects?

A: Seifi: It is not a correct assumption that we are doing 100% of what we are doing right now about NEOM and Louisiana in-house. We are not experts in carbon sequestration and will get experts to engineer that. We are using large engineering firms for detailed engineering. Melissa: In the Middle East and India segment, the decline is due to lower merchant demand and slightly down pricing in the United Arab Emirates, but the Jazan joint venture is performing as expected.