Air Products and Chemicals, Inc.

Good morning and welcome to Air Products and Chemicals' third quarter earnings release call. Today's call is being recorded at the request of Air Products. Please note that the 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.

Thank you, Leanne. Good morning, everyone. Welcome to Air Products' third quarter 2020 earnings results teleconference. This is Simon Moore, Vice President of Investor Relations. I am pleased to be joined today by Sefi Ghasemi, our Chairman, President, and CEO, Scott Krakow, 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 two. In addition, throughout today's discussion, we will refer to various financial measures. Unless we specifically state otherwise, when we refer to earnings per share, EBITDA, EBITDA margin, 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, and return on capital employed. Reconciliations can be found on our website in the relevant earnings release section. Now, I'm pleased to turn the call over to Safey.

Thank you, Simon, and good morning, everyone. As always, we thank you for taking time from your busiest schedule to be on our call today. Before we talk about our result this quarter, please turn to slide number three. As I said last quarter, the true character and leadership of individuals and companies are revealed during times of crisis. And unfortunately, this crisis continues at different levels in different places around the world. Our number one priority has been and will continue to be the safety and well-being of our people. We have provided all the necessary protective equipment and instituted protocols focused on the safety and health of our people. I want to thank our employees for following these procedures and working hard to serve our customers and their challenging conditions. In addition, as we mentioned last quarter, to ensure the peace of mind during this time of highest stress with COVID-19, we have not reduced the staff nor cut everybody's salaries. Our people are doing a great job in keeping all of our 750 plants running around the world. All of our corporate and business functions are running smoothly. We continue to win mega projects around the world and serve our customers and deliver good results despite the significant crisis facing our world. Our robust business model is proving its resilience globally. Our on-site business remains a stadium. In addition, We have maintained our focus on pricing discipline despite the lower volumes, and as you can see, our merchant businesses delivered improved pricing in all of our regions. Our business model supports and enables our strong financial position, and we successfully accessed the debt markets in April to ensure they are ready for our exciting growth opportunities, which there are plenty of. We continue to execute on our growth opportunities, including the $7 billion carbon-free hydrogen project we announced earlier in July, and the $2 billion coal-to-methanol project in Indonesia. We remain confident and optimistic it can successfully deploy a very strong balance sheet and ongoing cash flow to create significant value for our shareholders. As Scott will explain in more detail later, we set a goal for ourselves in 2018 to commit $15 billion of growth projects by end of 2022. We are actually two and a half years ahead of the schedule And as of now, we have already committed almost $16 billion. A great job for our business development team around the world. And while we are proud of succeeding our goal, we still have substantial capacity and projects for additional projects to continue our growth path. Please now turn to slide number four. I'm pleased that our team stayed focused on working safely throughout these challenging operating conditions. Look at the slide number five, which is the goal we set for ourselves in 2014. I am proud to say that today Air Products is the safest and most profitable industrial gas company in the world. The slide number six, We have showed you many times before and we continue to believe in our management philosophy that cash is king and that prudent capital allocation is one of the most important jobs of any CEO. Slide number seven lays out our five-point strategy moving forward with an emphasis on our higher purpose as a company. Now please turn to slide number eight. There you can see the exciting, innovative carbon-free hydrogen project we announced a few weeks ago. This is a unique world-class project to produce carbon-free hydrogen, zero carbon, zero footprint carbon hydrogen for the global markets. Air Products, Neom, and Aqua Power will invest about $5 billion to produce green ammonia from wind and solar power in Neom, Saudi Arabia. Air Products will take all the green ammonia and invest an additional $2 billion to develop the infrastructure to convert the ammonia to carbon-free hydrogen and deliver it to bus and truck depots around the world. Therefore, air products overall investment in the total project will be about 3.7 billion, and we expect the financial returns to exceed our previous commitments. This project is a true game changer for the carbon-free hydrogen market, which, as we have always said, we expect to grow significantly in the next decade, and we are positioning air products to continue to be the leader in the hydrogen space. On slide number nine, you can see another great project, our $2 billion investment in Indonesia to gasify coal to methanol. Air products will take coal from Bakri and Ithaca and provide methanol under a long-term on-site business model. Once again, This demonstrates the expansion of our on-site business model, enabling us to offer customers a one-stop and complete solution, providing the products they need from the feedstocks that they have. The fundamental drivers of this project are the national security and energy independence policies of the government of Indonesia, and we expect to do more projects like this in Indonesia. Please turn to slide number 10, our gasification strategy. All the projects you see here continue to move forward. There are fundamental drivers creating significant growth opportunities in gasification. Countries and large companies around the world continue to focus on gasification to utilize the abundant natural resources they have to produce chemicals, transportation fuels, and energy in a sustainable manner. We continue to make progress on our important $12 billion Gazan gasification project for Saudi Aramco. Despite the current challenging times, I am very happy to report today that we have now launched the $7 billion financing required for this project, and we expect to close the transaction in October of 2020. Scott will have some more to say about this thing in his portion. As I'm sure the investors and analysts will notice, we have removed the YK project from our project list and our backlog. This was a large coal gasification project in China. We have always told investors over the past two years that we will only do this project if we can get formal allocation of coal reserves dedicated entirely to this specific project. We have now come to the conclusion that this might not happen in the near future. It might happen later, but it's not happening in the near future. And as a result, we are removing this project from our backlog. If we ever get the allocation, then we can add it to our backlog. But right now, it is not appropriate to count on it. Now, please, to slide number 11. Thanks to the hard work of our team and the strength of our business model, our EBITDA margin remained over 40%, which is up 1,700 basis points from early 2014. Now, I would like to turn the call over to Mr. Scott Krakow, our Executive Vice President and Chief Financial Officer, to provide a financial overview. Scott?

Thank you, Sethi. As he stated earlier, our company's financial position is very strong. Our cash flow generation is very stable, supported by our industry leading onsite business, which represents more than half of our sales. We were able to complete a highly successful $5 billion debt offering, which was enthusiastically received by investors and enables us to deploy significant capital into high-return projects. Please turn to slide 12, where you can see a summary of our April issuance of $3.8 billion and 1 billion euros of fixed-rate debt, raising about $5 billion of cash in total. We are committed to manage our debt balance to maintain our target A2 rating while continuing to pursue our capital deployment strategy. We plan to use this cash to repay about $1 billion of debt maturing between now and the end of 2021, and to fund the project, as well as our other exciting growth project opportunities. We have announced several strategic investments this quarter. and we firmly believe that investing in high-return projects will create more shareholder value than share buybacks. We are committed to rewarding our investors by increasing the dividend and growing the company by deploying capital. As shown in slide 13, Air Products has delivered 38 consecutive years of dividend increase, through many periods of challenging economic conditions. Now, please turn to slide 14 for a summary of our third quarter results. Our teams around the world have worked very hard managing through this crisis. We are encouraged to see that our businesses have been resilient under these challenging conditions. I would like to thank our team for their focus on health safety, and serving our customers reliably. A job very well done. Despite the unprecedented disruption caused by COVID-19, our adjusted EBITDA of $880 million, closely matched prior year and last quarter, supported by the stability of our businesses and the positive actions taken during this time, including price increases, cost management, LNG project execution, and acquisitions. We delivered price improvement in all three regions. Overall price was up 2%, the 12th consecutive quarter of year-over-year price increase, and also increased 1% sequentially. For the quarter, higher price nearly offset lower volumes. The 7% decline in sales was mainly the result of 4% lower energy pass-through and 2% unfavorable currencies, primarily the Chinese RMB, the Chilean peso, Korean won, and the euro. Volume was unfavorable 3% as new plants, increased LNG activities, and acquired assets only partially offset the negative impact due to COVID-19 and the volume impact from planned maintenance outages. COVID-19 reduced overall sales by about 9% and lowered merchant volume about 14%, primarily in Americas and Europe. EBITDA margin reached 42.7%, the fifth consecutive quarter exceeding 40%. and up 260 basis points compared to prior year, and 240 basis points higher than last quarter. About 140 basis points of the improvement versus prior year was from lower energy pass through, with the rest primarily driven by higher price and lower costs. COVID-19 negatively impacted EPS by about 35 to 40 cents. EPS is down 7%, despite consistent EBITDA due to higher depreciation on new plants, including the PDF hydrogen plants, additional interest expense from the new debt issuance, and higher tax rates. ROCE of 12.4% is down 30 basis points from prior year, negatively impacted by about 80 basis points from the step up in the denominator from the additional $5 billion of debt. Now, please turn to slide 15. Our third quarter adjusted EPS of $2.01 was down 16 cents per share, or 7%, despite the negative 35 to 40 cent impact from COVID-19. Volume, price, and cost together were down by a modest $0.05 despite the negative COVID-19 impact. Costs contributed $0.04, primarily due to lower travel and reduced maintenance activities. We are pleased with the overall positive cost this quarter, even as we continue to invest in resources for future growth. Currency and foreign exchange was $0.05 unfavorable, primarily due to the Chinese RMD, trillion peso, Korean won, and the euro. Equity affiliate income was down two cents due to COVID-19. The effective tax rate was 19.3% for the quarter of 70 basis points over last year and had a negative two cent impact. We continue to expect an effective tax rate of 20 to 21% in fiscal year 2020. The additional two cent reduction in other is primarily due to the higher interest expense associated with the additional $5 billion of debt, partially offset by lower pension costs. Now, please turn to slide 16. We continue to generate strong operational cash flow. As I mentioned, our EBITDA has held firm despite COVID-19 global pandemic, again, demonstrating the quality of our business model. Over the last 12 months, we generated about $2.7 billion or about $12 per share of distributable cash flow. From this distributable cash flow, we paid almost 40% or over $1 billion as dividends to our shareholders and still have about $1.6 billion 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. Now, please turn to slide 17. As I'm sure you will all remember, in 2018, we said we saw significant potential for high value creating capital deployment. In fact, we communicated a five-year target of committing $15 billion of new investments by the end of 2022. I am pleased to say that today, after less than three years, we have already been able to commit nearly $16 billion, exceeding our original goal more than two years ahead of schedule. We certainly took a significant step up this quarter, despite removing Yang Kuang, driven by the large Saudi Arabia and Indonesia projects. Slide number 18 provides additional details on the significant progress we made on our capital deployment this quarter. As you can see, we expect almost $18 billion of investment capacity available over the five-year period from FY 2018 through FY2022. Our total capacity is expected to continue to grow as we increase EBITDA. The $18 billion includes over $9 billion of cash and additional debt capacity available today, almost $4 billion of investable cash flow between now and the end of FY22, and almost $5 billion already spent. We will continue to focus on managing our debt balance to maintain our current targeted AA2 rating. As Stacey said, we continue to sign new projects. So, our total project and M&A commitments have significantly increased to about $12.5 billion with about $11 billion remaining to spend on them. So, you can see, we have already spent almost 30% and already committed about 90% of our total available capacity. But to be clear, we still have plenty of capacity available to deploy in high-return projects. And some of this commitment spending will occur after 2022. And our capacity will continue to increase as EBITDA increases. Now, to begin the review of our business segment results, I'll turn the call back over to Seiji.

Thank you very much, Scott. I am very pleased to say that our teams have done an exceptional job proactively responding to the current crisis. All three regions delivered strong pricing results and higher EBITDA margins this quarter. In addition, Our costs are under control, and we also brought new projects on the stream and acquired assets which have added to our results. Now please turn to slide number 19, our Asia results. Our volumes in the third quarter were down mainly due to some negative impact from COVID-19, and planned maintenance shutdowns in two of our large facilities in China. Our team in Asia has stayed totally focused and disciplined on pricing like the rest of the regions. Our merchant pricing in this region was up 4% in the quarter versus prior year. I would like to emphasize that this is the 13th consecutive quarter of year-on-year price improvement in this region. Our EBITDA for the region was down 2% versus prior year, primarily due to unfavorable currency. Adjusted EBITDA for the margin of 50% was up 100 basis points over prior year, driven by pricing and favorable costs. Now I would like to turn the call back to Scott to discuss America's results.

Thank you, Sethi. Thank you, Sethi. Please turn to slide 20 for a review of our America's results. America's strong pricing trend continued, up 2% versus last year. This is the eighth consecutive quarter of year-on-year improvement. Price was better across most major product lines. Sequentially, price was up but rounded to zero. COVID-19 negatively impacted sales by approximately 8%, while lower energy pass-through and unfavorable currency reduced sales by another 6% and 2%, respectively. Overall volumes were down 5% as the effect of COVID-19 which reduced merchant volumes by 15%, was partially offset by other growth, including the PBF hydrogen plant asset acquisition. As expected, the on-site business, which accounts for about two-thirds of the region's sales, remained stable. The merchant volumes in June did show some modest improvement. EBITDA of $411 million was flat compared to last year, as the impact of lower volumes was offset by better price, productivity, and lower plan maintenance activities, some of which were delayed into the fourth quarter. EBITDA margin approached 50%, up 550 basis points, with energy pass-through contributing about half of this increase. Now, I would like to turn the call back over to Simon to discuss our other statements. Simon?

Thank you, Scott. Now, please turn to slide 21 for a review of our Europe, Middle East, and Africa region results. Our EMEA business continued to deliver strong price despite the challenging COVID-19-related economic conditions in the region. Price increased 3% with improvement across all major products and subregions. This is the 10th consecutive quarter of year-on-year price improvement. Price was also up sequentially but rounded to zero. Volume was down 7% as the adverse effect of COVID-19 and maintenance outages more than offset positive on-site business. Merchant volumes were down about 20% with weaker demand from packaged gas customers. For the quarter, COVID-19 lowered sales about 13%. Sales were also negatively impacted by 6% from lower energy pass-through and 3% from unfavorable currency. EBITDA of $170 million was down 11% as the weaker volumes and unfavorable currency was only partially offset by strong price. EBITDA margin of nearly 40% improved over 100 basis points as energy pass-through contributed about 200 basis points. Similar to the Americas results, we did see some modest recovery in Europe merchant volumes toward the end of the quarter. Now, please turn to slide 22, global gases, which includes our non-LNG sale of equipment businesses as well as central industrial gas costs. Sales increased due to higher sale of equipment project activities, but profit is lower due to higher project development costs as we continue to invest to support future projects. Please turn to slide 23, corporate, which includes LNG and other businesses, as well as our corporate costs. Sales and profits were higher this quarter driven by LNG project activity, including the Golden Pass and Mozambique LNG projects. Now, to provide some additional thoughts on the future, I'll turn the call back over to Sethi.

Thank you, Samuel. I do not need to tell any of you about the current crisis and its significant impact on the world and global economy. You see it and read about it every day. The COVID-19 recovery is very mixed around the world, with some areas back to normal activity, some slowly recovering, and some, unfortunately, seeing significant community spread and having to implement or reinstate restrictions. They are clearly living in uncertain times, and that makes it very difficult to make any reasonable projections for the future. Therefore, we are not providing any guidance for our fourth quarter performance. But I can and will tell you about what we are seeing so far in the month of July. As of today, the 21st of July, the 52% of our sales that is our on-site business is doing well and we expect this to continue. In Asia, our merchant volumes are at similar levels as we saw in October in quarter three. In Europe, our merchant volumes have been improving and are now down about 10% so far in July versus last year. In the Americas, where we see the greatest uncertainty on the future economic recovery, our merchant volumes are down about 10% so far in July versus last year. As a reminder, we do not have a package gases business in the United States. However, we do expect higher maintenance costs in the fourth quarter as a number of planned outages by our customers that delayed from quarter three. I would also like to add that although we are concerned about the short-term effects of COVID-19 and its impact on the world economy, we do not see any slowdown on the demand for our growth opportunities, the mega projects around the world, hydrogen for mobility, gasification, carbon capture, and all of that. Therefore, I remain continuous, continue to remain very optimistic about prospects for future growth for air products. Now, please turn to slide number 24. Now, more than ever, Our real competitive advantage is the commitment and motivation of the great team we have at Air Products. Our business model and strong financial position will allow us to continue to execute our strategy to create long-term shareholder value. A top priority is the ongoing growth of our dividend also. we are committed to increasing our dividend as we go forward. The projects in our backlog continue as expected, and we continue to win significant projects to create long-term shareholder value. Most importantly, we will continue to protect our people's health and safety and take care of their welfare and their families. Let me end today by thanking our 17,000 employees around the board for their dedication and commitment. The board will drive us forward. We are proud to play a critical role and make a difference to the board during this challenging time and into the future. That is our higher purpose at Air Products. and air products. We all stand together to make a difference. Now, we are pleased to answer your questions.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, please press star 1 to ask a question. And we'll take our first question today from Vincent Andrews with Morgan Stanley.

Thank you, and good morning, everyone, or good afternoon, I guess, almost. Do you want to understand, you know, maybe starting in Europe, the EBITDA percentage decline was a little bit more than in the other regions. Is that just sort of the math of the lower margins in that region versus the other two, or was there a mixed issue or any incremental color you can provide on that?

Good morning, Vincent. It is just the fact that it is a lower margin than the other parts of the wood. I would like to ask Scott, do you have any additional comments on that?

No, nothing more. We did have an outage of one facility, but there's nothing of systemic issues or anything like that. Just as you mentioned, this is a lower margin business overall. Okay, very good. And just as a

There's a lot of conversation about decaptivation opportunities, and I'm just wondering if that's still something that's, you know, front of plate, or the opportunities we all thought were big three months ago maybe have come and gone as the financial markets have recovered.

No, I think those opportunities are still there, Vincent. It's just that some of them It takes a long time for it to happen, but we don't see any slowdown on those. And some of those decapitations are fundamental strategic decisions by some of our customers of divesting of their non-core business. It's not so much driven by COVID or cash flow issues. I mean, Saudi Aramco doesn't have any cash flow issue, but they do want to, you know, gets rid of some of their non-core assets or other companies. So we continue to look at those, and if anything happens, obviously, we'll tell you.

Okay. Very good.

Thanks very much.

Thank you, Vincent. Have a nice day.

And we'll take our next question from Ian Sheehan with SunTrust.

Thank you. So you've exceeded your goal, your prior goal for capital deployment. Do you think that means that you should be more aggressive with the next target? And when might we see that?

Well, thanks for the kind comment. I'll take it as a positive comment. We have always said that, you know, if you do the math and take the projects that we have announced, calculate the EBITDA for them. And then obviously our capacity goes up and so on. You can come up with the fact that their product can invest $30 billion in total. And so we are just going to continue doing what we are doing. And as I promised you last time, next summer, we will give you another five year plan in terms of what we want to do for the, for another five year period, not that we achieved our goal, but, uh, The opportunities are there. They are very significant, and we are not running out of capacity and so on. The math that Scott is doing is very appropriate, but he is only allowed to use our current last two of money. And I'm sure you have done the math. A lot of the investors have done the math, and they say, well, Sethi, you're going to spend $30 billion. And I said, yeah, it's possible. So we continue to be very optimistic. Thank you.

Now, if the U.S. corporate tax rate is raised to 28% after the presidential election, what impact might that have on your effective tax rate?

Or what can you say maybe about any possible earnings impacts you see from changing a tax policy?

Well, you are very familiar with the impact it had when the number went down. So you can just reverse that. And you also need to realize that more than 60% of our business, almost 70% of our business is outside the United States. And therefore, you know, the tax rate in the U.S. does affect our results, but it's not as significant as if you had 100% of our business in the U.S. But you have a very clear reference point. I mean, when it was reduced, you saw how much it benefited us. We were very open about that.

Thanks, Stacey. Thank you.

And our next question comes from Kevin McCarthy with Vertical Research Partners.

Good morning. I think you made a comment that customer plant maintenance activity is likely to have an impact on your earnings in the fiscal fourth quarter. Can you elaborate on that in terms of the size of the impact and which regions you're seeing that activity?

Good morning, Kevin. First of all, that is a comment about Americas. In the U.S., there is some plan. As you know, our maintenance shutdowns are determined by the customers. We can't take our plan down unless they take the plan. Some of the customers decided they were going to do that in the U.S. in the fiscal year 10th quarter, and now they have decided to do it next quarter. So that comment is related to Americas only, and the effect of that is some are always very transparent. We do that, but it is not a material effect.

Thank you for that, Saifi. And then as a second question, I'd be very interested to hear your outlook on China as it relates to potential new projects. Obviously, you've taken YK out of the official budget. for now, you know, at the macro level, it would seem that tensions are rising between the US and China. What are you seeing on the ground and how would you assess potential for meaningful new projects in the region over the next year or two?

We don't see any significant change. We are a global company. The Chinese look at us as a global company. We have invested more than $10 billion in China since 1988, in the last 32 years that we have been there. Our business is very local. And therefore, at least up to now, the so-called tensions between the two countries hasn't affected us at all. And there are plenty of opportunities that we are pursuing there. The fact that we took YK out, I've been talking about that for the last two years. to the investor that it was just a matter of the coal allocation and they don't want to do a big project in China if you're not assured of the supply of coal. So don't read into that as if our opportunities in China has reduced or anything like that. So we are working on projects in China as we are working anywhere else in the world.

Good to hear. Thank you very much.

Thank you, sir.

And we'll take our next question from Steve Byrne with Bank of America. And, sir, your line is open. You may have us on mute.

Sorry about that. So, some of the Japanese utilities have been testing ammonia as a feedstock blend for power production, and just wanted to know if you had a view on the technical feasibility of that concept, say, versus a hydrogen blend in with natural gas. Could the ammonia actually reduce NOx? Do you see feasibility in delivering ammonia into this end market from your Saudi project as opposed to, you know, the dissociation requirement to sell hydrogen for fuel cell recharging stations?

Thank you for your question. Number one, technically, it is feasible, but with respect to us, we were very, very clear when we announced the known project. that we are not in the business of selling ammonia. We are selling carbon-free hydrogen. So whether it is technically feasible or not, those are not the applications that we are looking at because we don't think they are as highly value-added as hydrogen for mobility. Ammonia for us is just a transport medium to take the hydrogen gas from Saudi Arabia and convert it to something that can be transported. So we are in the business of selling hydrogen, not ammonia, whether it is green or blue or anything like that. That's not our business.

And just a question about, yeah, sure, thank you. Just to follow up on the Indonesia project, like the Saudi project, there's a component here that's moving downstream into synthetic chemistry and just wanted to hear your comfort level with that or what you do to mitigate that risk of moving into a new unit operation there. And would it be reasonable to assume that you do so because you're expecting maybe a higher return on that investment?

Well, first of all, we are not getting into the methanol business, as you know very well. The only thing that we have added to our scope is building the plant and operating the plant. The product is going to be sold by other people and the variations on that is the responsibility of other people. In terms of the unit operation of methanol, obviously people are running methanol plants all over the world. But we did realize that we did not have that experience directly. And that is why we made the strategic alignment with , who is the leader in production of ammonia and methanol and all of that. And therefore, we are using their technology and their help in enabling us to do that part of unit operation without any risk. Thank you. Thank you, sir.

And next, our next question will come from PJ Juvicar with Citi.

Good morning, Shafi.

Hey, PJ. How are you doing, my friend?

Good, good. So I have a question on your green hydrogen project in Saudi Arabia. You mentioned that the opportunity is huge, and you can keep repeating that project. Then you also have this gray hydrogen, what you call gray hydrogen on the Gulf Coast from natural gas, and then you have the more polluting coal gasification. I guess my question is, if the hydrogen opportunity is so big, then why tie up the capital in more polluting coal gasification?

Fiji, you're asking an excellent question, but it is very much, I don't want to oversimplify, but it is like when people go buy a car. Some people like to buy a Rolls Royce, and some people like to buy a Bentley, and some people like to buy a Toyota Camry. Therefore, we are there to serve the market. Some people are going to say, I don't care about CO2 emissions. I just want the hydrogen because I'm worried about pollution in my own specific city. Therefore, give me hydrogen, and I don't care how it is made. And some people might say, no, I want blue hydrogen, and some people say, no, I want carbon-free hydrogen. Therefore, we are the largest producer of hydrogen in the world. And therefore, we feel obligated to have all three options available and sell it to the market. As I said, it's just like not everybody wants the same thing. And therefore, as a result of that, we don't want to kind of walk away from business by saying, no, we only sell carbon-free hydrogen. Why not? The other things, we are selling hydrogen right now, gray hydrogen in California for mobility. and it's very profitable. Why shouldn't we continue doing that if the customers demand that? So that is our philosophy to be able to sell a spectrum of customers. Thank you. Yeah, you know what I mean.

Thanks. Thanks for that, Kala. That's helpful. And a question for Scott. Scott, can you go over sort of the merchant pricing in the quarter in different regions? Thank you.

Yeah, I'm sure. Scott, do you want to answer that?

Sure, absolutely. Let me answer it both in terms of the merchant on the segment as well as what we refer to as so-called merchant on merchant. So for the company, overall pricing up 2%. And you know that that is all merchant because there's not really any pricing in the asset business. So let me give you from a total company perspective, 2%. And then America's was 2%, Europe was 3%, and Asia was 2%. That's the total price. Let me now put it to you on a merchant-on-merchant basis. The company was four. It's roughly twice. The way it goes is 4% merchant-on-merchant for the company, five for America's, four for EMEA, and four for Asia. Hopefully that answers your question.

Thank you very much. Thank you, Peter.

And our next question will come from Mike Thyssen with Wells Fargo.

Hey, guys. Nice quarter.

Thank you, Mike.

Appreciate some of the insight on the COVID impact on EPS. You know, some of that's cost, some of that's volume. Can you maybe just frame what needs to happen to get all that back in, you know, I guess next year? Is it possible to get that back next year? Just kind of thinking through how to rebuild some of that earnings power.

Well, the thing is that, you know, next year, you know that we have our costs under control. So we are not going to have any issues with costs. Then our on-site business is going well and it will continue going well. Then it all becomes the issue of mixed involvement. You know that we are committed to pricing. That is a principle that I've been talking about in every call. We are committed to that, and you see that we are delivering 4% price increases during the time that the world is basically shut down. So we are committed to that. Then the only thing that is there is the volumes and merchant volumes, and the merchant volumes, as we have always said, is directly related to industrial production activity in different regions. So right now, China is almost back to normal. So next year, it will actually, I think, be better than this year because they are talking about now China growing about 8%. I had a conversation with a very high-level person last night that was predicting about 8% growth in China. So I think that will be there. And then you need to kind of figure out How would Europe come out of this thing? And how would the Americas come out of there? So we are very much at the mercy of that. I mean, if you want to have a rosy picture that there will be a vaccine and everything will be back to normal, which I hope is the case, then we'll be doing great next year. Plus the fact that in addition to that, in terms of growth of our EPS, please don't forget that if we are able to close JASAM, which we announced the the fact that they are in the market for the financing sometime in October, then that would give us a significant boost in terms of EPS in 2021. Okay, got it.

And then just quick follow up, you know, you gave us European and America's Merchant for July. You guys have better visibility than we do. Any thoughts on where you think it could go in August or September?

I don't know where it will go because it's just like the last time we had our results. It was a question of, well, America seems to be on demand, but now we've been the other way. But I don't want to predict that, but honestly, right now, I don't see any reason why it should get worse. But who knows? Thank you. I can't predict that. Thank you.

And our next question comes from Duffy Fisher with Barclays.

Yes.

Good morning, guys.

Hi, Duffy. How are you?

Good. Thanks. First question, just on your $15 billion plus of commitment now, you know, it's been a couple three, four year journey. If you go back to the beginning of that, how did it turn out different? You know, obviously, you probably had a preconceived notion of what that $15 billion employed would look like. What was different about it? You know, how it returns versus what maybe you thought originally? geographic split versus original, and then, you know, kind of end markets versus original?

The thing that turned out differently, you're asking an excellent question. Number one, the hydrogen for mobility came sooner than I thought. I thought the hydrogen for mobility would be more like 2023, 2024, but fortunately, we've been able to put that project together and announce it. Then the other thing is that the so-called asset buybacks ended up to be bigger than we thought because, you know, at the time we announced it, I didn't expect us to do a $12 billion asset buyback from Saudi Aramco with the Jazan project. So those are the two main things that was a little bit different than what we thought, which has allowed us to be two and a half years ahead of schedule.

Great. Thank you. And then just one follow-up on NEOM project, or maybe two parts to it. One, when do you need to order your long lead time equipment for that project?

And two, what infrastructure needs to be put in place by the country before you're able to start doing what you need to do, whether that's ports or electric power? you know, streets, you know, what do we need to see on the ground happen there first before you start to put your capital in?

First of all, in terms of long-legged items, we are already talking to their people, to people. Now, secondly, in terms of what needs to happen in Saudi Arabia, they just need to give us a piece of land. That's it. We are going to be self-sufficient. They are going to build everything. They are going to build the power plant. They are going to build all their things. We are going to build the roads. We are going to build the port and the whole thing. So we are not dependent on anything specific happening there. Great. Thank you. We are very much self-sufficient. Thank you.

And we'll take our next question from with JP Morgan.

Thanks very much. Sethi, I think you said that NEON project will have 4 gigawatts of power. Do you need 4 gigawatts of power to supply a 1.2 million ton ammonia plant? Or can you talk about the point of that amount of power generation?

You are asking me, first of all, secondly, you are asking me a question that It gets me into confidentiality and all of that with our partners. You obviously do not need four megawatts of power to produce 650 ton a day of hydrogen. You know, that is very easy to calculate. You know that every kilogram of hydrogen requires approximately 60 kilowatts. That can be calculated, and then we say 75%. And that means you need to multiply by about two just to make sure that you have enough power to run your facilities. And then it's not difficult to calculate how much power the ASU needs or the ammonia plant needs. So, you obviously do not need four megawatts. Therefore, there are other plans for the excess that I cannot talk about.

So, the economics of the project are complicated. because there may be other dimensions to it other than hydrogen production.

Which would be accreted to what it is, just hydrogen.

Yeah.

So anything else would be additive rather than subtract.

Okay. Thank you so much, Saifi. I hope you're well. Thank you. Thank you very much.

And we'll take our next question from Jonas Oxgaard with Bernstein.

Morning. Hey, how are you?

Not bad. Thanks for speaking in the last minute here. Question on the CapEx. So you mentioned that some of the CapEx in your backlog is going to be spent pretty far in the future. So can you give us a little bit more of a cadence of how much cash do you have available to spend over the next two to three years?

As of right now, Scott, you're sitting on $6 billion of cash. It's not a little bit more than that. And we do generate a lot of cash even after paying dividends, and you saw in the slide. So we have plenty of cash to do all of the projects you have talked about and still continue to pay dividends and increase the dividends.

Yeah, I guess more wondering about how much room there is to sign up more projects with near-term cash outlays. Or is what you have now what you need to get for the next couple of years?

No, no, no, no. There's plenty of room because we can always go and issue additional bonds because our EBITDA goes up. We have plenty of room. The company right now, our net debt is about less than So we have a lot of room. I think that's a very important point to make that we are not constrained for additional growth and you should expect us to continue to announce mega projects as we go forward. We are not slowing down.

Okay. And I'm curious, Daniel, you put your backlog in the context of your target. Are you going to take the opportunity to update the target, to change the timeframe of it?

Yeah. Next summer, we will do that. Next summer, we'll give you another five-year plan.

Okay. Thank you very much.

So that you have visibility to 2026 or something like that.

Perfect.

Okay. Any other questions?

And next we'll go to Chris Parkinson with Credit Suisse.

Great. Thank you. Sophie, can you just further speak about the proposal for your HRS strategy and then also your technological positioning and just how it varies versus what others are now progressively proposing with their own projects, you know, obviously in some cases on a much smaller scale. You know, it's fairly clear that distribution will be integral to anybody's strategy, but from your perspective, You know, what makes your, ultimately, your value chain proposal different other than just the green aspect, the fully green aspect of it?

Well, the thing is that what makes it unique is the fact that we have come up with a practical solution that you can actually execute. I mean, people are talking about a lot of different theories, but we have come up with a way of taking green hydrogen and actually converting it to something that can be transported and delivered to a different station, whether it is in Frankfurt or Tokyo or Shanghai. I mean, that is the innovation. And the fact that hydrogen refueling stations are self-sufficient, that means we are not going to require power from the grid, which is not clean power. And you're not going to require power from the grid to run the compressors because those compressors use a lot of power. In order to put hydrogen into a truck, you need to raise the pressure to about 10,000 pounds per square inch. That requires a lot of compression. So if somebody says, well, I'm going to connect to the grid, first of all, that requires a lot of voltage and a lot of electricity. And secondly, that grid, how is the power produced from that grid? So what we have come up with is a unique thing that we just don't touch anything related to carbon, produce the hydrogen and put it in somebody's truck. Some people put a lot of value on that. As I said before, to answer to another question, some people might say, no, I don't care how you make the hydrogen, I just want you to make it somewhere else and then I want to convert the buses in my city to hydrogen because then the There is no pollution in my city, but the fact that the board is getting warm, that's somebody else's problem. But the uniqueness of the new project is that they have come up with something practical that four years from now you can actually deliver hydrogen problem-free to a truck, wherever it is. It's not a theory. It's a practical way of doing it.

Thank you. And then just second question, there's also been a lot of chatter about carbon capture, and people thought it was a long way off, but then again, everybody talked about hydrogen as well. You know, if we just look at, we know you have proven technology, so we know there's a demand spectrum that's evolving in the state of California, which could arguably apply to PBF, and then also a few different areas which are already being you know, explored in Northwest Europe, just how should we think about their, you know, these opportunities in terms of your own technology, competitive positioning, and is your enthusiasm up or down versus even just a few months ago? You know, it appears there's clearly something here as well.

We are very, very enthusiastic about carbon capture. We have a lot of projects in development. And then the time comes we will announce them. We are very excited about that because that is another significant solution because if you can capture carbon and kind of create, you can create blue everything. You can capture carbon, you can make blue methanol. You can make blue urea. I mean, the carbon capture is a very, very essential part of everything because no matter how many neurons we build, the world has 1.2 billion cars running around. So carbon capture and hydrocarbons are still going to be used. And if you can find a way of capturing the CO2, that can be a huge business. We have always said that, and we continue to work on that and develop the projects for that. And I think in the next two or three years, you will hear about us coming up with real commercial proposals on that.

Thank you. Hope you're well. Thank you, sir.

And our next question will come from David Zegreiter with Deutsche Bank.

Thank you. Stacey, just on Jezanne, assuming it closes in October, how should we think about the earnings ramp up in fiscal 21 from Jezanne?

But the JASAN, when it comes on, it is going to, I mean, if we close, we close, and then we get our BFC, and we are giving you some guidance, you know, how much capital you are employing, you know, the kind of the rule of thumb of 10 cents of operating income per dollar of investment, and then you can calculate what the effect will be.

Very good. And just in China, one of your competitors has announced a couple of MOUs with respect to China and hydrogen in the last week or so. What's your strategy, and should there be multiple players and winners for hydrogen in China going forward?

Well, the thing is, I don't want to make any comments about what our competitors are doing. I mean, they should answer that about what is the difference between an MOU and a signed contract and what is an aspirational project and a real project. But that's up to them. I don't have any comments about that. But in terms of our prospects in China, we are working on many, many, many, many opportunities in terms of supplying hydrogen. We are building hydrogen fueling stations there. Most of them are so-called gray hydrogen, but that is what they want. They are not, in China, they are not yet too enthusiastic about green hydrogen. They seem to be happy, they are more focused on carbon capture and so-called blue hydrogen. But we are there, we are working, and as I said, we want to supply the whole spectrum. They actually have a lot of activity in terms of hydrogen fueling stations in China. I think if you count them, they probably are working on 120 projects. But we don't put out any time to do something, we don't put out a press announcement. Thank you very much. Thank you, sir.

And our next question will come from John Roberts with UBS.

Thank you. And I'll only ask one since we're going long here. I think you said merchant volumes were down 10% in the Americas and in EMEA in July. Were they down about 10% in June as well? Are we plateauing here in terms of the improvement in merchant volumes?

Approximately, that's a correct statement. How are you doing, John, by the way? Doing okay?

Very good, thank you. And you sound well also, so thank you very much.

Thank you. Thank you, sir.

Appreciate that. Any other questions out there? Yes. Our next question will come from Bob Court with Goldman Sachs.

Holy cow. Appreciate your patience, JP.

Well, the thing is that absolutely, we wouldn't have ended the conference call until we got a question from you. I'm sure it's a difficult one, but I'm getting myself ready for you.

Oh, boy. Tough setup. Well, yeah, I wanted to ask you, you know, on the coal gasification, you guys did a good job of assembling technology. You had the capital available. You had the willingness to do it. When we look at this green hydrogen effort, I mean, I suppose also your capital availability is an advantage. It sounds like you've got some electrolyzer technology that's an advantage. You've certainly shown a willingness to do it. But I would also suspect there's a long list of others that want to break into this market. So what do you see as your secret sauce? What is your competitive advantage here? Is it the relationships? Is it the technology? Is it the capital? Give us a sense why Air Products is fit to win here.

Bob, excellent question. The thing is that in order to bring about a project like NOAA, what you need, number one, You need to have a billing partner who is going to give you access to a location which has the sun and the wind. That means you need to have access to the government. You need to convince the government. This is not something that you go there and you buy a piece of property and try to do something like that. You need vast quantities of money. area, and you're going to be doing things in very sensitive areas and all of that. So that is the first requirement. And with Neom, I think we were able to do that. It's very difficult to come up with and if there are places in the world that might have those kind of capabilities, you need to have a relationship and be able to convince the government to support you. That's the first. The second thing is obviously the idea of how to do this thing. Now that we have announced it, I guess everybody says, oh, I knew all about it. Yeah, we can convert it to ammonia. But I think that was what sold the known project because we demonstrated to the Saudi Arabian government, which is really known, that, look, we are talking about a practical problem. We are not just talking about, okay, we make hydrogen gas, and then we are daydreaming about the fact that someday somebody will build a ship to – liquefied and taken to the market. It was a real solution and a real project. Then the third thing is that we have tied up with the largest and most credible producer of electrolyzers. There is no other company in the world right now that can match the capacity of Thurston Crow in making this stuff. So, and they have, as you know, they have an exclusive arrangement with them. So, that is the second thing. And then the third thing is obviously the fact that they have been doing hydrogen fueling, and we have more than 50 patents with respect to actually hydrogen fueling stations and how you put this stuff in somebody's trunk at 10,000 PSI. And therefore, Those are the competitive advantages that we have. But the most important thing is being the first starter, and that is what we have done. So, it's a little bit like gasification, because right now, any country, believe me, any country, or anybody, anywhere in the world, and I have examples of this, anybody in the world who is thinking about gasification, whether it is a country, whether it's a company, whether it is a chemical giant or a refinery giant, they pick up the phone and call their products. And that gives you a significant advantage. And we hope to be the same thing with respect to, and over there we have the technology, we hope to be the same thing with hydrogen for mobility. And don't underestimate a lot of other people wanted to do their own because they're the only one.

Yep. Yeah, that's helpful. And is there meaningful differentiation in technology for electrolyzers? I know you mentioned Tyson Crump and you got the alkaline. Is that competitive? Are there advantages, disadvantages to proton exchange or solid oxide? Is that a stage-gating part of the process here, or do you think that's not something worth spending a bunch of time if we're on the outside looking in?

But I think this is public information, you know. The people who have this technology, Thurston Crook has been doing this thing for 60 years. They have been doing it for making chlorine and all of that. So their technology is very known and their manufacturing capacity is very well known. Obviously, Siemens is talking about their 10 technology. We did look at that and we decided that the technology Susan Krupp was a better option for us at this stage. Now, with that 10 technology developing something later on, it might or it might not. The other people are small operation research professors doing things. There's nobody there which is quite honestly credible.

Got it. Thanks so much, Stacey. Appreciate you squeezing me in.

Thank you, absolutely, Bob, anytime, and hope it's all deserved with you and your family. Okay, next question. Is there any?

Yes, our next question will come from Mike Harrison with Seaport Global.

Hi, good morning. Good morning, Mike. How are you doing? Doing well, thank you, Tafy. Generally, we think about your merchant business as being more profitable when you have higher utilization rates. Yet, you seem to have delivered really good margin performance here, even though you saw double-digit merchant declines in the Americas and in Europe. So can you provide a little bit of detail or color on what actions you were taking to prevent the merchant decline from having a more pronounced impact on your margins?

I see my friend. Focus on pricing. We are not focused on volumes. We are focused on prices. And if you lose market share, you lose market share. That is the philosophy that we announced about two and a half years ago. You know very well. And we said that, look, the time has come for us to increase prices on our products because we haven't increased prices for 10 years. Our costs are going up. We are spending a lot of money on development. Our cost of driving the trucks, our drivers cost more, our operators cost more, and all of that. And therefore, we have been very focused on pricing, and that is what is driving this thing. And you can see the pricing. I mean, when you look at the history of the industrial gas businesses in the last 10 years, there aren't that many places that even under normal times, people got 4% price increases every quarter.

All right. And then maybe a question for Scott. Just the contribution of the PBF Energy acquisition in the quarter from a revenue standpoint in Americas?

I didn't take that question because I don't think Scott did answer that question because we don't want to disclose that. But, Mike, you can calculate that, right? He told you it's $530 million. and we keep saying that the minimum thing is $0.10 for every dollar of capital. So you can calculate that very easily, right? And you know our tax rate is about 20%, so you can come to the conclusion and then figure out that it was in the quarter for about a month and a half, and you come up with a number. But we don't want to go through the details of that because we do not want to exactly talk about the profitability of that project.

Understood. I think I was speaking more in terms of the revenue contribution, just trying to break out what was truly organic versus what was driven by an acquisition. On that point, you can make a good guess, my friend.

But we cannot go there. Sorry about that. Give us a break at least once in a while, okay?

Understood. Thanks very much.

Thank you, Mike.

And our next question will come from Lawrence Alexander with Jefferies.

Good morning. Thanks for squeezing me in. Just a quick question then. On the return on capital on projects or the conversion rule of thumb, the 10 cents for every dollar of CapEx, that's been sort of an industry benchmark for several decades. If you look at the size of the addressable markets that you now have access to, your technology position, your process know-how, just everything you're bringing to the table to help make this all possible. When we look at the next wave of projects, so not the market creation projects, but the next wave after that, should we expect the return on capital that our products can get to go higher because of technology value and process know-how? Or is there something going on in the industry where the 10 cents is a good rule of thumb for the next decade?

We are going to do better than 10 cents. You're right. The next stage is going to be more profitable. Yes. Thank you. Okay. Thanks. Thank you. Sure.

And our last question will come from John McNulty with BMO Capital Markets.

Hey, Stacey. Thanks for taking my question. So you have a lot of future EBITDA coming on projects that won't be really materializing over the next couple of years. It's really more of a 23 to 25 kind of timeframe. And it looks like a growing portion of your business is actually going to be tied into joint ventures, at least relative to kind of past levels. So I guess with that, should we be thinking about how EBITDA flows through to your cash flow's similarly on those joint ventures? Or is there anything that maybe holds back some of that cash? So when we start trying to, you know, compound things and look forward, we should maybe be haircutting it a little bit. How should we be thinking about that?

Well, John, you're asking a very, very good question. Can I just make a comment? Not everything is going to come on stream 23, 24. We are going to have a lot coming on the stream in 2021, if we close it down. Then in 2022, we have Juitai and several other projects that come on steam. So, this is going to be a continuous growth. So, we don't have a big hold somewhere. The other thing about the EBITDA and the joint ventures, obviously, it depends, and we don't have too many joint ventures, but the joint ventures that we have, some of them we can consolidate, some of them we cannot consolidate. And the issue, that becomes a very complex calculation and all that. I don't think you want to take too much of a haircut on the EB-DOS because we did get most of it.

Got it. Perfect. Thanks for the clarification.

Thank you very much, John. Appreciate that.

And we currently have no further questions in the queue at this time. I'd like to turn it back to our presenters for any additional or closing remarks.

Thank you. So in closing, I would like to thank everybody for being on our call. Thanks for listening to our presentation. We appreciate your interest, and we look forward to discussing our results with you again next quarter. As I said earlier, please stay safe and healthy, and looking forward to talking to you in three months. All the best. Thank you.

And that does conclude today's conference. Thank you for your participation. You may now disconnect.