Air Products and Chemicals, Inc.

Good morning and welcome to Air Products and Chemicals' fourth quarter earnings release conference call. Today's call is being recorded at the request of Air Products. 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.

Thank you, Leigh Ann. Good morning, everyone. Welcome to Air Products' fourth quarter 2020 earnings results teleconference. This is Simon Moore, Vice President of Investor Relations. I'm pleased to be joined today by Safi 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 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 Sebi.

Thank you, Simon, and good day to everyone. As always, we thank you for taking time from your very busy schedule to be on our call today. Before we talk about our results this quarter, I would like to take to talk about 2020. Please turn to slide number three. I continue to believe that the true character and leadership of individuals and companies are revealed during times of crisis. And unfortunately, the war continues to be challenged by the COVID-19 crisis. Our number one priority has always been the safety and well-being of our people. We continue to provide them the necessary protective equipment and the right protocols to uphold their safety and health. I want to thank our employees for following these procedures and working hard to serve our customers and execute significant projects under challenging conditions. Throughout COVID-19 crisis, we have not reduced staff nor reduced the salaries of our people, and we remain committed to that course of action. Our people continue to do a great job in keeping all of our 750 plants running around the world. Meanwhile, our corporate and business functions continue to run smoothly and productively. Recognizing the greater needs during this time of crisis, We also have increased our commitment to our local communities through our volunteerism and financial support. Our robust business model continues to prove its resilience globally. As our onsite business remains stable, as we have mentioned before. In addition, we have maintained our focus on pricing discipline despite the lower volumes. And as you can see, our merchant business developed improved pricing in all of the regions. We were very proud to announce the $7 billion NEOM carbon-free hydrogen project, which will enable air products to supply truly carbon-free hydrogen to power buses and trucks around the world when it comes on the stream in 2025. This revolutionary and forward-looking project will demonstrate on a massive and commercial scale the possibility of a transportation system of the future based on a totally carbon-free source of energy that is the green hydrogen. He also signed a long-term on-site contract for a world-scale coal-to-methanol facility in Indonesia. This significant project supports Indonesia's focus on energy independence and will produce nearly 2 million tons per year of methanol when on a stream in 2024. We are very excited about the potential for additional opportunities in Indonesia. Now, please turn to slide number four. We continue to create and win megaprojects around the world that help our customers meet their most pressing needs for clean energy and environmental solutions. And we expect these projects to drive our growth for decades to come. This year, these projects included our largest ever investment in the United States for the Gulf Coast Ammonia Project in Texas. the acquisition of five operating hydrogen plants and a long-term hydrogen supply agreement with PBF Energy in California and Delaware, and multiple onsite projects for electronics manufacturers in China and Malaysia. We also began construction of three nitrogen plants in the Netherlands and brought on a stream an extreme methane reformer, and cold box in Louisiana to supply products to our U.S. Gulf Coast pipeline system. We are delighted to be selected for these large new projects, demonstrating our customers' confidence in our complete solution, delivered safely, on time, and on budget. Now, please turn to slide number five. Our industry-leading LNG technology was selected for major projects in Mozambique, Qatar, and Algeria. Our business model supports and enables our strong financial position, and we successfully raised about $5 billion of debt earlier this year to ensure we are ready for our exciting growth opportunities. We have significant balance sheet capacity remaining and are continuing to build strong positions in growth markets. With the board's focus on cleaner energy, we see gasification, carbon capture, and hydrogen creating profitable growth opportunities for air products. for many years to come. With our strong cash flow, we continue to complement our growth investments by returning cash directly to shareholders through our dividend. And we made new commitments to sustainability, the environment, which we are going to speak about in a moment. Now please stand for slide number six. I'm very pleased that our team stayed focused and worked safely throughout these challenging years. We obviously always want to see no accidents or incidents, but I'm pleased to see improvement versus our fiscal year 19 safety performance. The following slides, number seven, eight, and nine, you can see our goal, management philosophy, and five-point plan that we have shared with you many times before. While I'm not going to go through the details of each of these slides, since you have seen them many times before, I have included them as a continuing reminder of air products and delivering focus on cash generation and implementation of our well-defined strategy. Now, please turn to slide number 10, which is our higher purpose. We are obviously committed to delivering superior financial performance, but our people also know they are supporting the higher purpose in the work they do every day. Our higher purpose at Air Products is to bring people together from all over the world so that they can collaborate and develop innovative solutions to some of the most significant energy and environmental challenges we all face. That is our higher purpose, and it inspires our team and drives us every day. In support of our higher purpose and consistent with our focus on sustainability and environment, on slide 11, you can see our new diversity goals also. By 2025, air product aims to achieve at least 28% clean air representation in the professional and managerial population globally, and at least 20% minority representation in that same population in the United States. Our growth projects give us a unique opportunity to bring diverse talent into the company. And as we measure our progress, we will continually stretch and drive for further improvement. We also recently launched a legal advocacy program for racial and identity discrimination matters. Through this novel program, products will support employees and their dependents who have been subject to such discrimination outside the workplace. These are a few of the specific steps we are taking to continue building our culture of inclusion and belonging. Now please turn to slide number 12. Then you can see our third by 30 goal, which means that we intend to reduce our carbon emissions intensity by one-third by 2030. As I discussed this subject in September, This goal focuses on reducing emissions relative to the amount of energy that we are delivering to the world. It is fully aligned with our business's strategy. It is near-term and measurable and holds us accountable for delivering. Now please go to slide number 13 when we show you the key opportunities we have to achieve the third by 30 goal. One very important point is that this growth is enabled by and consistent with our profitable business growth opportunities. Carbon capture, carbon-free hydrogen, low-carbon projects, operational excellence, and renewable energy all support our 30 by 30 goal. Now, please turn to slide number 14. which highlights our key gasification projects. The fundamental drivers for gasification are still valid and very relevant today. Countries and large companies around the world continue to focus on gasification to convert abundant natural resources like coal, pet coal, and refinery bottoms, all of these low-value raw materials into high-value chemicals, transportation fuels, and energy in a sustainable manner using gasification. At this point, I think it's appropriate to specifically give you an update on our largest gasification project, the acquisition of gasifiers and power plants from Saudi Aramco in Jassan, Saudi Arabia. to work diligently to complete the financing and close all the open contractual terms. But as a result of the COVID-19 situation, these activities are taking much longer than we anticipated. Therefore, I would like to repeat on this call what I said on another public call in June of 2020. That is, my strong advice to investors is to please do not count your chickens until they are hatched as it relates to this acquisition. We will only close on this acquisition if the terms and conditions of the final contract and the expected financial returns are in line with our expectations. Now, please turn to slide number 15. where you can see that we have grown our EPS, the earning per share, by over 10% on average over the last six years. And then slide number 16 is a reminder that while we are continuing to develop these exciting growth opportunities, we have also grown our dividend by 10% on average over the last six years. This continues our record of raising a dividend every year for the past 30 years, and we will provide about $1.2 billion in dividends to our shareholders this year. And finally, slide number 17 shows our EBITDA margin, which is obviously my favorite slide, where it shows that the margin is up over 1,500 basis points since 2014, and more than 40% EBITDA margin for the sixth consecutive quarter, despite the COVID-19 challenges this year. I would like to thank all of our dedicated and hardworking people around the board for staying focused on safely operating more than 750 facilities around the board and serving our customers. Thank you again. Now I would like to turn the call over to Mr. Scott Calco, our senior vice president, our executive vice president, and chief financial officer to provide a financial overview. Scott?

Thank you, Safey. As Safey stated earlier, our company continues to demonstrate our strength despite the challenges presented by the pandemic. We have made significant progress in committing our capital, announcing megaprojects in gasification and hydrogen for mobility, and completing a highly successful $5 billion debt offering. Both of these will support our long-term growth. We also won several world-scale LNG heat exchanger projects which will add to our profit over the next few years. Meanwhile, our business, which is more than half onsite, continued to deliver profit growth and stable cash flow in a difficult year. Now, please turn to slide 18 for more details on our full-year results. Our profits and margins grew despite the adverse effects of COVID-19. EBITDA was up 4% and EBITDA margin increased 200 basis points. Sales were roughly flat at almost $9 billion as the combined 5% gain in volume and price were offset by non-operational factors. Specifically, the lower energy pass-through and the India contract modification together decreased sales by 5%, but had no real profit impact. The volume growth was primarily driven by acquisitions, new plants, and higher sale of equipment activities, including LNG, which overall more than offset the negative COVID-19 impact. We estimate COVID-19 reduced our sales by about 4%, and our EPS by about 60 to 65 cents for the year. Price improved in all three regions and across most major product lines. Price was also the largest contributor to the 200 basis point increase in EBITDA margin. ROCE was 140 basis points lower, negatively impacted by the step-up in the denominator from the additional $5 billion of debt. Now, please turn to slide 19. Our full-year adjusted EPS from continuing operations was up 17 cents, or 2%, driven by the strong 77 cents per share increase in price, the third consecutive year of price improvement. Volume declined 19 cents as the negative COVID-19 impact was partially offset by acquisitions, new plants, and higher sale of equipment activities. Different business mix caused volume to be positive on sales but negative on profits. Again, we estimate COVID-19 reduced full-year EPS by about 60 to 65 cents. Against this challenging backdrop, we continued to add resources to support our future growth and to maintain our facilities. This is one reason why our other costs were negative $0.38. Currency was unfavorable $0.07, primarily due to the weaker Chinese RMB, Choi and Peso, and South Korean lines. Our joint ventures also had strong underlying business results. Equity affiliate income and non-controlling interest together added 8 cents. Interest expense was 10 cents favorable. We adopted new accounting guidance this year that moves about $9 million from interest expense to non-operating expense each quarter. The impact of this reclass lower underlying debt balance, and lower interest rates were partially offset by the cost of our $5 billion debt issuance. Non-operating expense was 15 cents unfavorable due to the accounting change I just mentioned and a reduction in interest income. Our effective tax rate of 19.1% roughly equaled last year, and we expect an effective tax rate of 20% to 21% in FY21. Now, please turn to slide 20 for a brief discussion of our fourth quarter results. I'll start by commenting on our results versus Q3. Volumes grew 8% sequentially, supported by increased sale of equipment project activities and improved merchant volumes. as economies across the regions gradually began to improve. Price also continued to improve, up 1%. EBITDA rose 6% sequentially, primarily due to the higher volume, better equity affiliate income, and favorable currencies. However, these benefits were partially offset by higher costs, mainly due to additional growth resource investments and increased planned maintenance, particularly in Americas. As we mentioned last quarter, some of these customer planned maintenance outages were delayed from earlier in FY20. And EPS was up 9%, with the lower tax rate partially offset by higher interest expense. Now, turning to our results versus last year, sales of $2.3 billion were up 2%, driven by price, with improvement in all three regions. This is the 13th consecutive quarter of year-over-year price gain. Volume was stable as the additions of new plants, acquisitions, and increased sale of equipment activities compensated for the shortfalls attributable to COVID-19, customer plan outages, and the end of a short-term contract in Asia, which contributed last year. EBITDA of almost $940 million was 2% lower than prior year's level, driven by business mix and higher cost, partially offset by favorable price, currency, and equity affiliate income. Volume was flat in sales, but unfavorable in EBITDA due to product mix. EBITDA margin remained above 40%. This is the sixth consecutive quarter EBITDA margin exceeded 40%. Operating income was down 7%, greater than the decline in EBITDA due to higher depreciation on new plants, including the PBF hydrogen plants that we acquired earlier this year. COVID-19 reduced overall sales by about 5% and EPS by about 15 to 20 cents. Now, please turn to slide 21. Our fourth quarter adjusted EPS of $2.19 was down 8 cents per share, or 4%, with unfavorable volume and cost partially offset by favorable price and tax rate. Volume was unfavorable 22 cents, primarily due to COVID-19. Cost was unfavorable 13 cents, as we added new resources for future growth and increased plan maintenance. Currency and foreign exchange contributed 3 cents, primarily due to the Euro, Chinese RMD, and British pound. The effective tax rate of 16.8% was down 340 basis points and has a positive 9 cent impact. This was driven by higher share-based compensation benefits and a tax benefit associated with the PBF acquisition. As stated previously, we expect our effective tax rate to be around 20 to 21% in fiscal year 21. Equity affiliate income and non-controlling interest together were up 6 cents due to strong underlying business results. Interest expense was 3 cents unfavorable as the cost associated with the additional $5 billion of debt was partially offset by the previously mentioned accounting reclass. This reclass also primarily drove the unfavorable four cents in non-operating expense. Now, please turn to slide 22. We continue to generate strong cash flow, underscoring the stability of our business. Our higher EBITDA supported higher cash taxes driven by timing and higher maintenance capex driven in part by spending on our new corporate headquarters. For the full fiscal year 2020, our distributable cash flow of $2.6 billion, or about $12 per share, is comparable to prior year. From this distributable cash flow, we paid over 40% or $1.1 billion as dividends to our shareholders and still have nearly $1.5 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. Slide number 23 provides additional details on our capital deployment. We have substantial investment capacity remaining. Some of the spending in our backlog extends beyond FY22, and we will generate more cash and borrowing capacity as projects come on stream. We expect to reframe this potential for you in 2021. As you can see, we expect almost $18 billion of investment capacity available over the five-year period from FY18 through FY22. The $18 billion includes over $9 billion of cash and additional debt capacity available today, about $3 billion of investable cash flow between now and the end of FY22, and over $5 billion already spent. We will continue to focus on managing our debt balance to maintain our current targeted AA2 rating. With a few new projects signed and some coming on stream, our total project and M&A commitments remained around $12.5 billion, with about $11 billion remaining to spend on them. So you can see, we have already spent 30% and already committed over 90% of the capacity we show here. Now, to begin the review of our business segment results, I'll turn the call back over to Safey.

Thank you, Scott.

Before I talk about Asia, I would like to make a few comments about our overall performance. I'm very proud to say that our teams have performed exceptionally well responding to the current crisis. All three regions continue to deliver strong pricing and our full-year EBITDA margins increased in each geographic segment despite the significant COVID-19 impact. I have full confidence that our teams will execute our business strategy and run our businesses very efficiently in the coming months. Now, please turn to slide 24, which is our results in Asia. Compared to last year, our fourth quarter volumes were down 5% mainly due to the continuing adverse effect of COVID-19 the impact of a customer outage and a short-term contract that contributed last year. Pricing was positive for the 14th, and I'd like to repeat, 14th consecutive quarter, and EBITDA margin for the quarter was 46.3%. Now I think it's appropriate if I give you more information about the customer outage that I just mentioned. In Asia, Our largest customer is Luan, a cold to liquid facility in China. After successfully operating for over two years, the customer scheduled a planned shutdown, and I like to stress planned shutdown of their facility for a normal and expected maintenance turnaround area in 2020, actually in June 2020. We successfully completed this major maintenance activity by the end of September. So that is the negative impact for our result that I just mentioned. In the last quarter, the plan was basically down on for a scheduled maintenance. But I also would like to add that as of today that I'm speaking, our customer has not yet formally asked us to restart the plant due to COVID-19 and market conditions. Any further delay in the restart of this facility will obviously have an impact on our sales to this customer in fiscal year 2021. And we are in the process of working with the customer on this issue. We will update you on the status of this situation when we announce our first quarter results in January 2021. Now, I would like to turn the call back over to Scott to talk to you about our Americas results. Scott?

Thank you, Sefi. Please turn to slide 25 for a review of our Americas results. Sequentially, merchant recovery and the full quarter impact of the PBF hydrogen plants acquisition more than offset the planned maintenance outages and drove volume 4% higher. Price was also up 1% with improvements across key product lines. EBITDA was flat as increased planned maintenance activities offset the positive volume and price impact. Compared to prior year, volumes were down 3%, primarily driven by the effect of COVID-19. while planned maintenance outages of our hydrogen facilities were largely offset by the PBF acquisition. Maintenance outages postponed by our customers from earlier in the year and some modest repairs due to damage caused by Hurricane Laura increased our maintenance activities this quarter. America's strong pricing trend continued, up 2% versus last year for the segment, or 5% for merchant. This is the ninth consecutive quarter of year-on-year price improvement. Price was better across all major product lines. As expected, the onsite business, which accounts for about two-thirds of the region's sales, remains stable. EBITDA of $411 million remained unchanged from last year as better price and the PBF acquisition compensated for lower merchant volumes and higher planned maintenance activities. EBITDA margin was up 110 basis points versus last year, primarily driven by price, while sequentially, margin was down 340 basis points, mainly on increased maintenance. Now, I would like to turn the call back over to Simon to discuss our other segments. Simon?

Thank you, Scott. Now please turn to slide 26 for a review of our Europe, Middle East, and Africa region results. Sales increased 18% sequentially, driven by an 11% increase in volume and 6% favorable currency. Merchant recovery and acquisitions both supported the double-digit volume improvement, while currencies were due to the favorable euro and British pounds. EBITDA also climbed 18% sequentially, driven by the volume uplift, together with favorable currency and seasonally better equity affiliate results. Costs were unfavorable, primarily due to planned maintenance outages in our hydrogen facilities and higher power costs, which we expect to recover in the future. Compared to last year, volumes remained flat as acquisitions and other growth offset the adverse impact of COVID-19 and the planned maintenance outages. Also compared to last year, price was again up, increasing 2% for the region or 4% for merchants, with improvement across all subregions. This is the 11th consecutive quarter of year-on-year price improvement. EBITDA of $200 million was up 4%, supported by strong price and favorable currency, but partially offset by product mix and increased maintenance costs. Now, please turn to slide 27, Global Gases, which includes our non-LNG sale of equipment business, as well as central costs. Sales increased due to higher sale of equipment project activities, but profit is lower due to business mix and higher project development investments. Please turn to slide 28, corporate, which includes LNG and other businesses, as well as our corporate costs. Sales and profits were higher this quarter driven by LNG project activities, including the Golden Pass and Mozambique LNG projects. During the fourth quarter, we were also awarded the massive Qatar gas project and the replacement project for Sonatrack, which will both further add to our results in the near future. Now, to provide some additional thoughts on the future, I'll turn the call back over to Sebi.

Thank you, Simon. As we look forward, unfortunately, we continue to see COVID-19 crisis deepening and adversely affecting the people and economies of most of the world. When I spoke to you in late April of 2020, the daily cases of COVID-19 in the U.S. were about 35,000 and the number of worldwide cases per day was about 80,000. Today, the situation is a lot worse. The number of cases in the U.S. is around 120,000 And for the board, it's almost 600,000 cases a day. Therefore, it is very difficult, if not just plain impossible, to make any reasonable projection about the course of economic activity around the world as we move forward. Therefore, we are not providing earnings per share guidance or capital audience for our fiscal year 2021. We hope the outlook is less uncertain in January, and if that is the case, we will provide guidance. We are not shying away from guidance, but we are being very open with you that we just don't know as we sit here today in terms of what the course of economic activity will be. However, I want to share with you what we are seeing so far this quarter, that is the month of October, and as of today in November. The 52% of our sales that is our on-site business is doing well, and we expect this to continue. The other 48% is our merchant business around the world, and this is where we are today in each area. In Asia, our merchant volumes are approximately where they were at this time that last year. So Asia has recovered and we see good results there. In Europe, we are seeing the impact of the recent COVID-19 surge with merchant volumes down 5 to 10% as of today versus last year, mainly due to our packaged gases business in Europe. In Americas, Unfortunately, due to the significant increase in COVID-19 cases, merchant volumes are down about 5%. And I would like to remind you that we do not have a packaged gases business in North America. And now please turn to slide number 29. Every day, but certainly in these challenging times, our real competitive advantage is the commitment and motivation of the great team we have at Air Province. Our business model and strong financial position will allow us to continue to execute our strategy and create long-term value for our shareholders, including the growth of our dividend. We are committed to the growth of our dividend every year. The projects in our backlog are moving forward as expected. and we continue to create and win some of the board's most significant projects. And as we do, we will continue to protect our people's health and safety and take care of their welfare and the welfare of their families. We are 100% committed to that. In closing, I want to say thank you. First, to all of our employees around the board for their dedication and commitment Our employees are playing a critical role and making a difference to the world during these challenging times. I also want to express my thanks to our customers. Innovating alongside you, our customers, we serve our higher purpose, supplying products that benefit the environment and help you to be more efficient and sustainable. Thank you for your continued confidence and trust in us. And finally, to our local communities around the world, I want you to know that we will continue to support you and stand together with you, especially during these difficult times. Now, we are pleased to answer any questions that you might have.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are 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 will take our first question from Jeff Zakowskis with J.P. Morgan.

Thanks very much. So if you have a question about the JASAN project, is the Is the sole issue the financing of the project, or are there unclarities in the financial terms with Aramco that need to be settled?

Good morning, Jeff. Hi. Jeff, that's an excellent question. You know, this is a very big acquisition, $12 billion. The supporting documentation for this thing is – I'm not exaggerating too much, about 4,000 or 5,000 pages. I cannot represent to you that we have agreed to every single term and dotted every T and crossed every I. There are still items that lawyers are going back and forth with on this project. That is why I felt very strongly that I should be very upfront with our investors, as we always are, to tell you exactly where we are. We are not done with this thing. Financing is still going on. As you know, we launched the financing back in July. That is proceeding, but the whole thing is not 100% done, and I just wanted to be very clear with the investors exactly where we are. That's our job at these calls to tell you exactly where we are and how we see things. Now the situation can change two weeks from now and we can announce that we have signed this thing. But I just want you to know that as of right now, this is very real.

And with the Luan project, since there's a, I don't know, there's some volatility in Air Products' financial return, does that mean that the Luan project isn't structured as a conventional on-site contract? in that if you were receiving, you know, a fixed fee or something like that, there wouldn't be that volatility. Can you explain the difference between the Luan contract and a standard on-site contract?

Jeff, again, that's an excellent question. You know, the different contracts we have around the world are not exactly the same. With Luan, one of the differences is that We have agreed with the customer that during the times of planned shutdown, that, you know, this is a very complex facility. I'm sure you know better than I do that once every two or three years, you have to shut it down and do a complete maintenance. We have been running this facility at 99% capacity for two and a half years. Therefore, there was time to shut it down. We shut it down in June, and it took us about three months to do a maintenance, which is the largest maintenance of a gasification facility around the world. We very successfully completed that. But our agreement with the customer was during the planned shutdown, we wouldn't charge them a fee. During planned shutdown. Yes. Okay.

All right. Thank you so much. Yes. Thank you. Thank you.

And we'll take our next question from Duffy Fisher with Barclays.

Yes, good morning. Good morning, Duffy.

How are you?

Good, thanks. Just a follow-up on Luann. If they decide not to restart it because of economics, would that nonpayment continue forward as part of this, or would that take or pay start to kick in? And I guess the corollary to that is if you just put all the capital in to kind of refurb it, how far out of the money are they on economics with that plant today and what needs to happen for that to move to a better economic situation?

Again, Duffy, as I said, we feel obligated to tell you exactly where we are right now. We are not indicating with you guys that there is any significant issue with this facility. We had the shutdown, and as of right now, they haven't asked us to start it up. If they never shut it down, we have an enforceable contract, and we will go, and they have to – live up to their contract terms and conditions that we have, like any other facility. As you know, the other day, Shell announced that they are going to shut down their refinery in Convent in Louisiana. So over there, we supply them. We have a contract. We'll deal with that. So what we are trying to tell you is that, look, this is the situation with this customer. Because it is a very big customer, I felt obligated to bring that up to the attention of the investors.

Very fair. And then maybe just on the actual results for the quarter, if you look, margins stepped down from Q3 to Q4, even though the COVID hit was bigger in Q3 than it was in Q4. So as we think about going forward in modeling for 2021, is the margin structure of Q4 more indicative of a baseline we should use, or was Q3 more indicative?

Well, it obviously depends on COVID and all of that. I think Q3 is more indicative than Q4. But fundamentally, there is one other thing that is going on, which I'm sure you appreciate, is that air products is not in a cost-cutting mode that we were in 2014 and 2015. We are in a growth mode. That means that we are hiring people and all of that in order to support our growth. Therefore, in the short term, our costs are going to be higher. And then once all of these big plans come on the stream, then the cost relative to the margins and so on will come down. So we are, you know, we are not a company where we are in the mode of cutting costs and all of that. We also make a conscious decision. which is different from a lot of people, but I feel very strongly about it, that under the COVID conditions, when all of our people are under a lot of stress, worrying about the health and safety of their families, that I didn't want to cut their salaries or lay them off. That was a conscious decision on our part. We could have cut their salaries like a lot of other people did. We could have laid a lot of people off, but we decided not to do that. Obviously, the consequence of that is that our margins go down. But we felt that it is better to take a hit on our margins, but at the same time demonstrate to our people that we are with them for the long term. We are not operating the company based on trying to be heroes and announce a result this quarter. We are building the company for the next 30 years. Our people have sacrificed. They have got up every morning in the middle of COVID going to running our facilities. and I just wanted to be absolutely supportive of them. That means that we take a hit, as you have seen, but I think that is well justified, and that is our policy, and that is what we will do as we go forward.

Terrific. Thank you, guys.

Thank you very much, Daphne.

And we'll take our next question from Steve Byrne with Bank of America.

Yes, good morning. Good morning, Safey. When you look back at this last fiscal year relative to what your expectations were a year ago, obviously you had the COVID impact of $0.60 to $0.65. Gizan has been delayed and therefore not contributed to the fiscal year. I'm curious, what else would you highlight as as being meaningfully different than what you were expecting for the fiscal year?

Steve, you're asking an excellent question. You know, we have given a guidance of about $9.35 for the year. If you take Chazan contribution out, and you know that was about $0.50. If you take the COVID contribution out, which is about $0.60, we delivered $8.38. So we basically delivered what we had kind of committed to. So other than those two, there was no surprises. There was nothing unusual that we want to highlight. I think we got the pricing. We got our plans kept running. We didn't shut down any facility, and there wasn't anything unusual. That is why, Steve, you know, I'm not giving guidance. But I don't want that to be interpreted that we are in any way, shape, or form concerned about the performance of air products. Obviously, COVID-19 will have its impact. We might have to go into another lockdown and all of that. But fundamentally, air products is doing great. We have great bunch of people. They are motivated. They have demonstrated. Please remember, we checked all of our 750 plants operating during the COVID, even at the height of the crisis, even today. and served our customers. So I feel very good about the company, and I feel very confident about the future.

Thank you for that. And following your announcement of Neom, the news flow on green hydrogen has certainly surged, and in particular quite a bit recently on green ammonia, either out of Australia or CF Industries. But I would say they're kind of targeting Neom, different end markets than you have highlighted for Neom. And I was just curious whether any of that might have led to any change in your dialogue with potential customers with respect to the green ammonia coming out of Neom longer term, and any expectations on your part on when you might be able to line up some contracts for that project?

Well, thank you for the question. We are getting more and more optimistic and more and more excited about the whole green hydrogen and green ammonia project. But at the same time, there is a lot of emphasis on hydrogen in general, blue hydrogen and green hydrogen. We are the largest producer of ordinary hydrogen, which comes from hydrocarbons. You know, I call that gray hydrogen. We are the largest producer, and as people need that, we will provide that. There is significant interest in so-called blue hydrogen or blue, I mean, ammonia and hydrogen go together because ammonia is a way of transporting hydrogen around the world. But blue ammonia is becoming very popular for countries and places where they only care about the CO2 emissions. They say that, look, you can make me ammonia in Indonesia, burn coal, do whatever you want, but if you capture the CO2 and I can certify that the ammonia that I'm using doesn't have, the CO2 has been collected, it's blue ammonia, then I can use it and get the credit for not putting CO2 in there, which they are right. So that is what is called blue ammonia. And then the oxygen, I mean, That is the middle one, and then the ultimate one is obviously green ammonia that we are going to produce in Iran. So to me, it's like unleaded gasoline, which is gray hydrogen, you know, ordinary gasoline, which is blue ammonia, and then premium, which is equivalent to green hydrogen. We play in all of these sectors. NEOM is focused on green hydrogen. But we do have projects that we are working on blue ammonia, on blue hydrogen, and obviously gray hydrogen. So the main thing that I think is significantly encouraging is the board is beginning to see what they have been saying for four or five years, that hydrogen, in one form or another, is going to be the energy of the future. Everybody is now talking about it. I'm very happy about that. But the important thing is that I think we have a lead because we have actual real projects doing these things. But we are very excited about all of those opportunities that you mentioned.

Thank you.

Thank you, sir.

And we'll take our next question from Vincent Andrews with Morgan Stanley.

Hi, thank you for taking our question. This is Angel Castillo. I'm for Vincent. Sophie, sorry to belabor the point, but just wanted to ask on Suzanne. So you went from an uncertain timeline to, you know, hoping to finish or close everything in October. As you look today, it looks like we're a little bit more of, you know, kind of back to uncertainty. So just curious, you know, you talked about the trends and conditions. Did something change between, you know, when you last talked about this and now that makes it more uncertain beyond just kind of, you know, ongoing COVID-19? Or, you know, as you think about the risk profile of the project going forward, did the risk profile change?

I mean, the world is changing every single day. I mean, the oil prices go up and down. The financing markets change. People change in different companies and all of that. All I'm saying about JASAN is that I just do not want the investors to have in their model for 2021, whatever it is that they have, a dollar a share or something like that, and count on that. All I'm saying is please, to use my exact quote, don't count your chickens before, wait until they announce that you have done this before you put that in your absolute model. That's all I'm saying is that because everything changes every day. I mean, look at that. You know, they have a presidential election. There is a possibility they have a new president. There is a possibility they have a new foreign policy. There is a possibility of a lot of different things. Nothing is 100%. My obligation is that every quarter that I'm in front of you to tell you exactly what we know. And what we know right now is that we haven't closed on this acquisition, and I just wanted to make sure you know that.

Understood. And then maybe just back to the quarter and the business. As we think about 4Q, could you just give us a sense for what merchant volumes were versus kind of your broader business by region? And as we look at the trends that you mentioned and highlighted thus far in 1Q, could you talk about the different end markets as well and what you're seeing there?

Well, on that one, in my preferred remarks, I'll mention something. I'll repeat that for you, that as of today, the 11th of November, the way we see our business is that our Asia volumes are back to where they were in 2019. Asia, especially China, there is no COVID issue. It has recovered, and our business is doing fine there. So that's what we said. In Europe, unfortunately, there is a significant surge, as you know very well, in COVID-19. That is creating a situation when governments are putting restrictions. Some of them are actually doing lockdowns and all of that. Therefore, our volumes as of today there is 5% to 10% lower than last year, especially significantly lower in our packaged gases business, which is very logical and understandable because that is the most susceptible to economic activity. In the United States, again, as you know, COVID cases have gone up. People are getting a little bit more conservative about their business activity, and our merchant volumes are down 5%. They are not down 10% like in Europe, mainly because we don't have a packaged gas business in the United States. So that's where we are.

Thank you. Thank you, sir.

And we'll take our next question from Kevin McCarthy with Vertical Research Partners.

Yes, good morning. It seems like you have a lot going on in the LNG arena. You referenced, I think you used the word massive to describe the Qatar project and then Mozambique, Algeria, and U.S. Can you give us a sense for two things, the capital required for these projects and what the earnings tailwind could be from them in fiscal 2021? Sure.

Thank you very much. Good morning, Kevin, and thanks for the question. Kevin, we are very optimistic about our energy business. Obviously, we have picked up a lot of orders, and we think that the outlook for this business is very positive. You obviously know better than I do that this business is cyclical. Right now, we think we are on the up cycle. Obviously, for the last two, four years, we've been on the down cycle. In terms of capital, the great thing about these projects is that the return on capital is infinite. because we don't put any of our capital. We get paid for what we are doing. It's sale of equipment. So whatever the money that we make is return on capital employed of the plant and the facilities that we have that we don't build a new plant, then we get a new order. So the return on capital on these projects are very, very, very high.

Thank you for that. And then as a second question, I wanted to ask about the sequential margin pattern, EBITDA margin pattern in the Americas in the fourth quarter versus the third. That was down 340 basis points. I think in prepared remarks, you indicated there was increased maintenance activity. Did that explain all of the change there? Were there other factors? In particular, I'm wondering if the hydrogen business affected the percentage margin.

Kevin, you are very right about the main effect being the maintenance cost. The maintenance cost is driven. We don't have control of that. I mean, we have control of the cost of the maintenance, but we don't have the control of it when that happens because that can only happen during the time that the customer decides to shut down their refinery. Obviously, a lot of the refineries, considering what was going on with the market, they decided to take their shutdown during the summer when there was not a lot of, I mean, you know the situation in the marketplace for refineries. So that is what we got to hit. But other hits, please don't forget that when we report America, it includes South America. Obviously, South America is not doing very well. So it was a combination of other factors. But the main factor was the maintenance costs, as you mentioned.

Okay, thank you so much. Thank you, sir.

And we'll take our next question from Bob Court with Goldman Sachs.

Thank you, Sophie. I think you highlighted you're still plugging away at Indonesian opportunities. I guess it was a news blip that maybe Bukit, Assam, and Pertamina were going to sign a deal with you this month. Can you give us some insight into that? Bob, good morning. Good morning.

You are obviously very up-to-date about the latest thing that comes out from any part of the world, Bob. But, you know, the one lesson that we have learned from Jazan is that it is better not to say anything until you have a final contract rather than announce something and then have to explain why it is delayed. As a result of that learning from that, I have no comment about what is coming out of Indonesia. Once we have a deal, we will let you know. There is a lot of rumors going on, but I don't want to comment on that one way or another until we actually have anything to announce, and if we have anything to announce, we will announce that.

Fair enough. I'm wondering on NEOM, when do you think you might be able to formally announce some offtake agreements for the green hydrogen with truck or bus depot customers?

Never. We don't intend to make any announcements. Sorry to be categorical, Bob, but I'm just making a point. We do not intend to start announcing whom we signed the contract for and so on because we just obviously don't want to tell people that much of this.

I mean, if you're going to be very confidential about that, thank you, Bob. Thank you. Okay.

And we'll take our next question from P.J. Jupiter with Citi.

Good morning, Citi.

Hey, good morning, P.J. How are you, my friend?

Good, good. Can you talk a little bit about the health of the refinery customers? You know, on the Gulf Coast, given that low 211 margins, the light heavy spreads have come in, what's the outlook for hydrogen volumes into refining?

But, PJ, you know, you and your people and a lot of other people know a lot more about that than me, so I'm not an expert to be able to comment on that. The only thing that I know is that, you know, when you look at the U.S. refining capacity of somewhere between, I don't know, 18, 19 million barrels a day, you have already had announcements about shutdown of about 800,000 barrels, which is about 4%. Now, has there been enough of a demand destruction to justify that, or is that going to come back and create shortages, or is more needed? I really don't know. I don't know how to comment on that. But the main thing is that what we have seen up to now hasn't had any material effect on our business, and as we go forward, we do not expect any material effect on our business, based on what we know today.

Okay, fair enough. And then on the CCS type projects, carbon capture projects, you know, is that like a stepping stone before we really get into green hydrogen? And do you expect to see more of these carbon capture projects coming on? And what's your experience there? Are your expertise there? And can you just talk about your position there?

But we think that things will move in parallel. I think people will continue to need gray hydrogen just to clean up the transportation system in the cities, no matter how the hydrogen is produced. Then they will need blue hydrogen, which means that they will drive blue hydrogen and blue ammonia, which will drive a lot of carbon capture opportunities, and obviously green hydrogen. So I think all three of them will go in parallel. We are playing in all three of them. We obviously, as I said, they are the largest producer of gray hydrogen in the world. We have a lot of projects working on on carbon capture, whether it is for production of ammonia or whether it is production of blue hydrogen and all of that. And then the time comes, we will announce them. And we obviously are very much involved in production of green hydrogen. So I think there is opportunities for all three of these. And quite frankly, you will see projects announced by us and of different people for all of these activities. Because fundamentally, I think there is a massive fundamental change in the public opinion, especially in Europe, even in the US, even in China, Korea, Japan, everywhere. a fundamental move that the world is getting warmer. Global warming is not a joke. It is a fact. It is science-based, and we need to do something about that. And as a result, all of these projects will go forward, and I think everybody would make announcements and everybody would want to play in it because that is the future.

Okay. Thank you.

Thank you, P.J.

And our next question comes from John Roberts with UBS.

Thank you. Sepi, this may not be big, but you acquired a company called ACP in Europe for dry ice and carbon dioxide. Do you think there are going to be any spikes in that business like we had in helium? Are we facing some shortages with the vaccine distribution?

Well, you're asking me a very good question. I really don't want to opine on that because it depends on the market development and all of that. And I really don't want to make too much comment about our involvement with the vaccine because we have confidentiality agreement with the people that we are working on.

All right. Secondly, Shell recently announced it's going to close eight of its refinery sites. and I assume we'll see some other closures. Do you have any refinery hydrogen contracts coming up for renewal in the next couple of years with refineries that might be closing?

Well, the only one that we know that is closing is, I mean, we know that Shell Martinez is closing. We had a contract there. And we know that Shell Invent is closing. Those are the ones that we know. Anything else that might come up might come up. But these things are not going to be material to air products because, quite frankly, we don't make that much money selling hydrogen to Shell anyway. So even if they close, it's not going to rob us of a lot of profit.

Thank you. Thank you, John.

And we'll take our next question from Mike Sisson with Wells Fargo.

Hey, good morning. Stacey, can you talk about some of the other drivers for earnings growth in 21? You know, you should have some pricing, cost savings, potentially. You should have other projects, I think, in the hopper. So, you know, even if Jezanne and Luan are delayed, you know, are there other things that helps keep EPS on the positive trend?

Good morning, Mike. That's an excellent question, and you are absolutely right. We see very positive trends in 2021 for air products in LNG. I don't really want to comment on pricing because we don't make forward-looking statements about pricing, but you have seen our track record of what we have done, our merchant pricing, Merchant pricing in all of the regions was up about 5% even in the last quarter. We were in COVID and all of that. So, LNG pricing, and then we do have other projects, other new projects that are going to come on the stream. Therefore, as a result of that, as I said, I'm very positive about our results for the next year. It's unfortunate that because of this uncertainty, at this time, we are not able to give you a you know, some kind of a guidance, but I hope that by January we will be able to do that. But we do have a lot of good things going for us.

Got it. And then just a quick follow-up on Indonesia. Can you maybe remind us, you know, why that region or area is attractive for growth, for capital growth going forward?

Indonesia has made a fundamental decision at the highest level at the level of their president, that they are going to use coal, their natural resource, to produce chemicals such as methanol or DME in order to reduce their dependence on imported oil and reduce their commitments to foreign currency because they have to buy these things. If they make them internally, they don't have to use foreign exchange. They have made that decision. Therefore, as a result of that, I think you are going to see a lot of core gasification projects in Indonesia, and we hope that with our technology and all of that, we will play a leading role in that.

Thank you.

Thank you, sir.

And we'll take our next question from David Begleiter with Deutsche Bank.

Thank you. Good morning. Stacey, just on Jezanne, what's the timeline from here in terms of your negotiations with Aramco and Aramco starting up their portion of the refinery that needs the product from Jezanne?

Good morning, David. I hope all is well with you and your family, but David, I really don't want to put a timeline on this thing because I don't know. I mean, it can be A month from now, it can be four months from now, or it can be six months from now. I don't know. I think it would not be appropriate for us to put a timeline on this thing. But, you know, everybody knows exactly where we are and what we are doing, so I just wanted to be very open about that.

And just on Luan, first, when did you get paid by the customer and Why is the customer not operating yet given and market demand in China appears to be doing fairly well as we speak?

We took the shutdown. The plant is shut down. We are starting up some of the different parts of the plant to keep the plant generated steam and all of that to make sure that things don't freeze and those kind of things to keep the plant at a stage that it can be The customer, I mean, right now, the supply-demand situation with the price of oil and all of that, I mean, maybe they have decided that right now they don't need the product and so on. I'm not into the minds of the customer, and we don't want to force them under another decision. But I don't want to represent either to you that they have a major structural problem or anything like that. We just feel obligated on these calls. We feel responsible to tell you what we know as the time that I'm speaking to you right now. So the situation can change two weeks from now or three weeks from now. But as of right now, they haven't decided to formally start up the plan. Thank you. Thank you, sir.

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

Hey, good morning. Thank you. I was hoping to take one more stab at Jazan, if you don't mind. But between which parties is the sticking point here? You and Aramco or the JV partners, the banks? Who is the negotiation really held up by?

Well, I wouldn't want to say held up. It is taking a long time. But at the end of the day, we have... three different parties. It's Saudi Aramco, for sure, obviously, because they are the customer. But in a funny way, it is interesting because Saudi Aramco is also a partner with us in the joint venture they have put together to do the acquisition. So, as you know, the structure of the joint venture that is going to do the acquisition is Air Products, the majority shareholder, Aqua Power, and Saudi Aramco themselves. So that is the joint venture that is negotiating with Saudi Aramco about the acquisition. The acquisition is, as I said, $12 billion, exactly what is included, what is not included, what the returns are, what the terms or conditions of the financing are, and so on. Those are all of the complicated issues that need to be finalized. And then you have all of the banks. who are committing to supply $7 billion, and they have their term sheets. They have their term conditions. When do they get paid? Who gets paid first? At what time do they get paid? How much of the dividend goes to them? How much of the dividend comes to the joint venture? What is the final interest rate that they want to charge? How is it related to RIBO? All of these things, all of these things takes time. considering, unfortunately, the situation that nobody can really physically get together with people and do things in two hours that doing the video conference becomes a little bit more of a challenge, that is what is taking time. So at the end of the day, all the parties have to agree. I mean, even if we finalize everything and everything and everything with Saudi Aramco, which is not done yet, But even if you do it, then they have to deal with the banks and finalize everything with the banks in terms of their requirement. And their requirement and so on obviously changes. You know, now what is the view of the banks based on the recent election in the U.S.? What do they see? How do they see the future? These are all of the complications on a deal like this. It's just like any other major acquisition.

Very interesting. Thank you. And a different question, if you don't mind. Both your big competitors are talking about biogas into green hydrogen. Now, if I remember correctly, you guys built a biogas hydrogen facility in Japan, like five years ago, three years ago. Did you learn something from that project? And is there a reason that you're not talking about biogas today?

My friend, we are talking about, we have no problem. We are actually doing some projects in Europe related to hydrogen involving biogas. We don't have anything against it, but it is quite honestly ridiculous for anybody to assume that there will be enough biogas to power 200,000 trucks around the world. That is where, I mean, we are involved on those projects, but those are biogas at their specific location. for making two ton a day of hydrogen. We have those plans. We continue to have that. I have no issue with that. But for anybody to claim that they can build a plant, produce 600 ton a day of hydrogen based on biogas, that would be a joke. Thank you. And obviously, we want to do this in a bigger scale. Thank you very much.

And we'll take our next question from Chris Parkinson with Credit Suisse.

Great, thank you. So, Steki, you mentioned a few opportunities in Indonesia, which we've seen. It seems like there are also some opportunities in India that despite being in the COVID world are still, you know, likely moving forward. Could you just, you know, kind of hone in on whether or not these would also be a prime opportunity as well? Thank you.

Thank you very much, Chris. Hope all is well with you. Chris, we definitely see opportunities in India. India is being very much on the record. with the prime minister talking about co-gasification. And right now, actually, India does have a request for quotation for a very giant co-gasification project in India. And obviously, we are participating on that. We expect India to do co-gasification, significant amount of co-gasification in the future. And we will definitely participate on that. Whether we win it or not, we'll see. But we think that India will definitely do coal gasification because they are at the same place like Indonesia. They are seeing China right now where China is converting 280 million ton a year of coal into chemicals. And as a result, that has given them significant opportunity to massively reduce their dependence on oil. And I think countries like India Indonesia and India see that their leaders are very much committed to that. It's just a matter of these things becoming reality through their systems. But, yes, we do see opportunities in India, and as I said, it is a live project, a very big project, probably about $3 billion of investment that is being publicly bid, and we are participating on the bidding process.

Great.

And just as a quick follow-up, just a lot of us have obviously been talking about H2 for mobility and just obviously trying to identify some potential key markets in Europe. But just a quick question for you. Do you believe investors are also underappreciating the ammonia slash blue ammonia opportunities in Northeast Asia? And if so, why?

Well, I think that, you know, I don't – you know, investors are very smart and they will catch up with everything. I think the reason is that People haven't been paying a lot of attention to some of the details going on. Japan has been talking about ammonia as a source of their hydrogen for many years. They have authorized their trading companies to go and look for that. But they specifically, Japan specifically, is very much focused on blue ammonia. because they want, they are not so much concerned about getting, being free of hydrocarbons. They want to have, use hydrogen or ammonia where the CO2 which is produced by making the ammonia is captured, because they are focused in meeting their requirement for the Paris Accord for CO2 reduction. So they are focused on what is called blue ammonia. And the reason they are focused on ammonia is that their intention, at least for now, I think it will change, but right now their big plan is I'm going to buy ammonia. It will be blue ammonia. Therefore, the CO2 is captured. And then I'll take that ammonia and inject it into my power plants. just burn the ammonia in the power plants, and as a result, I'm going to be producing electricity, which is carbon-free. It doesn't put any CO2 in there because the ammonia which was produced, CO2 was captured. And then I would use the electricity which is produced to drive my cars and so on. That is their intention right now. I think they will come to the conclusion that that is not enough because what are you going to do about your buses and trucks because they cannot run on electricity. So at some point in time, they will need green hydrogen anyway. But I think right now that is what they are very much focused on. And then the other thing that they are focused on is that, okay, I can take the ammonia and burn it, generate electricity, and then I will heat up. All of my buildings and all of that did electricity, and I claim that that electricity is CO2-free. But that is the focus. That's why there is so much discussion about blue ammonia for Japan. And we are obviously very well aware of it. We have been aware of it for four or five years, and we are working on projects to supply that.

Great. Thank you very much.

Thank you, sir. We have gone 26, half an hour past the, how many, are there more questions left, operator?

And we currently still have two questions.

Okay, that's fine. We'll take that. That's okay. Go ahead.

And our next question will come from Mike Harrison with Seaport Global Security.

Hi, good morning. A quick one on the impact that you saw from a hurricane. Can you maybe strip out what impact you saw there separate from the maintenance outages? Just wondering if you had an impact from power outages in that Lake Charles area and any other impacts on your Gulf Coast pipeline network?

Good morning, Mike. Mike, There was an impact, but it is not material. I mean, it's in the order of $4 or $5 million of impact, not $40 or $50 million. So that's why we didn't talk about it. But there was an impact. Unfortunately, there have been three of them, which have hit the same area. Our Westlake plant was out for a while. But the impact on our bottom line is not that significant.

All right. And then in the past, during times when steel mill utilization rates have been low or when some of those mills are taking down time, it has impacted your ability to produce merchant argon. Can you talk about what you're seeing in argon supply and demand and whether you're seeing elevated costs to move some of that LAR around?

Not taking maturity off my fund, Dan.

All right. Thanks very much.

Thank you, Mike. Okay, so this will be the last question then. Yeah, go ahead.

And our last question comes from Lawrence Alexander with Jeffrey.

Hi, good morning, and sorry, just a very quick one then. In the core on-site business, do you have any regions or any end markets where bidding activity is improving?

Let me just make sure I understand. When you say bidding and improving, that means that there are more people asking for bids and all of that.

Exactly. In the core, like what people think of as the traditional industrial gas businesses.

I would like to point out in two areas. One is obviously in electronics. We are seeing a lot of activity there. There's a lot of people talking about building new fabs both in the U.S. and in China and other parts of the world. And then the second one is obviously a lot of, you know, inquiries about green hydrogen, blue hydrogen, blue ammonia, and all of that. Those are the two significant areas.

Thank you.

Well, thank you very much. And with that, I would like to thank everybody for being on our call today. We very much appreciate your interest. Please stay safe, stay healthy, and we look forward to talking to you for our results next quarter. Thank you for taking the time. All the best.

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