Air Products and Chemicals, Inc.

or 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. Today's discussion contains forward-looking statements, including those about earnings and capital expenditure guidance, business outlook, and investment opportunities. Please refer to the cautionary note regarding forward-looking statements that is provided in our earnings release and on slide number two. Additionally, throughout today's discussion, we will refer to various financial measures, including earnings per share, operating income, operating margin, EBITDA, EBITDA margin, the effective tax rate, and ROCE, both on a total company and segment basis. Unless we specifically state otherwise, Statements regarding these measures are referring to our adjusted non-GAAP financial measures. 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 Sefi.

Thank you, Seth, and good day to everyone. Thank you for taking time from your busy schedule to be on our call today. The committed and dedicated people at Air Products delivered another set of outstanding results this quarter, driven by strong organic sales growth, demonstrating the strength and stability of our business. At Air Products, We have an excellent and resilient industrial gas business that is the foundation of who we are and what we do. We supply customers in dozens of industries, customers who depend on our people's expertise to make their products and processes more efficient and sustainable. We have been doing this for the last 83 years. And we will continue to do all we can to be the safest and most profitable industrial gas company in the board, providing outstanding service to our customers. But at the same time, we are using all of our experience, financial strength, and core competencies as the board's leading supplier of hydrogen to implement are low and zero carbon hydrogen megaprojects around the world. When it comes to generating a cleaner future now, we want to lead the way, decarbonizing heavy-duty transportation and heavy industry around the world with clean hydrogen at very large scale. This combination is our growth strategy. and it is the path forward for our continual success and profitable growth in the quarters and years to come. I want to thank the hardworking and talented team at Air Products who make all of this possible. Now, please turn to slide number three, our safety performance, which is always our highest priority. We have worked hard to realize significant progress since 2014, but we always drive and strive to do even better. Our goal is to achieve zero incidents and zero accidents. Now, please turn to slide number four, which summarizes our management philosophy. We have shown you this slide every time that we have an earning call. But I cannot emphasize enough our commitment to the basic principles delineated in these slides. These principles will guide our actions in the future. Now please turn to slide number five, our third quarter adjusted earning of $2.98 per share improved 40 cents or 16% versus last year and exceeded the top end of our guidance for the quarter. Both price and volume were again positive. We continued to demonstrate significant pricing strength while our volume improved for the ninth consecutive quarter, driven by strong on-site performance, including improved hydrogen demand in Americas and over 30 new assets that we have brought on the stream. Additionally, we anticipate the recently announced $1 billion Acquisition of the natural gas to syngas facility in Uzbekistan and new LNG sale of equipment projects will add significantly to our future earnings. As you can see on this slide, we have delivered an average of 11% cumulative average growth rate of earnings per share in the last nine years. Now, please turn to slide number six. We are committed to rewarding our investors by providing a healthy dividend and return cash to them. We are proud of our record of more than 40 consecutive years of dividend increases. We expect to return more than $1.5 billion of dividends to our shareholders in 2023. And also, this slide demonstrates that we have increased our dividend by an average of 10% in the last nine years. Now please turn to slide number seven, which shows our EBITDA margin. This continues to be my favorite chart. This graph is self-explanatory. and clearly demonstrates the significant improvement of our margins as compared to nine years ago when I had the honor and privilege of becoming the chairman, president, and CEO of Air Products. Now, please turn to slide number eight. I would like to again highlight the two fundamental pillars of our growth strategy. our resilient core industrial gas business, and the low and zero carbon hydrogen projects, the mega projects, each underpinned by sustainability. By running our existing business efficiently every quarter, we were able to deliver double-digit earning per share growth in eight of the last quarters. And we continue to advance our blue and green hydrogen projects to help decarbonize the transportation and the heavy industrial sector of our economy. We expect these world-scale clean hydrogen projects to significantly add to our already strong profit stream in the future. Now, it is my pleasure to turn the call over to Melissa Schaefer, our Chief Financial Officer. Manisha?

Thank you, Safey. As Safey has said, the consistency and resilience of our business was on full display this quarter. Price and volume gained 4% and 3% respectively, and all profit metrics were up again double digits over last year in a difficult environment. Thanks to the people of Air Products for your continued commitment to serving our customers around the world. We are proud that our Neom Green Hydrogen Joint Venture, the world's largest green hydrogen production facility, achieved financial close in May. The joint venture successfully secured over $6 billion of non-recourse financing from over 20 global project finance leaders. The project was two times oversubscribed, a clear demonstration of confidence in this project. Now please turn to slide nine for a review of our third quarter results. In comparison to last year, volume increased 3%, driven primarily by our onsite business. Merchant price was 10% higher compared to last year, the seventh consecutive quarter of double-digit increases. This equates to a 4% price gain for the total company, with positive pricing across all regions. Declining natural gas costs in Europe and the Americas, reduced energy cost pass-through to our on-site customers. This 11% decline in sales had no impact on profit, but had a positive impact on margins. The overall impact of currency was modest. However, Asian currencies were particularly weaker and contributed to slightly unfavorable currency impact against the U.S. dollar. EBITDA improved 12%. as strong price and equity affiliate income, including the contribution from the second phase of the GEZAN project that closed in January, more than offset higher costs. EBITDA margin jumped almost 600 basis points, with lower energy costs passed through, accounting for two-thirds of the margin improvement. ROCE progressed steadily to reach 12%, which is 130 basis points higher than last year. We expect ROCE to further improve as we bring new projects on stream and continue to put the cash on our balance sheet to work. Adjusting for cash, our ROCE would have been 13.6% this quarter. Sequentially, favorable volume and price net available cost drove improvement to the EBITDA and EBITDA margin. Lower energy cost pass-through also benefit EBITDA margin. by about 200 basis points. Now please turn to slide 10 for a discussion of our earnings per share. Our third quarter GAAP earnings of $2.67 per share included two non-GAAP items that together negatively impacted EPS by 30 cents per share. First, we recorded a 23 cent charge for business and asset action. Second, the non-service components of our defined benefit plan resulted in a $0.07 cost this year versus a $0.03 gain last year. Excluding these non-GAAP items, our third quarter adjusted earnings was $2.98 per share, up $0.40 or 16% compared to last year, driven by strong pricing and higher equity affiliate income. Price and volume and cost added $0.34 to our third quarter adjusted earnings. Price, net of variable cost, contributed $0.52 this quarter, and volume improvements contributed an additional $0.09. Costs were unfavorable $0.27, driven by inflation, as well as our ongoing efforts to support our growth strategy, including bringing new assets on stream. Equity Affiliates' income was 18 cents higher due to the contribution of the second phase of JASAN project and good results from our other unconsolidated joint ventures in the Americas and Europe. The remaining items, including non-controlling interest, interest expense, and non-operating income and expense, together had a modest negative 6 cent impact. We expect our fiscal year 2023 effective tax rate to be approximately 19 to 20 percent. Now, please turn to slide 11. Our ability to steadily grow this railroad cash flow, especially in challenging conditions, is a hallmark of the strength and stability of our businesses and underpins our dividend and capital deployment program. Over the last 12 months, we have generated about $3.2 billion of distributable cash flow or over $14 per share. We prioritize over 45% of or about $1.5 billion as dividends to our shareholders while still having roughly $1.8 billion to invest for growth. Now, please turn to slide 12. We have made significant progress in developing or deploying our capital since 2018, committing most of our estimated investment capacity available in 2018 to the 2027 timeframe. Because our strategy related to the energy transition extends well beyond 2027, we have revised this slide to show a rolling 10-year time horizon. We have not changed any other assumptions or calculations. We remain committed to maintaining our current targeted AA2 rating. With our strong cash flow and additional debt leverage, we estimate that we can put more than $30 billion to work over the next 10 years. Today, we have an $18 billion backlog with $11 billion of projects focused on the energy transition. We believe that investing in these high-return projects is the best way to create long-term shareholder value. Now, to begin the review of our business segment results, I'll turn the call over to Dr. Serhan.

Thank you, Melissa. During our fiscal third quarter, we again saw broad-based improvements across our businesses, extending the positive trend from previous quarters. Results improved in each of our regional segments versus last year, driven by strong price, strong volume, productivity actions, despite the challenging operating conditions around the world. Before I discuss the results of each region, I would like to provide a brief update on our major projects. First, turning to slide 13. You will see that we have enhanced how we present our major projects clarifying the project investment amounts, specifying the long-term nature of the related off-take agreements, and highlighting energy transition projects. We believe this new format provides a clear overview of key projects in our backlog and provides near-term and long-term visibility. Now please turn to slide 14. I'm pleased to say that the Jyotai gasification project is in operation. Our team executed the project in the midst of COVID lockdown and supply chain disruption, including several months of severe lockdowns during the startup period. We were able to complete this complex project with outstanding safety performance and come in under budget. The team of over 3,300 workers during peak construction completed nearly 13 million hours without a lost time incident. I would like to thank the team for a job well done. Our team in the Americas has also overcome many challenges to execute the Gulf Coast Ammonia Project, which had nearly 1,300 workers during peak construction and completed over 3 million hours without a lost-time incident. The facility is currently in startup, and we expect to begin delivering hydrogen to our pipeline system this month. Finally, following many years of hard work, we announced the $1 billion acquisition of the natural gas to syngas plant in Uzbekistan. As part of one of the most advanced energy plants in the world, This acquisition includes the two largest auto thermal reformers in the world, in short, ATR. This is the same ATR technology we're deploying in our net zero energy complex in Edmonton, Canada. This will further enhance our industry-leading hydrogen production capabilities, driven by our own partial oxidation technology, in short, POX, P-O-X. This is the technology we have acquired from GE several years ago. This box technology, which we are deploying in our clean energy complex in Louisiana, has been a proven mainstay for efficient syngas generation for many decades. We will operate multiple box units at the Louisiana facility, each of which will be the world's largest. FOX and ATR are the two leading processes for the production of blue hydrogen. Having the capability and the flexibility to use both leading technology to produce blue hydrogen at world scale will further extend our leadership in low-carbon hydrogen production. Now please turn to slide 15 for a review of our America's segment results. Compared to last year, America's EBITDA was up 18%, driven by higher price and volume. Merchant price improved 11%, which corresponded to 4% improvement for the region overall. Volume grew 6%, driven by on-site, including strong demand for hydrogen. EBITDA margin jumped more than 1,100 basis points, Driven by strong price, lower energy cost pass-through, which drove about three-quarters of the margin improvement. Sequentially, EBITDA increased 10%, mainly on better hydrogen volume and lower variable costs. Lower energy cost pass-through also drove roughly around two-thirds of the margin improvement. Now please turn to slide 16 for a review of our Asia segment results. Our results in Asia improved despite the currency headwinds. Low recovery in China and higher energy costs across the region. Compared to last year, EBITDA was up 10% despite a 5% negative currency impact. Positive price and volume more than offset higher costs. Merchant price increased 9%, which more than offset higher variable costs. Volume improved 8%, primarily to better onsites, including the addition of over 30 new assets in the past year. Our activities in the electronics sector were particularly robust, accounting for many of the new projects. We also added projects in the chemicals, glass, and other applications. Sequentially, volume was up 2% following the Lunar New Year holidays. Please now turn to slide 17 for a review of our Europe segment's results. Our team in Europe has worked hard to maintain positive momentum. Compared to last year, EBITDA increased more than 20%, driven by the impact of our pricing actions. Merchant price improved 10%, which equates to a 6% gain for the overall region. This is the seventh consecutive quarter of double-digit merchant price gains for the region. Volume was up modestly on better onsite. This is particularly driven by improvement in hydrogen. This more than offset weaker demand for merchant products. EBITDA margin was about 800 basis points higher and included the impact of lower energy cost pass-through, which benefited margin by around 300 basis points. Sequentially, the region's EBITDA held steady as several energy costs offset the lower price. Lower energy cost pass-through also benefited EBITDA margin by about 150 basis points. Now, please turn to slide 18 for a review of our Middle East and India segment results. From birth to last year, there are merchant volume and a price which sells higher, but increased costs negatively impacted operating income. The second phase of the Gizana project, which closed in mid-January of this year, added to our equity affiliate income, and it drove the region's overall results. The Jazan project has contributed as we expected, consistent with our commitment. Please now turn to slide 19 for our corporate and other segment results. This segment includes our sale of equipment businesses as well as our centrally managed function and corporate costs. The sales and profit for this segment will lower this quarter due to lower sale of equipment activities and higher costs resulting from ongoing support for our growth strategy. We do, however, continue to have robust discussions with customers interested in our LNG technology and equipment. We're pleased to announce two significant sale of equipment project wins with Qatar Gas and NextDecade. This is in addition to the two project wins announced in May. We plan to expand our production facility in Florida again and expect increasing LNG project activities to improve the segment results. Echoing what Saifi and Melissa have mentioned earlier, the outstanding results this quarter again show the resilience of our people and our businesses. I also would like to acknowledge the hard work and commitment of our teams around the world. I would like now to turn the call back to Seyfi to provide his closing remarks.

Thank you, Dr. Serhan. Now, please turn to slide number 20. Our third quarter results exceeded our previous guidance. However, the outlook for economic conditions around the world remain uncertain. We have again raised our fiscal year 2023 guidance by 5 cents at the midpoint of 1140 to 1150 earnings per share for the year versus the 1130 to 1150 we had provided last quarter. For the fourth quarter of fiscal year 2023, our earnings per share guidance is $3.04 to $3.14, up 7% to 10% over last year. We still see our capex for the year to be about $5 to $5.5 billion. Now, please turn to slide number 21. The people of air products are passionate about helping to solve the world's significant energy and environmental challenges. Their commitment and motivation continues to drive our performance. In our core industrial gases business, we are demonstrating continued strength and resiliency, even against a soft economic backdrop. And we continue to bring plants online and enter a new phase where we will bring additional larger scale projects on the stream. As a result of that, we see a great future for air products. And that is what makes all of us very excited about working here and being part of the global energy transition movement. At this time, we will be delighted to answer your questions.

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 that your mute function is turned off to allow your signal to reach our equipment. Please limit yourself to one question and one follow-up question. Again, you may press star 1 to ask a question. We'll take our first question from Christopher Parkinson with Mizuho. Please go ahead.

Great. Thank you so much. Safie, one of my emerging favorite slides is slide 12 for what it's worth, specifically the estimated future capacity in terms of what you can allocate to projects in the coming years. I understand this is a very fluid situation, but can you just kind of help us with a thought process around how much you believe could or will be allocated to projects oriented to the US IRA or something along those lines, just to help us really think about the next few years on that capital allocation process. Thank you so much.

Thank you very much, Chris. You are asking a very good question. We provided the slides. to give you a 10-year view because we are at a long-term strategy and we wanted investors to get as clear a view of the future as we can provide right now. You obviously appreciate that there is a very dynamic situation about different projects in different parts of the world. So I'd like to say that the comment that I make is based on what we know today. Based on that, I think a significant part of that investment is going to be in the United States as a result of the IRA and the opportunities that that creates for us. But obviously, you know, the board is developing. Different people are coming up with different projects and all of that. And we participate in those. But right now, I would say that the significant part of that $30 billion will be investments in the United States that we have already committed to and we will commit as we go forward. Okay, Chris?

That's fantastic. Thank you so much. And just as a very quick follow-up, can you just give us just a very, very brief overview? There are three questions, I think, that buy side inclusive of, you know, obviously longer-term holders. you know, just the update on the Jezan 2 ramp. Obviously, I believe that started in January. Between that, Gulf Coast Ammonia and Jutai, are those all trending basically in line with your expectations? And, you know, just trying to compartmentalize, you know, those names as we're thinking about fiscal year 24. Thank you so much.

I'm just trying to make sure that I understood your question because the sound wasn't that good. Yeah, is Jezan performing as expected? I would like to have... Dr. Serhan is the chairman of the company that we have formed to run Jazan. So I'd like to turn it over to him to answer the question.

Yeah, Chris, everything is going as planned, really, since we took over the group to assets. We've been commissioning them, putting them on a stream, and really supplying the product to power to the grid and supplying also products like hydrogen to the refinery and steam. So things are really going well with that project. I mean, we're really... fortunate to have a very strong 800 people doing this, running that facility.

Thank you. Thank you, Dr. Shah. Thank you.

We'll move to our next question from David Wong with Deutsche Bank. Please go ahead.

Hi. I guess you have very strong margins this quarter in Europe. How sustainable are those margin levels and how should we think about those going forward?

Well, thank you for the question. Obviously, from my point of view, I hope it is sustainable for a very long time. But obviously, time will tell. We, as you know very well, as a matter of policy, do not comment on forward pricing. We comment on what the pricing that we have achieved, but we don't comment on forward pricing. So our goal is to maintain our margins as high as possible. and create as much value for our shareholders. But I don't want to make any predictions. Dr. Serhan, do you have any additional comments on that?

I mean, really, the team in Europe has been doing an outstanding job. I mean, we deal with all of the challenges in Europe about the war, about energy cost fluctuation. But no doubt about it, the industrial output in Europe is not growing at all. I mean, and that is definitely a challenge that we're monitoring. Automative, I mean, some of the segments we support is better than last year. We see gradual improvement in electronics with some of the customers there. The low natural gas pricing, we see some of the chemical defining fertilizer business are picking up activity. Construction is still challenging there, which helps our package business. That's still really down compared to previous years. So, again, measured costs. Okay, thank you.

And then in your corporate cost for this quarter, how much was the increased loss from lower equipment sales and then how much was from increased investment spending?

I'd like to turn that over to Melissa to answer. Melissa?

So thank you very much, Stacey. So just to make sure I understand your question, you're asking what was the additional contribution from our sale of equipment?

Just your corporate cost overall is higher than the prior year. I guess how much was from lower equipment sales and then how much was from increased investment spending this quarter?

No, thank you very much. So I think you asked a great question, and I will focus on cost, not just within our corporate segment, but perhaps across our organization. So a portion of our costs are really associated with our good results, right? We increase our variable pay program across our organization as our results come in positively. Additionally, like most organizations, we continue to feel the burden of the wage inflation across the organization. Finally, another notable contribution is the fact that we have several plans that are pre-onstream or commissioning phases. This obviously adds to our headcount and preparation for the onstream of those plans. which will add to our cost stack for a period without support from the program or from the invoicing of those plans. So those three combined is really where you see the cost increase across the organization.

Okay, thanks. Okay, thank you.

We'll move to our next question from Steve Byrne with Bank of America. Please go ahead.

Yes, thank you. Your increased demand that you're seeing in hydrogen, just curious, which of your pipelines are you seeing that from? And are these your legacy refining customers or is this from renewable fuel? And would any of those customers justify your installing some carbon capture in the near term to generate some blue hydrogen for those customers?

Dr. Serrano, you want to answer that?

Yes, Steve. Good question. We really see the demand for hydrogen. It's really significant. I mean, the main driver for us, for our businesses, because you know that means we have the biggest network in the world in the U.S. Gulf Coast. That's really fully utilized. I mean, we have there more demand than we can really supply. And definitely there is also demand for lower carbon hydrogen for the renewable diesel refinery industry. So it's been really very robust. We saw some activity also picking up the hydrogen also in our Rotterdam pipeline system there. The same thing we see it in Canada, California. So it's overall really been robust. That means the demand for hydrogen with also some packets for low carbon hydrogen.

Okay. And just curious. Yes, yes. Thank you. With respect to NEOM, have you... reassessed whether or not you need to invest downstream in distribution. It's been three years since you announced that project and at that time you were thinking you would need to build some downstream pipeline capacity for the green ammonia. Do you have a view now of where you might be able to sell that green hydrogen from NEOM?

Yes, we do. And we have announced some of it, and I can elaborate on that right now. We see a significant demand for that product in Europe because it has been very clear with the policies that has been finalized in Europe that they were not finalized even two years ago. Europe, basically, most of Europe, especially Germany, has decided to go green. As a result of that, we plan to build at least three terminals in Europe, one in Hamburg, one in Rotterdam, and one in England, to bring the product, the ammonia, into those ports, dissociate it, and then sell it for mobility and for industrial applications. We might add additional terminals. In addition to that, there is a demand, a potential demand for that green hydrogen and other green hydrogen that we might make in the United States, and we are making in the United States, in the state of California because of the regulations that have been put in place in terms of conversion to very low emission vehicles. Therefore, we possibly see another terminal also in California. That is our current plans, but this is a dynamic situation. The regulations around the world continue changing, and as that develops, we will obviously update you. There is significant demand being generated and being discussed in Korea. There is obviously the demand for blue hydrogen in Japan and all of that, But we will update you as we go forward. But that is how we see it today.

Thank you. Yes, thank you.

We'll move to our next question from John Roberts with Credit Suisse. Please go ahead.

Thank you. Hi, Sefi. I'll just ask one question here. When do you think we'll get the first conversion of an existing U.S. hydrogen plant from gray to blue?

John, that is an excellent question. I can definitely confirm that we are working on that. I do not want to predict an exact time schedule because we are talking to customers and it is sensitive and they don't really want us to talk about these things too much. But we, as you know better than anybody else, have a significant number of SMRs in the United States that generate CO2 and And we are very interested in capturing the CO2 from as many of them as possible. And with the help of the IRA and the demand and the higher prices that people are willing to pay for blue hydrogen, we have a significant opportunity on that. And we will do that. Dr. Salomon, do you want to make any additional comments on that?

No, it's fine.

Thanks. Okay, John? Yep, thank you. Thank you.

Our next question comes from John McNulty with BMO Capital Markets. Please go ahead.

Yeah, good morning, Safey. Good morning, John.

How are you doing?

I'm great. I'm great. Hopefully you are as well. I wanted to ask on the Uzbek project that you're bringing on, I guess a couple questions on that. Can you help us to understand, because it looks like it comes on at some point relatively early in 2024, but so can you help us to understand how the timing of it and also the EPS contribution that you expect it to give as you look to 2024. And then I guess also tied to that project, how do you think about the returns for it? I know you look for a 10% plus return, but I also know you risk adjust those as well. So I guess how should we be thinking about that for the use-back project?

Well, I will... I'll make some general comments, and then I turn it over to Dr. Serhan to kind of elaborate even more in detail. But we expect that project, which is a very good project, as Dr. Serhan mentioned, that project has the largest ATRs in the world, and we are very happy to own it now. We expect contribution from that project in our bottom line for sure in our fiscal year 2024. In terms of the exact number, obviously, I can't give you the exact number, but order of magnitude, we expect a contribution of about $0.35 per share, at least. So, Dr. Serhan, would you like to comment?

Let's start really with what is really included in this acquisition. So this is really the two largest world-scale ATRs in the world. There's also a hydrogen unit, two large air separation units, around 4,000 tons per day. The plant is already built. It's in the process of being commissioned right now, and that's why we see it's going to be assertive to our earnings next year, 2024, and it will be fully in the numbers for 2025. Again, we're very proud of the project and really operating those ATRs, with how the topsy technology is really going to give us lots of know-how about how to really optimize our positioning in a blue hydrogen in the future.

Okay, John?

Got it. Perfect. No, thanks for the color. And then maybe just as the follow-up, you've got the Alberta project or Edmonton project coming on next year. It does seem like the demand for clean hydrogen is picking up in the region. Is that project sold out at this point based on the contracts that you've locked up?

John, on that one, we have announced what the signing of a long-term contract with Imperial Oil, which is part of Exxon, and we have given you the details of that. The rest of it, we have very clear visibility to where we are going to sell it. So I think it's a matter of semantics when you say sold out, that means contracts that have been signed and finalized for the fact that we feel that it is going to be sold out. So we feel very strongly that we will sell all of that product and we might actually need more than that. I'd like to have Dr. Serhan make some comments about where we are on this thing and any additional comments.

Thanks, Sefi. IOL is the anchor customer for this project. We're working together with them to bring our respective facilities on stream. Please note the products out of this project will go into our existing pipeline system there, which we have a system in Edmonton, Canada. And this will be feeding IOL other customers and also hydrogen for mobility because we are building a fueling station. Also, they are to use low carbon hydrogen for mobility. It's going very well. I mean, working very closely with IOL as the anchor customer.

Okay, got it.

Thanks very much for the call.

Thank you.

Our next question comes from Mike Sisson with Wells Fargo. Please go ahead.

Hey, good morning, guys. Yeah, just one question. When you think about 2024 or next year, How much earnings growth do you get from projects that are coming on stream, and does CapEx go up next year because you have such a big backlog of growth projects?

In terms of 2024 and what comes from there, I would appreciate if you have some patience, and we will disclose that to you at the end of October, obviously. I don't want to get ahead of ourselves. But in terms of our capex, our expectation today is that our capex next year will be approximately five to five and a half, the same as this year. That is based on what we know today.

Okay, Mike? Understood. Yep, thank you. Thank you. Thank you.

Our next question comes from Josh Spector with UBS. Please go ahead.

Yeah, hi. Thanks for taking my question. Just first on the Canada Blue Hydrogen Project, just, you know, the slide that you updated on the backlog maybe has a little bit less of the discrete timing elements of there. Do you still expect that in 2024, and I guess fiscal 24 for you guys, or has anything changed there? And same thing with the SAF project. Has that moved from 2025 to 2026, or is the timing relatively unchanged?

Well, that's I'd just like to, with respect to the project in Canada, as Dr. Serhan said, that project, when it comes on the stream, we are committed to process and supply hydrogen to IOL, so we can only do that when their plant comes on the stream. But in addition to that, we do have our pipeline, we do have existing customers, who do use hydrogen, and they're increasing their demand for hydrogen. So we have the option of putting that into our pipeline. So we have a lot of different options in terms of how we are going to deal with that. Dr. Serron, you want to make any additional comments? We've talked about it before already, yeah. Yeah, you're okay with this? Yes. So that's where we are with that.

Okay?

Yeah, I guess how about the staff plant and just, you know, my follow-up, I guess, on Canada would just be, are we looking about the returns there as being the pre- or post-grant number, so the 1.2 or 1.6? What do you base your returns off of?

The project cost that we have disclosed includes the grant, correct? That means the net is... That number that we have given you minus the $475 million Canadian dollars that we will get from the Canadian government. We have given you the gross number. The $1.6 billion minus the $475 million. Exactly. And then with respect to the SAF plan, the SAF plan, we are working on that. It is in California. And we are at the mercy of exactly when the permit will get issued. We have the air permit and all of that, but now we are working on getting the actual construction permit so that then we can start working on that project. The dates that we have given you is the best estimate that we have at this time, but that is subject to the issuance of the permit by the state of California for when we can actually start construction. Again, Dr. Sherman, any additional comments on that?

The visibility we have, we expect that by the end of the year that we will get the construction permit. But again, it really will depend on the officials in the state of California.

Okay.

Yeah, thanks. But just what I was asking on the Canada project is more the basis of what the returns are off of. So the 10% pre-tax return, is that based on the net number or the gross number?

Marissa, you want to answer that? I'm

Absolutely. So, yeah, thank you for the question. So, there's two components of the grant. The first component is a capital grant that we are getting from the government. The second component is around a production credit. But for your specific question around where you should expect to take our normal run rate of returns, it's associated to the net number, the 1.1 Canadian that we have listed on the project slide.

Okay. Okay. Thank you. Thanks. Sure.

Our next question comes from Mike Latehead with Barclays. Please go ahead.

Great. Thanks. Good morning, guys. Safey, just one question on your blue ammonia facility. A large fertilizer company last night paused their clean ammonia project, basically saying the costs are coming in higher and they're not seeing downstream applications develop as fast as they thought. I was hoping if you could speak to those two factors, cost and offtake agreements, as it related to your project.

But Mike, obviously I cannot comment on what other people are saying. The Blue Ammonia project that we are building in Louisiana, there are many different options that we are considering in terms of the exact final scope of that project As things develop with the markets and all of that, you know very well that that project, we are going to make 750 million standard cubic feet a day of hydrogen. One of the issues for us is finalizing how much of that hydrogen we are going to put in our pipeline and how much of that hydrogen we are going to put and convert to ammonia. That obviously makes a difference in terms of our total capital cost and all of that. I do not want to dispute the general statement that obviously the cost of these projects are going to be probably higher than people expected because of inflation, because of labor shortages and all of that. But we have not finalized anything yet that is at a stage that we would want to... talk about that. But because our scope is still under definition, the sequestration, how do we do the sequestration? It will make a difference whether we do the sequestration ourselves or be subcontracted to somebody. So there is a lot of moving parts. But I'd like to turn it over to Dr. Serhan to make some additional comments.

Thanks, Sefi. I mean, definitely in the context of the soft global economy, global COVID pandemic, shortages in labor, materials, supply chain disruptions, record inflation rate, I think we definitely at Aeroproducts showed that we can deliver. I mean, we showed that on Gizan. We showed it on Jotai. We showed that on Gulf Coast Ammonia. And projects that you don't really hear too many about, 160 of them were closed and put on stream during the COVID period. So I think, again, we managed to show that we are walking the talk, basically, and we deliver on these things with the challenges that exist. We do see something like the inflation subsiding, slowing down, but it's not going anywhere. But we're really having the execution, basically, where we're managing these challenges and deliver on our commitment, which is the 10% EBITDA during the contractual life of these assets.

I'd just like to make one additional comment. I can't help but make the comment. You know, as I said, I don't want to comment on what others are saying, but I do like to make a general comment that a lot of people sometimes start on this journey of blue ammonia and green ammonia based on back of the envelope things without really understanding what they are talking about because they have never done it before. As a result, they come up with numbers that looks pretty attractive. Then when they start actually doing the project, defining their scope, and finding out the complexities, then they get surprised. So I wouldn't be surprised if in the future many of the people who have embarked on this energy transition would come up with the realization that some of these projects are a lot more complex than they think, it takes a lot more, and not everybody who has never made a pound of hydrogen in their life can become a supplier of blue or green hydrogen and participate in the energy transition. We have been in this business for 60 years. We think we know what we are talking about. But anyway, I just couldn't help but make that general comment. Okay. Fair enough. Thank you so much. Thank you.

Our next question comes from Duffy Fisher with Goldman Sachs. Please go ahead.

Yes, good morning. Stacey, maybe if you could, you've seen quite a few business cycles, so I'd be interested if you'd pontificate a little bit how you see Europe and China in particular playing out kind of the rest of this year into next year from a macro standpoint.

Thank you for the question, and I really appreciate the fact that you used the adjective pontificate because that is what I'm going to be doing because it's very difficult to see the future. Right now, the way that we are seeing right now things developing in China and in Europe. China, we have seen some slowdown. It is not affecting our business in a material way, but it is affecting our business. But the future is very much dependent on what the Chinese government decides to do in terms of any kind of a stimulus or not. That is very hard to predict, and obviously we will react to that. The good thing is that a significant part of our business in China, something like 65% of it, is on-site business. So there is a lot of stability there. In terms of Europe, I hate to put it this way, but it really depends on the weather and the energy costs. Because if the weather becomes significantly cold and energy costs go up, it will have a significant effect. If they become lucky, like they were last year, then the effect will be less and the energy costs will stay low. But overall, it is a little bit of an unpredictable situation. That is why we as a company, the way we deal with this is we are very focused on productivity. And as you saw and as you heard Melissa explain, We have taken actions in terms of productivity, and we are taking a charge for that in order to make sure that we are prepared just in case things do not turn out to be as rosy as some people are predicting. Dr. Serhan and Melissa, any additional color on this?

Europe is the one business or one region we have where we have significant amount of merchants. I mean, versus the other regions. So definitely the industrial output not growing in Europe is a concern. I mean, we see some signs of picking up, but it's still there. We don't really see it picking up full steam. China, again, we saw some recovery, but it's slowing down. I mean, we're keeping an eye on this and what type of incentives they're going to have there to really incentivize the economy.

Yeah, so I'll just add one comment specific to Europe. So we are in a situation where we have now lapped the strong pricing momentum so that although we are seeing a slight decrease sequentially, we still have very strong pricing in Europe. And so I think we just need to remember that that lapping, the comps are tougher, but it's still very strong pricing in Europe. So we need to hold on to that to continue to show the strong returns in Europe.

Great. And maybe we'll stay with Europe and kind of switch back to the hydrogen question. Obviously, you're talking to a lot of folks there. You have both blue and green hydrogen to offer. How do you see Europe playing out? How much do you think will be mandated kind of at the green level? And how much will just care is it CO2 reduced so you can use blue hydrogen? How do you see that playing out over the next, you know, three, four or five years?

Duffy, that is a very good question. Right now, our best information, based on discussions with customers, is that Europe is very much committed to green. The argument is that blue hydrogen is a transitionary thing, so why go to blue and then go to green? We know we are going to go to green, therefore let's make the leap. And therefore, I'm sure you have seen some of the announcements with respect to, for example, the 2.2 billion euros that the European Commission approved for ThyssenKrupp. That is clearly, you know, was approved for use of green hydrogen. So that is the direction we see in Europe. In Korea, in Japan, I think it will be more oriented at the beginning toward blue. because that is going to be used for decarbonizing the power plants. And in the United States, we have to see, but the good news for us is that we are seeing significant discussion on both, that it is not, as people predicted, that in the U.S. it would all be blue hydrogen. Right now, we are talking to companies who are very interested in green hydrogen in the United States. to make their products in the United States, whether it's a seed or chemical.

Great. Thank you, guys.

Thank you.

Thank you, Duffy.

Our next question comes from Jeff Sakakis with JP Morgan. Please go ahead.

Thanks very much. I have one question with two parts. The first is, when I look at your results, your volumes are up three, your prices are up four. When I look at your competitor in Danbury, I think its volumes are maybe down one, its prices are up seven. And in the different regions, it seems like your volumes are growing at a higher rate than theirs, and their prices are growing at a higher rate than yours. Can you reflect on that general phenomenon? And then secondly, Air Products claims to dissociate hydrogen at a 10% loss rate rather than 20%, which is sort of the general view that people have because of the energy you need to crack the ammonia. Can you just quickly explain to us in layman's terms how you're able to have a more efficient process?

Very good, Jeff. And good morning to you. Jeff, with respect to comparison, you know, you are comparing us to a company which has a different strategy and a different – so I don't want to comment on their results. Sure. You are comparing year to year because last year our pricing was significantly better than than the other people. So year to year, we are not going to show as much as an increase, because if they had a very low performance last year, this year, year to year, it looks better. I think that is the main reason for the pricing. So that is my general comment on that. But overall, we are very much focused on being a clean energy growth company. We are an industrial gas company and at the same time, so we are pursuing a totally different strategy as you and I have talked before. The fact that our volumes are up and I think this will continue to be the trend that we will beat other people on volume growth is because we are investing in the future and we are winning our share or even better than our share of the smaller projects than people have been talking about. So as a result, volume growth is obviously the key thing we are focused on. Pricing, we are holding our own. There is no significant difference in the pricing because if it was, the market shares would change and the market shares are staying stable. So that is the question that I have, first of all. On the second question that you have in terms of the efficiency of the crackers that we think we have versus the conventional wisdom that you use 20% to 30% of that, we have talked about this thing. It is a technology we have been developing. But the person who is doing that on a day-to-day basis is Dr. Serhan, and I'd like him to make some comments about that.

I mean, it really goes safely to what you mentioned before. I mean, it's that know-how we developed over the last 60 years in producing hydrogen. I mean, this is really what we had this challenge a few years ago. We looked at the market. We saw that there are ammonia crackers, but the efficiency is really not acceptable. You end up wasting lots of the valuable product. And again, we put our team of experts on this, and basically we developed a product where we feel it's very, very efficient, I mean, to a single-digit loss. that's really what we have without giving too many details.

Well, Dr. Serhan just gave you more information, but you were saying 10% and he's now talking single digits, which is good news. Jeff, if I may just summarize, I'm very proud of our team. We do have very good people and they have developed this technology and this is going to be a competitive advantage that we will end up having as we go forward on this conversion of ammonia to hydrogen.

Is that okay, Jeff? Thank you very much.

Yes, thank you. Thank you. We have time for one more question, and please go ahead.

Our last question comes from Vincent Andrews with Morgan Stanley. Please go ahead.

Hey, thanks for squeezing me in. This is Steve Haines on for Vincent. Maybe just a quick one on the fourth quarter guide. I think, you know, 4Q usually steps up a bit more seasonally than what you have baked in. I know you just kind of talked about some macro uncertainty in China and in Europe, but is there anything else in there that's causing a little bit of the more muted 4Q ramp? Thanks.

Well, thank you for your question. You know, the When we give you guidance, we put our thoughts together about what it is that we can see in terms of our best judgment of what we think we can deliver. When you look at our fourth quarter, I do agree with you that compared to seasonally adjusted results in the previous years, it seemed that there is not as much of a jump as you would expect. So on that one, maybe you can tell us that we are being a little bit cautious, but we are being cautious because we are totally uncertain about some of the economies. But that is our best judgment at this time, and obviously I certainly hope that we can do better than that.

Okay? Thank you. Appreciate it.

Well, thank you very much. That concludes our session. And I would like to, again, thank everyone for joining our call today. We really appreciate your interest and your good questions, and we look forward to discussing our results with you again next quarter. Stay safe, have a great summer, and talk to you soon. Take care. Thank you.

This concludes today's call. Thank you again for your participation. You may now disconnect and have a great day.