Air Products and Chemicals, Inc.

Morning and welcome to the Air Products 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. Sid Manjeshwar. Please go ahead, sir.

Thank you, Lynette. Good morning, everyone. Welcome to Air Products' fourth quarter 2023 Earnings Results Teleconference. This is Sid Manjeshwar, Vice President of Investor Relations and Corporate Treasurer. I'm pleased to be joined today by Sefi Ghasemi, our Chairman, President, and CEO, Dr. Sameer Serhan, our Chief Operating Officer, Melissa Schaefer, our 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. 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. Reconciliation of these measures to our most directly comparable GAAP financial measures can be found on our website in the relevant earnings release section. Now with that, I'm pleased to turn the call over to Seyfried.

Thank you, Sid, and good day to everyone. Thank you for taking time from your very busy schedule to be on our call today. I would like to begin with slide number three, our safety performance, which is our number one priority at Air Products. I'm pleased to share that our safety record has improved compared to last year, continuing the significant progress we have made since 2014. Our ultimate goal will always be zero incidents and zero accidents. Now, please turn to slide number four, which summarizes our management philosophy. We reiterate these principles every quarter because they are fundamental to how we manage the company, and continue to profitably grow our earnings per share. Now, please turn to slide number five. Air Products has a very strong business model and a long-term strategy to deliver consistent earning growth for the short and the long-term, and I stress the long-term. Projects in our on-site business, where we have long-term take-or-pay contracts with our customers, drove our volume growth this year, despite economic weakness across the regions. Our on-site business generates a stable cash flow and consistently contributes about half of our total sales. Also note for the is that strong pricing action in our merchant business, as well as our ability to contractually pass through energy costs in our on-site business, helped us mitigate inflation as well as higher power and energy costs, which we experienced last year. We also continue to successfully execute our long-term strategy to be the leader in blue and green hydrogen for the future, with a significant number of clean hydrogen megaprojects and their execution. Nobody in the world is matching what we are doing. Finally, our backlog of over $19 billion sets up a multi-year framework for double-digit earnings per share growth, which has been our goal since 2014 and remains our goal for the future. Now, please turn to slide number six. Our fourth quarter adjusted earnings of $3.15 per share exceeded the top end of our guidance for the quarter and improved 30 cents or 11 percent versus last year. For the full-year fiscal 2023, our adjusted earnings per share of 11.151 improved $1.26 or 12 percent over prior year, continuing our strong track record of consistently delivering double-digit average earning growth per share since 2014. We are very proud of the accomplishment in 2013, despite the unfavorable economic conditions. In addition to the strong results, we also made significant progress in our critical deployment, in our capital deployment strategy this year. Gazan phase two was completed, Both Gulf Coast Ammonia and Juitai are operational. NEON project financing was more than two times oversubscribed and closed successfully. We also added our four significant LNG sale of equipment projects. And I'm very pleased to announce that the natural gas to syngas facility in Uzbekistan is operational and contributing to our earnings. Before I go any further, I want to take time to thank all of our employees around the world, every one of the 23,000 of them, for their dedication and hard work, which has made it possible for us to deliver these impressive results despite significant economic and geopolitical headwinds. Now, please turn to slide number seven. We are continuing to deliver on what we promised to our shareholders in 2014, executing to deliver an average of at least 10% growth in earnings per share each year as we move forward. We believe our two-pillar strategy of focusing on our base business while extending our leadership in the growing demand for clean hydrogen It enabled us to continue to deliver double-digit growth in our EPS as we go forward. Now please turn to slide number eight. We are proud again of our accomplishment of more than 40 consecutive years of dividend increases. As you can see on this slide, since 2014, we have increased our dividend on an average of 10% every year. Slide number nine shows our EBITDA margin trend, continuing to be my favorite slide. Our margins have increased to nearly 40% in the second half of fiscal year 2023, confirming the strength of our business model and the significant cash flow that we generate. Now, please turn to slide number 10, for our fiscal year 2024 outlook and guidance. Although there will continue to be challenging economic conditions in the near term, I remain very optimistic about Air Products' future. Our capital deployment strategy and strong business model will sustain our double-digit average earning growth rate. Therefore, For fiscal year 2024, we expect adjusted earnings per share in the range of $12.80 to $13.10 per share, up 13% at the midpoint over last year. We expect new projects, many of which are already on the stream, to drive our earnings per share growth next year. Additionally, We also expect improved LNG sale of equipment activities to add to our favorable results in 2024. And for the first quarter of 2024, our adjusted earning per share guidance is 290 to 305, up 10% to 16% over last year. We also see our CAPEX for next year, somewhere between $5 to $5.5 billion. Now, please turn to slide number 11. I know that some of our investors refer to our major project commitments slide to track our projects. However, the size and scale of these projects, which all have multi-year execution timeframes, certainly now warrant more time and attention than we can give them in a single line on a single slide. Therefore, we remain committed to providing investors visibility and meaningful updates to schedule capital and offtake status as we continue to progress our major projects. So, From time to time, we will give you a more depth look into our projects. Today, we have decided to give you an update on our blue hydrogen and blue ammonia clean energy complex in Louisiana, which is one of the largest projects that we are executing. Please turn to slide number 12. We announced our intent to build this world-scale facility in Louisiana in October of 2021. As we moved forward with detailed planning to execute this project, a significant positive event happened in August of 2022, when the United States Congress passed the RRA legislation, which created tax incentives for the production of blue and green hydrogen. In addition, By 2022, it was becoming more and more evident that the future demand for blue hydrogen and blue ammonia is improving significantly, supported by positive developments in other regions of the world, particularly in Europe and Japan. Not only is there a growing need to decarbonize the heavy transportation and industrial sector, such as steel, but also other growing applications, including using low carbon intensity blue ammonia to fuel ships, reduce emissions from power plants and more. These events, especially the passage of the IRA legislation, led us to consider that now rather than later is the best time to build the infrastructure for this project to accommodate future expansion. It is important that we pre-invest in the infrastructure needed for future expansion now so that when the demand increases rapidly, as we expect it to, we will be able to bring the next phase of this project on the stream as fast as possible. In addition to the increased cost to build the infrastructure Obviously, the project cost has gone up due to inflation that we are seeing in the past three years since we announced the project and anticipate in the future to build this facility. In addition to all of this, we have included in the $7 billion funds to cover the interest on capital that we will be using as we build this plant. This facility is a huge facility. We are very excited about its future. We remain totally committed to this project and its profitability. It is a unique one-of-a-kind project that will put us significantly ahead of anybody else in the world in the production of this product. We see significant demand for the product that this plant will produce. As a result I am very pleased to announce today that our Board of Directors has given us final investment approval to proceed with the project at the new capital estimate of $7 billion. We expect this project will deliver double-digit returns to our investors when it is fully on the screen. As you know, this project will produce hydrogen and ammonia at very low carbon intensity. As the first company to make these unique low carbon hydrogen and ammonia products at a large scale, we expect to get a premium for the product, which will allow us to achieve double digit returns on capital. Additionally, the scale of our activities will provide a cost advantage over other similar projects in development at this time. We are really excited about the future of low-carbon hydrogen and ammonia. This project in Louisiana is well underway, and we are laying the groundwork to meet the expected additional demand in the future The additional infrastructure we are building now will continue to be a competitive advantage for air products in the future. Now, it is my pleasure to turn the call over to Melissa Schaefer, our Chief Financial Officer, to give you a summary of the fourth quarter 2023 results. Melissa?

Thank you, Sefi. And my thanks to the people of air products who have, again, delivered double-digit average earnings growth in a difficult environment, an impressive trend that we have achieved in nine of the past 10 quarters. Now, please turn to slide 13 for a review of our fourth quarter results. In comparison to last year, we have again achieved underlying sales growth despite ongoing economic weakness. Merchant price was 4% higher compared to last year, with positive pricing in most regions. This corresponds to a 2% price improvement for the whole company. Higher on-site volumes, including strong demand for hydrogen and higher LNG sale of equipment activities, were offset by one-time opportunities in the prior year, resulting in flat volumes for the company overall. Declining natural gas costs in Europe and the Americas reduced energy cost pass-through to our on-site customers. This 14% decline in sales has no impact on profit, but was a significant contributor to our higher margins. The overall impact of currency was minimal, as the strengthening of the euro and British pound against the U.S. dollar was mostly offset by a weak Chinese RMB. EBITDA of $1.3 billion improved 10% as favorable price, variable cost, and equity affiliate income more than offset higher other costs. EBITDA was up in four of our five reporting segments. EBITDA margin jumped more than 700 basis points with lower energy cost pass-through contributing to about two-thirds of the improvement. ROCE progressed steadily to reach 12%, which is 90 basis points higher than last year. We expect to maintain this steady progression as we continue bringing new projects on stream and put the cash on our balance sheet to work. Adjusting for cash, our ROCE would have been relatively flat at 13.4%. Results improved primarily due to increased LNG sale of equipment activities as well as onsite. Now please turn to slide 14 for a discussion of our earnings per share. Our fourth quarter adjusted earnings were $3.15 per share, up 30 cents or 11% compared to last year due to strong pricing and higher equity affiliate income partially offset by unfavorable costs. Price met a variable cost contributed 44 cents this quarter, benefiting from both price actions and lower power costs. Cost has been unfavorable impact of 28 cents driven by higher inflation and higher maintenance, as well as our ongoing efforts to support our growth strategy, including bringing new assets on stream. Equity affiliate income was 19 cents higher due to the contribution of the second phase of the design project, and positive results from other unconsolidated joint ventures across the region. The remaining items, including non-controlling interest, interest expense, and the tax rate, together had a modest negative 3% impact. Now please turn to slide 15. we remain committed to maintaining our current targeted AA2 rating. And 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 a backlog of over $19 billion, with approximately $15 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 to Dr. Serhan.

Thank you, Melissa. During our first four quarters, we again saw broad-based improvements across our businesses. Profits were favorable in four out of our five segments compared to the previous year. Please turn to slide 16 for a review of our America's segment results. Compared to last year, merchant price improved 10%, which corresponded to a 4% improvement for the lower region. Volumes grew 3% due to a strong demand for hydrogen. EBITDA of just over $600 million improved 17%, driven by strong price, volume, and equity affiliate income, while bullishly offset by higher costs. EBITDA margin of 44.5% jumped more than 1,100 basis points. About two-thirds of the margin improvement was driven by lower energy costs passed through. Sequentially, EBITDA increased 6% mainly on barrel hydrogen volumes. Now please return to slide 17 for a review of our Asia segment results. Compared to last year, Asia volumes were negatively impacted by slower economic recovery in China, a weak electronics market, and one-time opportunities that benefit last year results. Despite these volume headwinds, our teams maintain focus on price. EBITDA and margin were down primarily due to the unfavorable volumes. Sequentially, price and volume were flat. However, EBITDA declined primarily due to unfavorable business mix. Please turn to slide 18 for a review of our Europe segment results. Compared to last year, power costs subsided while merchant pricing remained stable. Strong volumes in our on-site business were offset by weaker demand for merchant products, resulting in flat volumes for the segment overall. EBITDA was up 15% driven by the lower power costs and stronger currencies against the U.S. dollar, which more than compensated for the other cost increases. EBITDA margin was 1,000 basis points higher approximately two-thirds of which was due to the impact of lower energy costs passed through. Sequentially, the region's EBITDA was relatively flat, as higher volume was offset by unfavorable price and costs. Like we mentioned before, we brought the new project in U.S. Pakistan on stream last month, earlier than previously anticipated. We expect this project to gradually ramp up and significantly contribute to growth in this segment going forward. Now, please turn to slide 19. Before we move on to the next reporting segment, I would like to take this opportunity to highlight the recently announced largest blue hydrogen project in Europe. Blue hydrogen project is being developed in conjunction with Portus, CO2 transport and storage project in the Port of Rotterdam, where we have an extensive hydrogen pipeline network. Portus will transport the CO2 emission from participating industrial companies and sequester them in depleted gas fields in the North Sea. Air products will build, own, and operate the carbon capture and CO2 treatment facilities. which will allow us to capture the emissions from our existing hydrogen facility as well as the customer refinery. The resulting low-carbon hydrogen produced will be supplied to ExxonMobil under a long-term off-take agreement. European regulations are supportive of low-carbon projects. We have secured additional support from the Dutch government. We expect the project to be on stream in 2026. Now, please turn to slide 20 for a review of our Middle East and India segment. Compared to last year, sales were lower due to lower volume. The second phase of the Gizana project, which closed in mid-January of this year, added to equity affiliate income, and it drove the region's overall results. Now please turn to slide 21 for our corporate and other segment results. This segment includes our sale of equipment businesses as well as our centrally managed functions and corporate costs. The sales and profit for this segment improved this quarter primarily due to higher LNG sale of equipment activities. We continue to have robust discussions with customers interested in our LNG technology and equipment. We were pleased to announce a significant new project involving sale of equipment in Malaysia last week, adding to our already robust project pipeline. According to Saifi and Melissa, the outstanding results this quarter again demonstrate the strength of our business. I also would like to thank our teams around the world for their hard work and commitment. I would like now to turn the call back to Sefi to provide his closing remarks.

Thank you very much, Dr. Serhan. Appreciate that. Now please turn to slide number 22. We present this slide during every earning call because it is our core belief that the commitment and motivation of our people are the key drivers of our success. After all, technologies, processes, and physical assets, which are often cited as competitive advantages, are all created by people in the organization. At Air Products, we have built an outstanding organization. Our people working together are creating innovative technologies processes and facilities that are making us a first mover in supporting the transition to lower and zero carbon energy and decarbonizing the transportation and industrial sectors. We are doing this alongside our excellent core industrial gases business, which is also underpinned by sustainability and delivering significant productivity and environmental benefits to our customers around the world. At Air Products, our higher purpose is to bring people together to collaborate and innovate solutions to significant energy and environmental challenges in our world. I can say that our entire team is focused on sustainable growth opportunities in generating a cleaner future for humanity. With that, we are now ready to answer any of your questions, and we welcome them. Operator, we are ready for questions, please.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. Again, that is the star key followed by the digit 1 if you have a question or a comment. We'll take your first caller. Don McNulty from BMO Capital Markets. Please go ahead.

Yeah, good morning. Thanks for taking my question. So I guess I wanted to dig into the Louisiana project a little bit more and the incremental $2.5 billion of spend. I guess it sounds like there's a bunch of buckets, including capital as interest, taking over more utilities, kind of expanding the scope of the project. I guess, can you help us to put into buckets where the bulk of that $2.5 billion is going? Good morning, John.

John, excellent question. Number one, obviously, as we said, we announced this project two and a half years ago. Everybody knows that there has been inflation. There is no escaping that, and there will be inflation as we continue to do this project. The labor markets are tight. Some of the supply equipment and so on are tight. Therefore, there is significant inflation that we have had to deal with, and we have included that in the new capital project. Order of magnitude, I mean, let's say that it's about a billion dollars or more is inflation. The rest of it is the fact that we have, as I said during the call, we have put in interest on capital. Obviously, as capital goes up, we do charge ourselves interest during our own capital because otherwise we would apply it somewhere. So that is a significant part of that $2.5 billion. And then in addition to that, we have decided because we see demand for this product being significant, that right now, some of the fundamental infrastructure, we want to build it bigger so that when we want to expand, we don't have to build smaller units again. Things like water supply, things like land preparation, things like we bought additional 1,000 acres for expansion. So it's a combination of all of that that adds up to the 2.5 billion, you'd say, increase. We also are putting contingency, and we have reviewed this thing in detail with our board, and I'm very happy that they have supported us. But I keep going back to the fundamental issue that we are reiterating, but please, very carefully, that we expect double-digit return now on $7 billion, rather than double-digit return on $4.5 billion. So if you want to look at it in a glass half full, we are actually going to make more money than before. John, I cannot overstress the fact that we see the demand for the product materializing. It is serious. And as we go forward, we will be able to demonstrate that to you. But this is a very exciting project. It's a unique project. We are executing it. We are in the field. And our people are very excited about it. And we are all very excited and very positive about this project.

Got it. Thanks very much for the color on that. And then I guess my second question would just be on the Netherlands project. You know, it sounds like it's an interesting kind of emerging opportunity. Can you help us to think about how much capital may get put to work on that project and how you're thinking about the returns for it as well?

Yeah, I'm going to have Dr. Serhan give you more color, but obviously the return for that will be double digits, as like anything else we do. But Dr. Serhan is very close to that project, and I'd like him to comment on that. Sami?

Thanks, Sefi. We're really not going to talk about the specific about the capital for the project. But again, it's a very exciting opportunity. It's our third project in our first mover advantage when it comes to blue hydrogen. We started with the net zero blue hydrogen project in Edmonton, Canada. Then we went to the Louisiana Darrow project. And now this is really the third. And it's really the biggest also in Europe. Very excited about it with long-term offtake agreement with a subsidiary of ExxonMobil, ESSO. We will capture CO2 from our existing hydrogen facility in the Port of Rotterdam, and we will also capture CO2 from another Exxon hydrogen plant where we basically provided to Portos to sequester it under the North Sea. Again, emphasizing the double-digit return for the project. I'm coming on stream.

Thanks very much for the call. Thank you. Thank you, John. Thanks very much.

We'll hear next from John Roberts from Mizuho.

Thank you. Nice quarter. Staying on the blue hydrogen project, project in Europe. Anything unique about the gas sourcing for that project, given Europe's disadvantaged gas situation? And is that replacing existing hydrogen capacity, or is your customer expanding their demand?

Well, I can answer that, and then if Dr. Serhan wants to add to that. But fundamentally, it is an existing plant that we have, an existing plant that Exxon has, We have the technology and the know-how. We are going to put carbon capture on these existing units and capture the carbon and put it in this pipeline to go and be sequestered. So we are actually reducing CO2 emission into the air. This is not a new plan that people say that you are building a new plan, you are capturing the CO2, but you are not really reducing existing emissions. This is really reducing existing emissions. And that is where our technology is, and that's where our know-how is. And therefore, it's a very positive project. It's received very positively. And it is a significant project. You don't want to disclose the exact amount because of the NDAs that we have. But it is not a $10 million project, but it's not a $2 billion project either. But it's a substantial amount of capital. Dr. Salam, do you want to add anything to that?

Again, it's really emphasizing no additional hydrogen. It's just really converting a gray hydrogen to blue hydrogen. And again, with full support of the Dutch government for low carbon hydrogen.

And on the volume weakness in China, could you peel apart syngas versus electronics versus merchant box lins?

John, that is a very, very good question. You know, I've been trying to get a handle on that myself, which is not that easy about where the weakness is. But there is obviously weakness in the electronics, but there is a weakness in the fundamental Chinese economy, and we are beginning to see that. So I don't want to go through all of the details of the breakdowns, but we are seeing a general weakness, and... Hopefully that trend will change, but that, you know, despite that, we are giving you the guidance that we are giving you because we are saying that if the Chinese economy doesn't develop as well as it should, then we will take additional productivity measures to make sure we deliver the guidance that we have given you.

Great. Thank you. Thank you, John.

And again, that is the start key followed by the digit 1. However, if you find your question has been answered, you may remove yourself from the queue by pressing the start key followed by the digit 2. We'll hear next from Vincent Andrews from Morgan Stanley.

Thank you, and good morning. Safia, I wanted to follow up on Louisiana in two ways. One, it sounds like some of the incremental capex will be spent now, but the benefits won't necessarily accrue to the company at the time the first phase starts up. So I just want to understand, you'll have $7 billion of total CapEx spent when the project starts up, and traditionally we think of your return coming to the company in that first year. Will you not get the return on the full $7 billion of CapEx when you start up? Will you have to wait until Phase 2 to get some of the return on some of the infrastructure and real estate spend that you're doing incrementally?

Vincent, good morning. Excellent question. We are not going to leave any money on the table. We are going to price the product in such a way that we get double-digit return on the project, on the $7 billion, right from the start. Okay.

And then secondly, if I... Go ahead.

Yeah. No, no, after you. Okay. And then secondly, I wanted to ask about your Canadian project. I believe one of your off-take partners, is also constructing a facility up there in part to use your product. And I believe they had an investor event earlier in September where that project might be delayed. If that project is delayed, how does that impact air products economics and their ability to market their own product?

Well, the way I would like to answer that is that, first of all, we are committed to meeting the requirements of our customer. So whenever our customers come on the screen, we will have our plans ready for them. They are a very valued customer. You know who they are, Exxon, and they are one of our largest customers, and we have a lot of respect for them, and we work with them very closely. In terms of if they are delayed and we are ready, not 100% of the product is going to them. We have other customers that we believe will be taking the product on time. We have a liquid hydrogen plant that we are going to feed. Therefore, we would expect that the effect on the products would not be that material. Thank you very much for all the detail.

Is that okay? Sure. Thank you.

We'll hear next from David Begleder from Deutsche Bank.

Hi, good morning. This is David Huang here for Dave. I guess on the major project slide, are there any other material changes on other projects in terms of project cost and timeline that you haven't updated. And also, I guess on project cost, if I think about the cost inflation on Louisiana project, it's about 20%. Why shouldn't that be the case for other projects that you have in your pipeline?

Well, first of all, with respect to other projects, there is no material change in the profitability of those projects. that we want to bring to your attention now. And as I said in my call, with some of these bigger projects, as we go forward in our earning calls, we give you more detail about the different projects. The second thing is that if you take a look at the inflation thing, one of the biggest projects we are executing was Josanne. That is already done. The next big project was Neom. We have already given you the capital for that, and we don't expect any significant inflation on that. That is in our backlog. With Daryl, we gave you the numbers right now. The projects that we are doing, the other projects that we are doing, are in such a way that the return is connected to the capital. So even if the capital goes up, the return doesn't go down. So there is nothing that material to report at that stage. Okay, thanks.

And then in FQ1, European pricing was down 1%. Is there any specific competitive dynamic that resulted in that 1% decline? Because I don't think you have a decline in pricing for a long time. And I think your peers are still seeing some price increase in European FQ4 prices. Can you just talk about what's causing that and then your expectation on pricing in Europe and then just in general for next year?

Well, I would obviously love to answer your question in detail, but you know that we do have a very strong policy and we adhere to that. All of us adhere to that. We do not talk about forward looking on pricing. That is not appropriate in our industry and we We can talk to you about what has happened in the past, but we do not have any opinion or any suggestions about what is going to happen in the future. And so my apologies. I will not be able to answer that question following our policy, and my chief legal officer is nodding his head that I'm doing the right thing.

Okay. Thank you. We'll move next to Mike LeThigue from Barclays. Great.

Thank you. Good morning. First, I wanted to circle back on the – Good morning. Good morning, Stacey. I wanted to circle back on Louisiana. You just answered an earlier question, I think, talking about pricing the product appropriately to get your double-digit return upon startup, which is great. But when should investors expect a signed offtake agreement to help us get a bit more comfortable with the revenue stream from the projects?

Well, on that one, I have been very clear about what is our philosophy. We could have signed agreements, long-term agreements, for selling that product two years ago. But we always said that we do not want to do that because as we go forward, it is going to become very clear to prospective customers that there are not that many plants or sources of low carbon, the level of low carbon intensity hydrogen and blue ammonia that we are going to produce. And therefore, the value of our product will go higher. We are not in a hurry to sign long-term agreements. The demand is going to be there. But right now, If you are negotiating with any of these prospective customers, to be very frank, they give you a list of 20 projects that, oh, wait a minute, I can buy from this guy in the Middle East and this guy in Louisiana and this project and this project. All of those projects are paper projects. Nobody's doing anything. We are the only people who are actually building a plant. So we have another two or three years before these plants come on the stream. We should not be in a hurry to go and sell this stuff cheap just because that makes everybody feel happy. Our business, our goal, our responsibility is to make as much money as we can for the shareholders. We think the value of these products will become higher as we get closer to where the demand is there and there is not that many people who are supplying it. So do not expect for us to come and make a big announcement about selling this product in the near future because we are just not going to do that. We believe that the demand is there. Our customers know that the demand is there. It's just a little bit of a game about at what point people are going to come to the table, and we just don't think that right now is the time to do that. But obviously, at some point in time, we do want to sell the product. There is no question about that. But it's just the fact that We are trying to get the maximum value for the very unique product that we are going to be making. Nobody else in the world is producing this kind of product. And by the time this plan comes on stream, there is nobody else who is going to be producing this product at this scale. Because nobody has made the commitment, and it takes a long time to develop these projects and build these projects.

Okay.

Thank you for that very thoughtful answer. And then second, just a quick follow-up on cash flow, maybe for Melissa. I think operating cash flow the past two years is about $3.2 billion, whereas CapEx is running about $5 billion, and the dividend is about $1.5 billion annually. So leverage is obviously moving a bit higher short-term. When in your multi-year outlook would you expect that to peak out, or when should we start to see operating cash flow helped by the project start to move meaningfully higher in your view?

I'll make a general comment and then I turn it over to Melissa to give you any more details if necessary. But fundamentally, we have always been telling you that we are committed to maintaining our A rating. That means that we will not level the company more than about three and a half times. If we ever get to that stage, we'll stop doing projects. We are going to be responsible. We have significant opportunity, and as Melissa has shown you on those slides, we still have a lot of headroom to level the company before we run out of cash. If we ever get to this stage, I just want to make a point. If we get to this stage that we are getting to the limit of three and a half, then we would slow down on the project. We are not going to be irresponsible and try to level the company because we are very committed to our A rating. That is the general comment. Specifically, Melissa, you want to add to that?

Sure. Thanks, Stacey. Hi, Mike. How are you? So as you mentioned, we do continue to have very strong cash flow to support our ongoing business. We do continue to increase dividends, which is our commitment, and we are executing against our global project backlog. With that situation, because of the cash outlay, we do expect to go to the debt market this year, this fiscal year. With that being said, as we bring these assets on stream, we will, of course, naturally be delevered. So that will be a decrease in our leverage, and obviously we'll continue to maintain that AA2 rating as Stacey mentioned. So again, likely we'll go out this year with the cash needs, but we do feel very comfortable that we will stay within that two-time leverage so that we can maintain our AA2 rating.

Great. Thank you so much. Thank you.

That's the caucus from J.P. Morgan. Your line is open. Please go ahead.

Thanks very much. The working capital was a use of $424 million this year, and your undistributed earnings of equity method investments was negative $260. So if you add that up, that's $685. That was pulled away from cash from operations. And so your cash flow is flat year over year. For 2024, what do you expect then? Three and a half billion, four billion, more than four billion? Is working capital an outflow or an inflow? Can you explain your cash flow dynamics for next year?

Good morning, Jeff. As usual, you are asking a very good and a very detailed question. And I'm going to refer that details to Melissa to give you some color on that. But, Melissa?

Yep, absolutely. Thanks, Jeff. I appreciate your questions, and you always definitely have very interesting and detailed questions. So, as we mentioned, we do still have a very strong cash inflow. This year, we had a few significant large cash outflows, including the closing of our phase two for JASAN that happened in January. However, with that being said, working capital is still being largely funded by our ongoing influent trade activities. This year, as we mentioned, we do expect to have CapEx at around five to five and a half billion, which is not far off where we were this year, including the closing of the JASAN joint venture. So we are very comfortable given our current cash flow, that we will be able to meet ongoing working capital needs, as well as execute against our growth strategy.

Okay. All right. For my follow-up, if your investment in Louisiana is going to be $7 billion, is that $7 billion to be spent by 2026? And so should we assume that your CapEx in 2025 and 26 should be higher than the 5 to 5.5 billion range you've got for 24?

Jeff, I'll take that question. Please. We have announced officially today that we expect the project cost to be $7 billion. We have not announced that we expect that Air Products will spend $7 billion on building the project. We can, as we go forward, and we sign long-term agreements to sell the product, we can and we will seriously consider, like we did with Neon, to level the project and finance the project. So you might end up that out of the $7 billion, our actual cash outlay for the project might be $2, $2.5, $3 billion, not $7 billion. So there is a possibility that of doing that. Please don't forget that. So we have the capacity to spend our own cash, but we would rather project finance these products so that we have more cash for future projects. And this we have demonstrated. We did this with Jazan, where it was a $12 billion project, and the project financed that. We have done that with NEOM, and there is a good possibility. I'm not saying 100%, but there is a good possibility that we will do that with this project, which is a very interesting project and very amenable to having project finance. Okay, Jeff?

Yes, thank you so much. Thank you very much.

Moving next to Mark Bianchi from TD Cowan.

Hi, thank you. I'd first like to ask for an update on the NEOM project. Can you talk about progress there, remind us of the timeline, and any updates on potential offtake agreements?

Our NEOM project is moving forward very nicely. We are certainly almost done with the engineering. We are actually constructing the plan. We have, as you saw, an announcement today by Neon Green Hydrogen Company that they are taking delivery of the wind turbines. So that project is expected. Right now, the timeline that we have announced is at the end of 2026, beginning of 2027, and we fully expect to meet that deadline. So in terms of discussions about the offtake, Again, the comments that I made about Louisiana apply to that. But also at the same time, there has been public announcements by other people about their demand for green hydrogen in Europe. You saw that one of the largest oil companies in the world announced that they will need 500,000 tons of green hydrogen by 2030. Just to put it in perspective, 500,000 tons is equivalent of three times the capacity of neon. So there is going to be plenty of demand for that project, but we will wait, as I said, in terms of our strategy to price that appropriately so that we can get appropriate return on that project.

Okay. Thank you, Safey. That's a great overview. Thank you. The other question I had was on the targeting greater than 10% internal rate of return of Does that suggest that this is an upgrade from your prior messaging of sort of an EBIT contribution of 10% of the project cost? And does this now include the benefit of IRA? I believe before the comment was that you were not including the benefit of IRA.

Well, it's a combination of all of that. We have always said that 10% IRA is the minimum. That really translates to what you said, 10 cents of operating profit on a dollar of investment. Those two go together. We do expect, and we have demonstrated that, now that you have all of the detailed numbers, please take a look at the return we are getting on Jazan. Jazan is a $12 billion project, and if you look carefully, you'll find out that in terms of IRR, the returns on that is more than 15%. We obviously, as I said, we price our products not based on just the return. The price is based on what the market bears. But if it goes below 10%, we usually don't do the projects, unless it is phenomenally strategic and we don't have too many of those. So overall, the 10% IRR is our minimum. And we expect most of our projects to produce more than that.

And the inclusion of benefit from IRA?

Well, the IRA, it depends on which project and how much it affects that and all of that. But IRA obviously will help. But as you know, IRA was designed in such a way that we would be able to get a good return but also price the product to encourage the customers to use that because it was an incentive for that. So it's going to help both sides.

Okay. Thank you very much. Thank you.

We'll move next to Mike Sasson from Wells Fargo.

Hey, good morning. Nice quarter and outlook. I apologize. I just want to ask. Louisiana again. Maybe I just don't understand. So... I take the seven billion and then your normal 10% of capital, it should be applied on the seven or is that less than seven?

Well, the rule of thumb that we said you should expect once that plant is fully operational, you should expect if we have financed that ourselves and the seven billion is all our money, you should expand the $700 million uplift on the operating income of our products. But as I said, we might decide to project finance it, which in that case, it would be in accordance with how much cash we put in there. But if it was all of our money, you should expect $700 million.

Okay. And then, given that the cost has gone up from $4.5 million to $7 million, Is the pricing assumption on what you're going to sell, has that changed? And does that 10% return change on a certain price that you need to get for the product?

Yeah, we believe that. Well, this is why our board approved the project at $7 billion, because they see that we expect that we will be able to sell the product at a price and at the premium to get that return. Look, it is not very difficult for the investors to take pen to pencil and just go through order of magnitude that plant to make it simple. Assume it is making 3.5 million ton a year of blue ammonia. Assume a price for blue ammonia. You know where the price of gray is. Obviously, blue is going to be Higher than that. And then see what the revenue is. And then the cost. It is natural gas cost that you can calculate. It is operating cost that you can calculate. It's electricity cost that you can calculate very easily. And then by the time you get done with the math, you'll find out that that plant has a reasonable price for blue ammonia it can easily make more than $1.4, $1.5 billion of EBITDA. So then that $7 billion becomes a decent return project. So it is not difficult to actually do the calculation. You know, right now, you know where the price of gray ammonia is, but it is not very difficult to convince yourself that that project is a very, very good project. The important thing for air products is to execute the project and bring the project, get the permit for the Class 6 well, do the sequestration. The execution is the challenge for us, but I think the rest of it will work out very nicely.

Understood. Thank you very much. Thank you.

Kevin McCarthy from Vertical Research Partners. Your line is open.

Yes, good morning. Safie, about three weeks ago, the U.S. government announced its intention to establish seven regional hydrogen hubs at a cost of $7 billion to be funded by the bipartisan infrastructure law. I'd be curious to hear your thoughts on that program. I believe you're involved with the so-called Arches project or hub in California. On the one hand, I suppose this accelerates the market development. On the other hand, there are many dozens of partners in these hubs, some of which might be customers, others might be existing competitors or possibly future competitors. So maybe you can put that into context for us in terms of your involvement and how you see that market developing.

But that particular project, which is part of the infrastructure project, we have never really emphasized that too much because that, in terms of helping what we are doing, is not comparable to the IRA. It is $7 billion spread over a lot of different projects. By the time it gets to any one individual company and so on, the amount is not that much to move a needle. We obviously welcome any kind of investment to promote the use of hydrogen. That is a positive thing. But in terms of any kind of a material, we are part of the Arches thing. I mean, we have an NDA. We cannot talk about it that much. But fundamentally, that contribution from that infrastructure bill, as you said, $7 billion divided by all of these projects, is not going to move the needle for us in terms of what we were or we were not going to do that. We have never counted on that as being anything significant. That is not comparable anything like the IRA because with the IRA, it becomes very meaningful when you start your sequestering in Louisiana, 5 million of ton of CO2 At $80, that's $400 million a year of contribution. Obviously, it costs some money to sequester the CO2. But as I said, the numbers are not comparable. So on the infrastructure bill, they have always said it's a good thing. It obviously is a good thing. It's better than nothing. But it's not something that will make any material difference to what we are doing or not doing.

Okay, thank you for that. And then secondly, if I may, Would you comment on your outlook for the corporate and other line? It came down quite a bit in the fiscal fourth quarter, and I know you've been active on LNG. So maybe you can comment on the forward profile for LNG as well as the controllable expenses flowing through that line in 2024. Sure.

I have made this statement in the last quarter, and I'd like to reiterate that, that We do have programs in order to control our corporate costs. We had a significant amount of corporate costs in 2023 because we were pursuing a lot of projects and starting up a lot of projects. Those things do cost money. We don't expect that the amount will be as much in 2024. In addition, the fact that our LNG business and so on and the other businesses are doing well will help on that. So we do expect a reduction of that corporate cost in 2024 versus 2023. Okay, thank you very much.

By a significant amount. Sure, thank you.

Moving next to Stephen Byrne from Bank of America.

Yes, thank you. Was the strength in hydrogen demand during the quarter in America specifically in your U.S. Gulf Coast pipeline? And if so, what fraction of those pipeline customers are you in dialogue with about switching them from gray to blue? And if the demand outlook in that region for blue hydrogen is so robust, might you potentially consider reducing the design and scope of the Louisiana project and drop the ammonia piece of it, which would include the offshore port and so forth, in addition to an ammonia reactor?

You are asking a very, very good question. I do not expect that we would get to the stage that we would drop the ammonia part, because there will be a robust demand for blue ammonia. But you are very right, the demand for blue hydrogen is growing in that part of the world. We are engaged with all of the customers. And the interesting thing is that if we ever expand the project, that is where we can focus more on what you said, that maybe produce more blue hydrogen than trying to produce more ammonia. So overall, the story is very positive, as you said. The fact that Air Products has a 700-mile hydrogen pipeline in that part of the world gives us significant advantage in being able to optimize this. So that is a very good position to be. And I think you're pointing out a very good point.

And then one follow-on with respect to the Netherlands Blue Hydrogen Project. I believe Erlikheid is also involved in a project with Porthos. And my question for you is, as Netherlands is moving in this direction of blue hydrogen, do you see potential that the rest of Europe might relax its preference for green and embrace blue more?

Right now, the blue hydrogen project in Netherlands is very practical because you do have these steam methane reformers there, and it's very efficient to capture the CO2 from there and produce the blue hydrogen. It's better than the gray hydrogen. But I do not think that that signals that the fundamental demand for new applications in Europe especially for mobility and for some of the refineries, will go to blue. I think green hydrogen will end up being a preference for Europe, as you have seen in the announcement of some of the major possible users. So I think it will be a combination of the two.

Thank you. Thank you. Yes?

Ladies. Ladies and gentlemen, as a final reminder, that is star one. We'll hear next from Josh Spector from UBS.

Hi, good morning. It's Chris Perrella on for Josh. A follow-up on, I guess, the volume outlook for this coming year with volumes in Asia down and some of the one-off deals that you did in 2023 rolling off. What are the volume assumptions underpinning your guidance for this coming year?

Well, on that one, the way we have looked at this thing, and it's very difficult to obviously predict the future, but overall, the way we have looked at this thing, you know that our business is very much related not to GDP, but to industrial production. So the way we have kind of budgeted ourselves is that industrial production in the U.S. will be positive. And, you know, not double-digit or anything like that. Last year, it was about 2.5%, something like that, maybe a little bit less than that. So positive in the U.S., flat in Europe, and down in Asia. That's the very much overall economic condition under which we have produced the guidance for next year.

All right. Thank you. And one quick follow-up on the Rotterdam project. How should we think about the capital spend? And with Porthos taking the CO2 from you, what's the cost involved in having them essentially dispose of it?

Well, they are going to charge us a certain dollars per ton or disposing the CO2, which we will obviously pass through to our customer. We wouldn't be paying for that. And then we obviously, we have a charge for our capital, and then there is a charge for the sequestration. And I don't think we are at liberty to quote the number that Fortis is going to charge us, but at some point in time, they might decide to make that public.

But the Dutch government is providing incentives for the CO2 sequestration.

But Dr. Ceron is adding that the Dutch government is also contributing on the cost for the sequestration.

All right. Is there a capital, a rough capital number for this, for the carbon capture?

We haven't disclosed that. We are not allowed to disclose that. But as I said, It is more than $100 million and less than a billion. So somewhere in between.

Fair enough. Thank you very much.

Sorry about that. We are not allowed to disclose the number.

Okay?

All right.

Thank you.

Thank you very much. Okay. With that, I think we have significantly gone over time. Is there anybody else on the queue operating?

At this time, there are no additional callers in the queue.

Okay. Well, with that, I would like to thank everybody for being on our call today. We appreciate your interest in our products, and we look forward to discussing our results with you again next quarter. Stay safe, stay healthy, and all the best, and have a great day.

That does conclude today's teleconference. We thank you all for your participation. You may now disconnect.