Air Products and Chemicals, Inc.

Good morning and welcome to the Air Products first quarter earnings release conference call. Today's call is being recorded at the request of Air Products. Please note that the presentation and the comments made on behalf of Air Products are subject to copyright by Air Products and all rights are reserved. Beginning today's call is Mr. Eric Guder. Please go ahead, sir.

Thank you, Lisa. Good morning, everyone. Welcome to Air Products first quarter 2025 earnings results teleconference. This is Eric Guter, Vice President of Investor Relations. I am pleased to be joined today by Melissa Schaefer, our Chief Financial Officer, and Sean Major, our Executive Vice President, General Counsel, and Secretary. On today's call, I'm also pleased to welcome Air Products Chairman of the Board, Wayne Smith, and Eduardo Menendez, Air Products' new CEO, effective tomorrow, February 7, 2025. Please turn to slide number two, and let me now turn the call over to Wayne for a few brief remarks.

Thank you, Eric. Good morning and welcome, everyone. Air Products' annual meeting of shareholders was held exactly two weeks ago, and five new directors were elected to our board. The reconstituted board met immediately, quickly coalesced, worked intensively, and made several key leadership decisions. First, I'm honored to have been elected as chairman of the board of Air Products, where I've served as a director since 2021, following my career in the chemicals industry, which included 11 years in industrial gases. Second, I'm honored to be working with our new vice chairman, Dennis Riley. Dennis had a tremendous career in the industrial gas industry, leading Praxair as CEO. Prior to that, Dennis held executive roles at DuPont and Conoco in industries which are significant consumers of industrial gases. Finally, and most significantly, I'm very pleased to introduce our new CEO, Eduardo Menezes, who is on the call today. Eduardo brings more than three and a half decades of international experience in all key sectors of industrial gases. At his last position, he was EVP of Linde for Europe, Middle East, and Africa, with responsibility for operations in more than 40 countries, over $8 billion in sales, and more than 18,000 employees. He's lived and worked around the world. We all look forward to working with him, taking air products forward, and maximizing value for shareholders. Let me now turn over the call to Eduardo to briefly introduce himself.

Thank you, Wayne. Air Products is a fantastic company with a bright future, and I'm honored to have the opportunity to work with the team to build on the company's strong positions. I met several larger shareholders during the last few weeks to understand their perspectives and requests. And starting tomorrow, I will begin meeting with employees, customers, and business partners to move Air Products forward. Tomorrow is my first day as an Air Products employee, so I apologize if I'm not going to be able to take questions on this call, but I look forward to sharing my priorities as a new CEO of Air Products and to presenting the second fiscal quarter results on the next call. I'll turn the call back to Wayne.

Thank you, Eduardo. Before turning the call back over to the management team, I would like to take a moment to thank the outstanding employees of Air Products who have remained dedicated, energized, and focused throughout this process. I'd also like to thank Sethi Ghasemi for his countless contributions and leadership of Air Products over the past decade. We have a great foundation to build upon. Now, as you can appreciate, given the changes underway, the scope of today's call will be limited to discussion of quarterly results of the company and our outlook. We appreciate you may have a variety of questions which extend beyond the results of the quarter, which will be addressed in due course. But for today, we kindly ask that questions be limited to and focused on the financial results that we disclosed this morning and our outlook for the remainder of the year. With that, let me turn it back over to Eric.

Thank you, Wayne. Our earnings release and the slides for this call are available on the earnings page of our website at investors.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 three. Additionally, throughout today's discussions, we will refer to various financial measures, including earnings per share, operating income, operating margin, EBITDA, EBITDA margin, the effective tax rate, and ROCE either on a total company or segment basis. Unless we specifically state otherwise, statements regarding these measures refer to our adjusted non-GAAP financial measures. Reconciliations of these measures to our most directly comparable GAAP financial measures can be found on our investor website in the relevant earnings release section. Now, I'm pleased to turn the call over to Melissa.

Thank you, Eric, and good day to everyone. Please turn to slide number four of the materials we have posted on the website for this call. Safety is our number one priority without exception. We are proud of the continuous improvement we were able to achieve in this area, but our goal and efforts are always towards zero accidents and zero incidents. Now, please turn to slide number five for our first quarter results. As we announced in January, First quarter adjusted earnings per share of 286 exceeded the upper end of our guidance range of 275 to 285, up 1% over last year, driven by results in the Americas. Our earnings per share improved despite the divestment of the LNG process technology and equipment business, which closed at the end of fiscal 2024. The LNG business contributed roughly 8 cents to our first quarter earnings in 2024. Our adjusted EBITDA margin was up 140 basis points, and our adjusted operating margin increased 80 basis points versus prior year. Please turn to slide number six for our fiscal 2025 second quarter and full year outlook. We are maintaining our fiscal 2025 full year guidance. We continue to monitor the strengthening U.S. dollar tariffs, and the global helium market for potential impact the remainder of the year. Consistent with our focus on driving productivity, we continue to evaluate actions to reduce our costs and improve our services to our customers. We expect our second quarter adjusted earnings per share to be in the range of $2.75 to $2.85. which is up 1% to 4% reflective of the LNG divestiture. We are proud of the results this quarter. I am particularly grateful that our people stayed focused on the work at hand, demonstrating their unwavering commitment to our customers, shareholders, and all whom we serve. I would like to thank them for their support and continued efforts to position the company for long-term success. Now please turn to slide number seven for a detailed review of our first quarter results. Compared to last year, overall volume was down 2%, primarily due to the LNG business divestment. Volume in America has improved this quarter, but was offset by the weakness in Europe. Total company price was up 1%, which equates to a 2% improvement for the merchant business, driven by continued pricing strength in the Americas and Europe. Adjusted EBITDA improved 1%, primarily due to a better price, partially offset by higher costs and lower equity affiliate income. Adjusted EBITDA margin was up 140 basis points due to favorable business mix and price. Sequentially, volume was down following a strong finish to fiscal 2024 and a sale of the LNG business in September. Now please turn to slide number eight for a discussion of our first quarter adjusted earnings per share. Adjusted earnings per share of 286 increased 4 cents, despite the 8-cent contribution from LNG in the prior year, which is reflected in our volume variance. Price, net of variable cost, was favorable 10 cents, demonstrating continued strength in the Americas and Europe. The pricing improvement more than offset unfavorable other costs of 7 cents. Lower prior year incentive compensation and inflation drove increased costs, which were partially offset by our productivity improvements. Now, please turn to slide number nine for a brief discussion of our business segment results. You can find individual slides covering each of the business segments in the appendix. Looking at each business segment, America's overall pricing was 2% higher with improvement across most product lines. This translates to a 4% merchant pricing gain for the region. The 3% volume improvement was driven by a significant non-recurring sale of helium to an existing merchant customer. These factors drove adjusted EBITDA 6% higher and improved adjusted EBITDA margin by 150 basis points. For our Asia segment, the 2% volume improvement was driven by contributions from new assets. Adjusted EBITDA increased 7%, primarily due to favorable volumes, costs, and equity affiliate income. Adjusted EBITDA margin was up 160 basis points. Looking at Europe results, broad-based pricing improved 1%. Volume was down 5%, driven by lower onsite and continued weakness in merchant demand, primarily helium. Adjusted EBITDA was 3% lower as weaker volume was partially offset by higher price and favorable cost. The Uzbekistan project is undergoing planned facility upgrades during the first half of fiscal 2025. We expect the facility to return to normal operation and contribute near its full run rate at the start of the third quarter. Moving to our Middle East and India segment. Lower merchant volume was a headwind for sales and adjusted EBITDA. Adjusted EBITDA was also negatively impacted by unfavorable equity affiliate income and cost. Finally, for our corporate and other segments, sales and profits were lower this quarter primarily due to the sale of the LNG business. Thank you. And now we will be delighted to answer your questions. As a reminder, we request that questions be limited to our financial results and our outlook.

If you would like to ask a question, please signal by pressing star one on your telephone keypad.

If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Please limit your questions to one with one follow-up. Again, press star one to ask a question.

We'll pause just for a moment to allow everyone the opportunity to signal. And our first question comes from Chris Parkinson with Wolf Research.

Great. Thank you so much for taking my question. Just very quickly, just given all the moving parts in Asia, how should the street be thinking about, you know, obviously some of the past headwinds in the helium business and electronics recovery and just general macroeconomic conditions in China? Are there just general things we can do to triangulate the forward outlook from this point in time? Thank you so much.

Hey, Chris, great to hear from you. So, yeah, let's talk about China. So China was supported this quarter by new assets and productivity actions. But China's still a wait and see. So right now we see no material improvement. The market still remains challenging. We obviously are watching tariffs as well as the China in-country stimulus impact. In the meantime, we remain focused on productivity and the things that we can manage. And we're focusing on delivering to our customers.

And just as a quick follow-up, can we just get a quick update on the Alberta project, please? Thank you.

So, thanks, Chris. From a project perspective, at this point in time, I don't have any new updates from what we had previously shared on calls. When we have updates, obviously, we'll bring that information to you.

All good. Thank you. Thanks, Chris.

And our next question comes from Duffy Fisher from Goldman Sachs.

Yes, good morning, guys. So at the midpoint of both your Q2 and the full year, you need the second half to be about $1.50 per share better than the first half. Can you give us a walk how much of that is seasonality and how much is stuff like the Uzbekistan plant coming back, obviously the helium going away, just some of the one-off stuff that helps us in the walk from first half to second half?

Yes. Hey, Duffy. Thanks for the question. So the split for the first half and second half is relatively consistent to what we've seen in the past couple of quarters, about 1% difference. There is definitely seasonality in Q1 and in Q2 because of the Lunar New Year in China. As you mentioned, we do have several planned maintenance outages, obviously Uzbekistan being the most significant one. For the second half, We are going to be focusing on pricing action, use Beccastan coming back on stream early in Q3. We're obviously going to be looking to capture volume opportunities, and we are going to be executing the remainder of our productivity initiative. We are, though, watching tariffs and seeing the impact from a customer perspective, obviously watching the strengthening dollar, and really just the general macro and geopolitical environment. So keeping an eye on all those things as we lead into the rest of the year.

Okay, and then if you looked at the Americas excluding that one-time sale of helium, what would price and volume have been in Q1?

Fantastic, Duffy. So let me just give you some generalizations about the Americas business. So pricing was strong across our product lines outside of helium, and hydrogen volumes remained strong. They were very strong in our HICO's business, and we actually saw some improvement in our merchants.

Okay, thank you. Yep.

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

Yes, good morning. Can you provide a breakdown on the CapEx outlook for the fiscal year, the $4.5 to $5 billion outlook? How do you expect that CapEx to be deployed by projects?

Yeah, Steve, thanks for the question.

So we aren't going to be breaking up at four and a half, but the vast majority is going to be the deployment to our large projects. We've got about $750 million associated to ongoing maintenance. And then there's about a billion that we associate to our normal, let's call it traditional industrial gas business. We're still forecasting that $4.5 to $5 billion to be what we're looking for for this fiscal year.

Okay. Thank you, Melissa. And any update on the permitting project in the world energy?

So at this point in time, as we've talked about, that project still is on hold, awaiting permits. When we've got new updates for that, obviously, I'll bring it to you.

Okay, thank you.

Our next question comes from Jeff Zekakis with J.P. Morgan.

Thanks very much. What was the helium EBITDA contribution in the Americas in the quarter, if there was one?

So, Jeff, as always, we've not broken out helium. So, I apologize.

From the sale. From the sale.

Oh, I'm sorry. Fantastic. Yep. Yeah. So, sorry, Jeff. Go ahead.

From the outsized sale, what was the benefit from that?

Yeah. So, from the one-time sale, what we're calling the non-reoccurring Americas sale, That is about a 10% EPS contribution for this quarter.

10% for the whole company or 10% for that unit?

10 cents, sorry. 10 cents EPS. Oh, 10 cents. Okay.

Yes. Great. And then... Lastly, can you talk about the overall helium market and what's happening with pricing? Is it different in the different geographic jurisdictions?

Yeah, let's talk about helium. Thanks, Jeff. So the helium market, as you're aware, is silico in nature. We've worked through these silico ups and downs for many decades. At this moment, the market is long. We are seeing helium come from the Russian assets into Asia, which is making the market long. But we're continuing to manage that and optimize our helium business. And obviously, we are in a unique position to really reliably supply our customers.

Okay. Thank you. Thank you, Jeff.

Yeah.

And our next question comes from David Beckleider with Deutsche Bank.

Thank you. Good morning. Melissa, in the Americas, on volume, ex-Helium, were volumes down around 3%?

No.

So Helium was a contributor, but we really saw very strong merchant volumes. And our HICO business, especially along the Gulf Coast, continues to be very strong. So Helium was a bit of a headwind outside of the one time. But again, merchant volumes were very strong and Heiko was strong as well.

Understood. And just in the Middle East and India, can you talk about the equity affiliate income decline and what drove that?

Sure, absolutely. Great question. So the equity affiliate income noise was really around our Gazan joint venture. Given the nature of that contract We do see some fluctuations quarter by quarter, but the JZAN project is contributing as expected, and we do anticipate the contributions to be on par with what we saw in 2024. Thank you. Thank you, David.

Thank you, David.

And our next question comes from Mike Leakhead with Barclays.

Great. Thanks. Good morning. Just on the 2Q guide, it looks like EPS is maybe about a nickel better sequentially if we back out the 10 cents or so from the helium non-recurring sale. Can you just speak high level with sequentially getting better or worse as we think about modeling here?

Sure. For the second quarter, we are looking to see some headwinds from Uzbekistan, but we obviously have some seasonality going into Q1 in many of our geographies. So we will see improved volumes in the Americas. We're continuing to focus on pricing in Europe, especially with the higher power costs that we're seeing there. And as I mentioned, we are closing out the execution of our productivity programs that we had over the last couple of years. So those would really start to show through in many of our regional results.

Great. Thank you. And then just a quick clarification or confirmation. Is full-year guidance, it does not assume any contribution from the Alberta project this year. Is that correct?

That is correct.

Great. Thanks.

And our next question comes from Patrick Cunningham with Citi.

Hi, good morning.

Melissa, you mentioned monitoring the tariff impact from customers. I'm just wondering what your latest thoughts are there. Any conversations with customers suggesting this could be maybe a short-term negative to production, but is there any sort of long-term benefit of higher manufacturing here in the Americas, for example?

Sure. Yeah, tariffs are definitely on everybody's mind, Patrick. So first, as you know, For the vast majority of our products, we're in region for region. Industrial gas is a localized model, so likely from a supply chain and a localized customer perspective, that should have little impact. There could be an impact on projects. We anticipate, relative to the size of our projects, it to be moderate. And of course, we have a global diversified supply chain to reduce that exposure. As you note, we do need to consider the macro impact to our customers and the knock-on effect to these tariffs, so we're staying very close to them and updating our forecast to meet their new production needs.

Got it. Very helpful.

And then, you know, interest expense came in a bit lower than what was expected, maybe down seven or eight million sequentially. I mean, is there anything, any additional interest being capitalized? Anything strange about the quarter? Is this a sort of quarterly rate that we can expect going forward?

So, you know, interest obviously has a little bit of movement based on the timing of the debt draw. So we did obviously have capitalized interest associated to our NEON projects as well as our other projects. largest contribution of capitalized interest, of course, going to NEOM, but nothing else really significant other than that capitalized interest. You know, obviously, as we take on new debt, that will increase, but we'll look to maximize capitalized interest as much as we can on our significant projects.

Great. Thank you so much.

And we'll move to our next question from Josh Spector with UBS.

Yeah, hi, good morning. I wanted to follow up on the second half bridge. I think in response to the earlier question, you talked about pricing actions. So specifically to that, I mean, I assume higher energy costs are having an impact negatively on 2Q. Is your comment about second half improvement that you recover some of that, or do you have visibility to pricing actions beyond response to near-term energy that you have visibility to that you're baking into your guidance?

Josh, thanks. It's good to hear from you. So as I mentioned, we are seeing power costs increase specifically in Europe. So as you know, there is usually a month or a quarter, depending on the customer delay, and being able to capture that increase in power costs with pricing actions. So obviously, the teams are working very hard with our customer base. to be able to quickly action on those pricing actions, but there is usually about a month or so to maybe even a quarter delay. So we are looking to take those pricing actions likely into the second half of this fiscal year.

Okay, thanks.

Can you just comment on what corporate cost is baked into your guide? I think the quarter came in a bit higher than we expected, so we're not sure what the right run rate is you're assuming there.

So we did see this quarter a bit of a headwind, let's call it about $0.07. Now, as I mentioned in my comments, there is some inflation based in there. The other main driver of that is obviously we had tougher results last year, so we took incentive compensation down. So as we accrue for this year, you'll see a little bit of a headwind with the incentive compensation accrual. And obviously, last year, we're looking to take the actions, and there was a little bit of cost associated with our productivity actions, having individuals come on and then being able to exit other individuals in other geographies. So productivity actions will start to really flow through this year, and likely in the second half, you'll see that really ramp up.

Okay.

Thank you.

Thank you. Our next question comes from John Roberts with Mizuho.

Thank you. And Wayne, good to talk again. And congratulations to Eduardo and Dennis. Wayne, how do you see the roles different between chairman and vice chairman?

Thanks, John, for your question. Listen, I think you can understand that we've got a lot of change going on right now. The board really is coalescing and working nicely together. A lot to do. I think we can talk more on that in the future once we've got things moving along a little bit better. But thanks for the question, John.

Okay. Maybe, Melissa, Uzbekistan is a relatively new plant. What upgrades does it need?

Yeah, thanks for the question, John. So as I mentioned, Uzbekistan is going through a planned maintenance. The Uzbekistan asset, when we took that asset on, we did determine that there was a need for a turnaround to allow some of the improvements to bring the plant up to speed to air product standards. So this is all part of the plan. We'll see that coming back on stream in Q3. And we'll see the full BFC run through the rest of the year. But again, was planned, was built into the original acquisition pricing and plan for the BFC moving forward.

Thank you.

And our next question comes from Lawrence Alexander with Jefferies.

Hi, this is Dan Rizwan for Lawrence. Does your outlook for 2025 assume any improvement in industrial activity or in consumer demand?

Thanks for the question. And we are not looking for very much improvement from a global perspective in industrial production. You guys can see the numbers. There is not a lot of significant improvement in any geographies that we're seeing. There's about 2%, I believe, from an average globally. So we're not looking to say there's going to be significant industrial production improvement throughout this year.

And can you guys remind us, in 2017, 2018, did those tariffs have any effect at all on your demand, on you and on your customer production levels, particularly in Asia, I guess, where the weather was focused last time?

So I'm going to have to come back to you on that question. I was not CFO at that time, so I will have the teams come back to you with that answer on 27 and 2018. All right.

Thank you very much.

Thank you. We'll move now to Kevin McCarthy with Vertical Research Partners.

Thank you and good morning. I was wondering if you could provide an update on your Blue Hydrogen project in Louisiana. And specifically, I'm interested in the prospect for partnerships. I think in the past you've discussed potentially bringing in an equity partner and or partners for sequestration or blue ammonia offtake. I appreciate you've had your hands full perhaps in recent months, but wondering if there has been any progress made toward those ends. Excellent.

Yeah, Kevin, good to hear from you. So as associated to our Louisiana project, it's being executed on the normal course, no significant updates on the project execution, you know, on the normal course as we projected. From a partnership perspective, you're right, we've been busy, but the teams have been focused on going out and having the right conversations with parties that would be interested in equity partnerships coupled with offtake. So we are having those active conversations focusing largely in Asia, Japan, Korea on potential equity partnerships, but really are opening it up to other partnerships from an industry perspective as well. When we have an update and progress those discussions, obviously we'll bring that forward to you.

Very good. And then secondly, Melissa, I think your products have signaled in the past that you would intend to be free cash flow positive in fiscal 2027, I believe. Is that still the case? And perhaps you can elaborate on the free cash flow trajectory as you see it shaping up here through the management transition, if possible.

Great question. Yeah. Let's talk about cash flow. we are still projecting to be net cash flow positive in FY2027. That's still the forecast. We could look, as we just talked about, for opportunities for equity partnerships, potentially even project financing if the portfolio fits. And as those progress, obviously, as I said, I will keep you updated. At this point in time, I look forward to working with Eduardo and the board to understand what their plans are for the projects. And as we have updates from that perspective and how that affects our cash flow, obviously we'll bring those forward as well. No changes at this point.

Thank you, Shane.

And our next question comes from Michael Cethon with Wells Fargo.

Hi, this is Abigail. I'm for Mike. I know you touched on pricing in Europe being higher because energy prices are higher. Are you similarly going to be pushing for higher pricing in Americas and Asia as well?

Absolutely.

So pricing is something that we focus on on a day-to-day, hourly basis. So our teams are actively working pricing, and that is not just unique to Europe. Europe I spiked out specifically because we are seeing power costs increase, but we are trying to maximize pricing and the balance of pricing and volume every single day with our customers. So absolutely, the teams are looking to take pricing actions where they can in the Americas and in the Asia market as well.

Got it. Thanks. And are you able to give us a feel for the capital intensity of the used Pakistan upgrade?

So there is a little bit of what I spoke about before. It's an increasing situation. So this was negotiated into the acquisition price. So there will be no additional capital outlay associated to these upgrades. That will be a discount to the $100 million that we have outstanding on that acquisition. So the acquisition price doesn't change, no additional capital outlay than what we spoke about before. It will just be a discount associated to the $100 million outstanding. We expect it to be much less. But that, again, will be no additional outlay for our air products.

Thank you for that question. Got it. Thank you. And we'll move to our next question from John McNulty from BMO Capital Markets.

Yeah, good morning. Thanks for taking my question. So I know Air Products had a number of cost cutting and restructuring initiatives in kind of late 23 and then in 24 as well. Can you help us to think about how much in terms of the benefit of that we should see in 2025 and how it sequences through the year?

Yeah, John, it's great to hear from you and thank you for the question. So you're right. We've had, let's call it two significant tranches of cost productivity actions. In aggregate, we've taken about 5% of our workforce down. If you look about that over a fiscal year, it's about $75 million. That being said, obviously, as you could consider, there is inflation as well as wage increases that could compensate, overcompensate some of that. but we're still looking for the cost productivity to really support us in the back half of this fiscal year.

Got it. Okay. So at least as of now, $75 million through 2025, you know, offset by some inflation. Am I understanding that right?

Proportional. So we'll see that ramp up in the back half of the fiscal year. We are seeing some of that go through but not the full ramp. Yep.

Okay. And then just one follow-up on Uzbek. I think that was supposed to add about 35, 36 cents to EPS on an annualized basis. Given what the turnaround work that you're doing, what do you expect that contribution to be in 25, just so we can kind of think about when we get to normalize what the additional help is going to be in 26?

So, and starting in Q3 will be fully ramped up again. So you should take the proportional quarters for Q3 and Q4. We had about, let's call it a month and a half of contributions in Q1. Q2 will be down and Q3 and Q4 should be fully ramped.

Got it. Okay. Thanks for the caller.

Yep. Absolutely. Thank you.

And ladies and gentlemen, that concludes today's question and answer session. At this time, I'll turn the conference back to our speakers for any additional or closing remarks.

Yes, thank you. I would like to thank everyone again for joining our call today. We appreciate your interest in air products, and we look forward to discussing our results with you again next quarter. Please stay safe and healthy, and all the best, and have a wonderful day.

And ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect and have a great day.