Air Products and Chemicals, Inc.

EBITDA, 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'll turn the call over to Eduardo.

Thank you, Eric. Good morning. This is Eduardo Menezes. Thank you for joining us today. Please turn to slide three. Let me begin by sharing a few thoughts from my first three months as a product CEO. I talked with our employees, visited several sites, and met with many of our largest customers and partners. I can say our product is a solid for industrial gas business with significant upside if we stay within our traditional business model. Decades ago, Air Products pioneered their on-site business model. Today, approximately 50% of the company's sales are on-site with long-term take-or-pay conflicts, the highest percentage in the industry. Air Products has also built density in its merchant business, helping customers be more efficient and sustainable. We became the leading supplier of hydrogen, operating hydrogen pipeline networks around the world, including the world's largest at the U.S. Gulf Coast. who have also became a leading supplier of high-period gases for the electronics industry. These are clearly strengths to build upon. However, over the past few years, Air Products moved away from its core business in search of growth. The company pivoted to investments in coal gasification and then in clean energy. It deployed capital to complex, higher-risk projects with first-of-a-kind technologies and more importantly, without committed off-take agreements in place. In doing so, Air Products moved away from its successful model while significantly increasing its financial leverage and headcount to support these projects. The company grew by almost 7,000 employees since 2018 to execute the capital plan. This had a negative impact on both cost and execution quality, leading to significant project delays. All of this leads to the importance of refocusing our products on its core business and core capabilities. Please turn to slide four and let me talk about where the business stands today. You can think about our product's business in three categories. First, we have the strong core industrial gas business. This includes the on-site projects with pay-per-pay agreements, original merchant business, and a portfolio of high-quality minority-owned joint ventures. The business has about $12 billion in sales and operating margin is 24%. I'm confident we can improve margins and unlock significant value through discipline, cost productivity, pricing, and operational excellence. This is the largest opportunity we have considering the $35 billion in capital we have invested in the base business. In summary, our products can grow strongly and profitably in traditional industrial gas. In the ass, we can also participate in clean energy opportunities as long as they align with the traditional industrial gases model where customers take the volume list. Second, we have the two large projects in Saudi Arabia and Louisiana. We believe these projects are set up to be the lowest cost producer of green and blue ammonia for several decades. To be clear, Airprolix is an industrial gases company and does not intend to be a retail marketer of ammonia. As a progress report, I can say that the Saudi Green project is progressing well. Our four gigawatts solar and wind power generation will be concluded by mid-2026, and we will start commissioning the electrolyzers and ammonia production after that. As you were informed before, we successfully limited our span on this project through partnership and project financing. We expect product availability in 2027. Regarding the Louisiana project, we are actively working to de-risk it by focusing on the industrial gases portion of the project. We announced ongoing discussions to divest the carbon sequestration and the ammonia production elements of this project. The earliest startup of this facility is 2028 or 2029, pending the de-risking strategy. To make it clear, air products will only move forward with this project when we have firm off-state agreements for hydrogen and nitrogen. Third, we also have the underperforming projects with capex totaling about $5 billion. These are first-of-a-kind energy transition projects with substantial cost overruns. In some instances, these underperforming projects were designed to produce additional volumes for non-contracted pipeline sales and for the hydrogen mobility market, which is being delayed or reduced. I will provide additional comments on these underperforming projects in a few minutes. Please turn to slide five. The products will get back to basics. First, we will return to excellence in execution in our core business. We can invest about $1.5 billion per year in core industrial gas projects going forward. Our focus will be on opportunities that meet our high return thresholds with high quality customers and contracted take-off pay off day. And we will work to expand our margins to operational excellence, productivity, and by right size in the organization as we return to a normal level of capacity spending. To focus on the second column of this slide, we remain cautiously optimistic about both the green hydrogen project in Saudi Arabia and the blue hydrogen facility in Louisiana. In Saudi Arabia, in the near term, we'll focus on completing construction and selling clean ammonia FOB Saudi Arabia until hydrogen regulations fully develop. and we will delay investment in downstream facilities in Europe until specific regulatory frameworks are clear for each country and we have firm customer commitments. As you all know, the previously announced agreement for green hydrogen supply in Europe is scheduled to start in 2030. We expect clarity regarding the development of this project no later than 2027. For Louisiana, we plan to concentrate on the hydrogen and nitrogen production and continue discussions to de-risk the carbon sequestration and ammonia production activities. There will be no new spending commitments on this project while we pursue the de-risking strategy. Lastly, we are moving forward with the underperforming projects, giving our commercial obligations and project status, though they are not expected to materially contribute to operating costs. We anticipate these projects will provide positive cash flow, which will allow us to recover on an undiscounted basis our cash investment over the life of the projects. We have roughly $2 billion remaining to be spent on these projects from 2026 to 2028. Our goal will be to maximize profitability for commercial negotiations, operational improvements, and productivity. Countries like CIS, we have begun the process of getting back to basics. We canceled three significant U.S. projects in February, and we are taking a more prudent approach to the Louisiana project. Additionally, we are also working to address the underperforming projects, which do not currently meet our expectations. For the previously announced net zero hydrogen project in Edmonton, total cost is now expected to be $3.3 billion, with on stream between late 2027 and early 2028. On the next two slides, I will detail how we will bring down both our capital expenditure and headcount in the coming years. On slide seven, you can see that once we complete the projects in Saudi Arabia and Louisiana, as well as the underperforming projects, our capital expenditure will level at roughly $2.5 billion per year, which can sustain both our future growth and ongoing maintenance. Now, please turn to slide eight. Part of our productivity improvement will come from right-sizing our headcount to the levels we had before we started the large wave of projects discussed in this presentation. The product's total headcount increased from approximately 16,000 to 23,000 employees since 2018. 1,300 reductions have already been identified and are in process. This is in addition to the approximately 500 related to the LNG digressions. We intend to identify another 2,500 to 3,000 positions which will be eliminated between 2026 and 2028 as we finalize the large projects with the objective of reaching an employment level similar to 2018 adjusted for employee growth to support new assets. Let's turn to slide nine and talk about our roadmap for improvement in the coming years. For 2025, we expect our base business to deliver around $12 per share of EPS, double-digit ROCE, and over 20% adjusted operating margin. We strongly believe we can do better, so we will look to maximize profitability from the base business to drive results in the coming years. We will manage our cash flow to allow dividend increases, new projects, and, in time, reduce our debt and buyback shares. As we improve our operating margins through productivity and address challenges in certain projects, we expect these key operating metrics to improve. Despite the burden of the underperforming projects, we anticipate that during the 2026 to 2029 period, we can achieve high single-digit adjusted EPS growth, adjusted operating margin in the high 20s, and adjusted ROCE in the low to mid-20s. We also expect our aggregate net cash flow to improve to neutral during this period. As you can see in the far right column, once the Saudi Arabia and Louisiana projects begin contributing, we expect to unlock significant potential, achieving roughly 30% adjusted operating margin, mid to high teams adjusted ROC, and double digit adjusted EPS growth by 2030 and beyond. Our objective is that at full contribution, These projects will allow us to achieve greater than 10% compounded EPS growth versus 2025 by 2031 or 2032. The Air Products team recognizes the importance of transparent communications with our investors. Going forward, we will A, focus 100% on our core industrial gas business, B, be disciplined with capital, and C, build a culture that prioritizes productivity and continues improvement. Finally, I would like to express my gratitude to our products employees for the way they received me during the last three months and for their support to refocus the company in our traditional business model despite difficult changes we'll need to go through. Now I'll turn it over to Melissa to go through our financial results. Melissa?

Thank you, Eduardo, and good morning, everyone. As a reminder, on this call, we will be speaking about our adjusted non-GAAP financial measures. Before we do, I want to take a moment to acknowledge the $2.3 billion after-tax charge taken in the second quarter. This charge included the project cancellation we previously announced, cost reduction measures, and executive separation costs. We will now turn to slide number 11 to review our financial results. Our second quarter adjusted earnings per share of $2.69 were below our previous guidance of $2.75 to $2.85, primarily due to changes in cost estimates on a sale of equipment project in the U.S. and lower than forecasted helium contributions. Compared to last year, sales volume was down 3%, with 2% driven by the LNG business divestment, while weaker merchant, primarily helium, was largely offset by favorable on-site volumes across the region. Total company price was up 1%, which equates to a 3% improvement for the merchant business, driven by continued non-helium pricing strength in the Americas and Europe. Adjusted operating income decreased 9%, mainly due to the LNG divestiture and unfavorable helium impact. Additionally, we saw higher costs driven by America's maintenance and fixed cost inflation, which was partially offset by strong productivity actions across the company. Operating margin was down 210 basis points, with approximately 100 basis points driven by higher energy pass-through. Now, please turn to slide number 12 for the details of the second quarter earnings per share. Second quarter adjusted earnings per share of $2.69 decreased 16 cents from prior year. The divestment of the LNG business accounted for 12 cents of headwind, and currency was unbearable 4 cents. Our base, which includes volume, price, and cost, was down 7 cents. Other than LNG, volume was relatively flat, as the lower helium was largely offset by favorable on-site volume. Price was positive 4 cents, driven by improvements in the Americas and Europe. Costs were 11 cents unfavorable, primarily due to fixed cost inflation and higher maintenance in America, partially offset by favorable cost productivity across the company. Equity of affiliate income was better in Europe, but partially offset by lower contribution in America. Now, please turn to slide number 13. I would like to provide an update on our FY25 full year guidance. Since our last earnings call, we have canceled several large projects and observed volatility in the macroeconomic conditions. As we look at the guidance year on year, the divestiture of LNG will continue to drive a 4% decrease relative to the prior year. The large project cancellation will be a 3% headwind resulting from lower operating income and reduced capitalized interest. We anticipate base business growth of 2% to 5% for the year, despite the 5% headwind and helium, resulting in a fiscal 2025 full-year adjusted earnings per share to be in the range of $11.85 to $12.15. Please note, the potential economic impact of global tariffs is not in our guidance. While the industrial gas business is primarily a local business and very resilient, It is difficult to determine at this time if there will be broader macroeconomic impacts from tariffs or events that may impact our customers. We expect our third quarter adjusted earnings per share to be in the range of $2.90 to $3, and our full year capital expenditures to be approximately $5. We've included additional details on the segment results in the appendix section. Now, we'll open up the call for questions.