Air Products and Chemicals, Inc.

Good morning and welcome to Air Products' first 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 Megan Britt.

Hello and welcome to the first quarter fiscal 2026 earnings conference call for Air Products. Our prepared remarks today will be led by Eduardo Menezes, Chief Executive Officer, and Melissa Schaefer, Chief Financial Officer. We have prepared presentation slides to supplement our remarks during the call, which are posted on the investor relations section of the Air Products website. During this call, we will make forward-looking statements, which are our expectations about the future. These statements are based on current expectations and assumptions that are subject to various risks and uncertainties. Our actual results could materially differ from these statements due to these risks and uncertainties, including but not limited to those discussed on this call and in the forward-looking statements and risk factors section of our reports filed with or furnished to the SEC. We do not undertake any duty to update any forward-looking statements. Please note that today's presentation will refer to various financial measures, including earnings per share, capital expenditures, operating income, operating margin, the effective tax rate, ROC, and net debt to EBITDA, 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. It's now my pleasure to turn the call over to Eduardo.

Thank you, Megan. Hello, and thank you for joining our call today. Please turn to slide three. Earlier today, we reported results for the first quarter of fiscal 2026. We delivered 12% improvement in adjusted operating income that was broad-based across our reporting segments. Earnings per share were $3.16, up 10% relative to the prior year on stronger productivity despite weak economic conditions. Our operating margin of 24.4% was also up, while return on capital of 11% was slightly lower than last year, but remained stable sequentially. I'm pleased with the progress that our global team is making to improve our bottom line results, and the first quarter represents a solid start to our fiscal year. I have now been at Air Products for a full year. In that time, we have taken significant actions to refocus on the core industrial gas business, including project cancellations, headcount optimization, and asset rationalization that are showing up in our results. Moving to slide four, we have focused on three key priorities for 2026, consistent with the longer-term strategy that we shared last year. One, unlock earnings growth. Two, optimize large projects. and three, maintain capital discipline. On unlocking earnings growth, we are affirming our full-year earnings guidance, which implies an improvement of 7% to 9% at the midpoint for the full fiscal year. EPS growth is expected to be achieved primarily through continued focus on pricing actions and productivity and new assets contribution. We are on track to deliver in line with these expectations, despite continuing headwinds in a sluggish macroeconomic environment that will limit volume growth for the fiscal year. Despite these headwinds, we see pockets of resilience from key sectors, including refining, electronics, and aerospace. For example, earlier this week, we announced our latest supply contracts with NASA to provide liquid hydrogen to multiple U.S. facilities. On our second priority, we continue to make strides to optimize our large project portfolio. Coming into our products, I prioritize de-scoping and de-risking our clean energy project portfolio. Along this path, in December, we announced that we are in advanced negotiations with FIARA International on the low-emission ammonia projects in Saudi Arabia and the U.S. I will share more detail about our next steps in a minute. Finally, on our third priority, we continue to take actions to drive discipline in our capital allocation to improve our balance sheet position while at the same time investing in strong base business growth and returning cash to shareholders. As we have previously indicated, we expect to reduce our capital expenditures by approximately $1 billion in fiscal 2026 and remain on track on that objective. Fiscal 2026 and the first part of 2027 are heavy capex periods for the clean energy products in Canada and the Netherlands, and we expect capex to decline significantly after these products go on stream. On return of cash to shareholders, We announced earlier this week that our board has authorized an increase in our dividend, marking our 44th consecutive year of dividend increases. We remain committed to disciplined capital allocation that ensures that we are well-positioned to continue our strong track record of returning cash to our shareholders. Please turn to slide five. In December, Air Products issued a joint press release with FIARA International announcing that we are in advanced negotiations for the low-emission ammonia projects in the U.S. and Saudi Arabia. We believe that the potential collaboration provides a strong strategic fee based on complementary capabilities. The collaboration would connect the global industrial gas expertise of Air Products with the global ammonia supply network and world leading crop nutrition and ammonia expertise of Yara. In Saudi Arabia, we are in advanced negotiations on a marketing and distribution agreement where Yara would distribute and commercialize all the renewable ammonia that is now used by our products to produce green hydrogen in Europe. We expect to have that agreement finalized in the first half of 2026. For the U.S. project in Louisiana, our goal is to have a traditional industrial gas project scope and return for our products. To that end, we are in negotiations for Yaro to acquire the ammonia production distribution assets from our Louisiana project and execute a 25-year hydrogen and nitrogen supply agreement for an industrial gas facility that we would build and own and operate by our products. Moving to slide six, I want to be very clear that we have set a high bar for moving forward with the Louisiana project, which aligns with our discipline capital location strategy. Already, we have taken action to find a world-class partner for the ammonia production. In this way, we would have traditional industrial gas company scope with a long-term uptake agreement to supply hydrogen and nitrogen together. We also require a partner for the carbon capture and sequestration scope prior to taking a fine investment decision. We have already launched an RFP process for the CO2 transport and storage scope and are in active discussions with several key sequestration service providers. More importantly, we must have a highly reliable capital cost estimate based on agreements with reputable EPCs that meet our return requirements. A TFID requirement for our products is having a project return on the go forward capital significantly higher than our traditional hardware rates. We expect to have full clarity on the project cost in the next few months. Overall, the project has many positive economic aspects, including location and the ability to receive 45 cube tax credits, which drives significantly higher returns per share for the project during the first 12 years of operation. We are monitoring recent reports related to fertilizer C-band tariffs in Europe. C-band came into effect in January 1st, 2026, and proposals to modify the current scheme would need to be discussed and approved by the EU. Any change in the C-band rules would have an indirect effect on our potential Louisiana project as only gray ammonia imports are subject to significant C-band tariffs. YARA bears the regulatory risk related to C-band changes if the project goes wrong. We're following this subject closely with YARA and continue to work on the cost estimate. Please be assured that the Air Products Managing Team and Board will take the time needed and drive a very high level of diligence on the capital cost before we reach our own FIT. Now, I will turn the call over to Melissa to discuss our financial results in great depth and review our 2026 outlook. Melissa.

Thank you, Eduardo. Hello, and welcome to those joining our call today. Please move to slide seven for a high-level summary of our first quarter financial results. With respect to sales, volume was flat as favorable onsite volume was offset by lower helium, which included a sizable non-recurring helium sale in the Americas in the prior year, providing for tough comparisons in the first quarter. Price improved on non-helium merchant products, particularly in the Americas and Europe. Operating income was up 12%, and margin was up 140 basis points on business mix and non-helium price, offsetting tough year-on-year comparisons. Margin also improved despite a 50 basis point headwind from higher energy cost pass-through driven by the Americas. Lower costs also improved results, primarily driven by productivity, net of six cost inflation, and lower maintenance. Earnings per share of $3.16, which grew 10% from prior year, exceeded the top end of our guidance range. Return on capital of 11% was lower versus prior year, but stable sequentially as we continue to execute on our project backlog. Moving now to slide eight. Our first quarter earnings per share of $3.16 increased 30 cents or 10% from prior year. Despite continued helium headwinds, which include the prior year non-recurring helium sale in the Americas of approximately 10 cents, The base business continues to demonstrate strong resilience in an uncertain macroeconomic environment. Favorable onsite volume, non-helium pricing action, and ongoing productivity improvement drove results this quarter. Moving now to slide nine. I will provide an overview of our results by segment. You can find additional details of the quarterly segment results in the appendix. For the quarter, America's sales were up 4%, driven by higher energy pass-through. Operating income improved on price, onset volume, and lower maintenance, partially offset by prior year non-recurring items and fixed cost inflation. Sales in our Asia segment were up 2%, while operating income was up 7%. This improvement was driven by productivity and reduced depreciation from certain gasification assets held for sale, partially offset by lower yields. We saw a modest contribution from our new assets as they continued to ramp up, contributing further in the second half of the fiscal year. Europe sales and operating income both increased due to volume and price, as well as favorable currency. higher volumes were driven by onsite, including a prior year turnaround, and non-helium merchant. Operating income was also impacted by higher costs associated with depreciation and fixed cost inflation, despite productivity improvements. In our Middle East and India segment, operating income improved on lower costs, while equity affiliate income remained flat. Lastly, The corporate and other segment results improved from lower costs, including productivity actions. Moving now to slide 10, we continue to generate strong cash flows from our base business. Our investments in both energy transition and traditional industrial gas projects remain on track with our expected capital spend for the fiscal year. Additionally, we return nearly $400 million in cash to our shareholders, increase the quarterly dividend, marking the 44th consecutive year of dividend increases. As it relates to our leverage, our net debt to EBITDA ratio is 2.2 times. As a reminder, we are currently consolidating the joint venture's investment in the neon green hydrogen project on our balance sheet during the construction phase. And as previously communicated, we plan to deconsolidate once the project is on stream and being operated by the joint venture. Therefore, we've adjusted our leverage ratio to better represent our products investment. Please turn to slide 11, where we will review our outlook. We are maintaining our fiscal full-year guidance of $12.85 to $13.15, given uncertainty around the macroeconomic environment. We remain focused on delivering these results through pricing action and productivity while bringing new assets on stream from which we expect increased contributions in the second half. For the second quarter of 2026, we expect to deliver earnings per share in the range of $2.95 to $3.10, representing a 10 to 15% improvement from the prior year. Our outlook assumes growth from pricing actions and productivity, partially offset by lower helium. As a reminder, We expect our second quarter earnings per share to be lower sequentially than normal seasonality, particularly related to the Lunar New Year and higher planned means. We're also maintaining our guidance for capital expenditures at approximately $4 billion in fiscal 2026 as we work to de-risk our Louisiana project and optimize our portfolio. Now, we'll open up the call for questions. Operator?

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Again, you may press star 1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal. We'll take our first caller from David Begleiter with Deutsche Bank.

Hi, this is Emily Fusco. I'm for Dave Begleiter. For your targeting double-digit return on the go-forward CapEx, how should we think about the returns on the $2 billion of capital already invested in the project? And is the 45Q credit included in the double-digit return on a go-forward CapEx? Thank you.

I imagine this question is related to the project in barrel, right? So, yes, the 45Q credit is going to be taken by Air Products, and it's included on the return. And, you know, it's an overall return for the project in the go-forward basis, and that's all we're going to disclose at this point.

We'll take our next question from Duffy Fisher with Goldman Sachs.

Yeah, good morning, guys. First question is just on helium. Obviously, this quarter you had to eat the one-time sale a year ago in your year-over-year comps, but could you just talk about how much the kind of continuing business is still down and how much of a headwind do you think that will be kind of in Q2 and throughout the rest of the year?

Yeah, we, I would say that in general, we had a, I think the volume from the aerospace segment in the Americas was very strong for Helium for us in the last quarter. Other than that, we continue to see the same trends we've seen before. As we said, we continue to try to increase our volumes for new accounts, and we're working very hard to increase our sales with new customers and new deals, especially on the electronic side. But I would say overall the, you know, the information that we gave you in the beginning of the year that we would be down for the year around 4% EPS effect is still our best forecast at this point.

Thank you. And then on the gasification plants in China, what was the benefit from moving them to for sale? And then what's the expectation for kind of timing and should we expect any meaningful proceeds coming from those?

It was about 1%, David, from the overall results for the quarter. I would say that, you know, We're still working on the process to sell the assets. We've received some offers. We've proceeded with the negotiations. It's always difficult to forecast these things, but we still expect to get this done on this fiscal year. Great. Thank you, guys. Hopefully sooner than later.

We'll take our next question from Jeff Sikoskis with J.P. Morgan.

Thanks very much. Is Air Products receiving income from or full income from Gulf Coast ammonia? And how much did you invest in that project? And what are the assets that you actually own?

Thank you for the question, Jeff. Yeah, we are in the process of starting the plant. So the plant is making product. It was running at up to 80%, 90% capacity for the last few months. In fact, this week we are taking a turnaround that we were expecting to do that to finalize the last components, and we hope to be up and running at 100% and finalize all the commitments for that side in the next few weeks. So that's the overall picture of the project. I think when Air Products announced this project, you know, five, six years ago, I think we made clear what the investments were on the numbers. I can go offline and get you the numbers that we published at that time. Air Products, in this case, we own the SMRs, so the hydrogen production. We own the air separation plant. and the customer owns the ammonia production and the the ammonia tank so this is basically the the you know the the setup that we have there uh the plant is connected to our hydrogen pipeline system and in fact import some hydrogen so we have a We form a data that I think is around 175 million cubic feet a day, which is probably 70% of the total volume required by the ammonia loop when running at 100%. And the balance of the hydrogen is imported through the pipeline.

Thank you. In your corporate line, it looks like there was some kind of sale of equipment cost overrun. How much was that versus last year?

Yeah. Hi, Jeff. This is Melissa. How are you doing? We did see some increase in our sale of equipment this quarter. In the queue, you will see that we had an impact to our results of about 30 million this quarter. That is comparable to what we saw last year in this quarter. And we obviously, as we bring this on stream, we will stop seeing that headwind in our results. But again, it was about $32 million this quarter. And as you know, that is a percent of completion accounting. And so that is our best estimate of future costs as well. So we've recognized the full future costs. Yep. Thank you. Thank you, Jeff.

We'll take our next question from John McNulty with BMO Capital Markets.

Yeah, good morning. Thanks for taking my question. Maybe on the first one, can we unpack a little bit the margin improvement seen in the Americas? You know, certainly it looks like price may have helped, but the volume drop of I think it was 4%, you know, is pretty meaty. So I guess can you help us to unpack where that 150 basis points of improvement came from?

Yeah, I'll let Melissa answer the question, but that one-time helium impact that we have is reflected in the volumes in the Americas. Melissa?

Yep, absolutely. Thanks for the question, John. So we did see strong on-site volumes in the Americas. This is specific to our HICO and non-helium merchants, so positive in the volumes. Price was also strong in the Americas this quarter across products outside of helium. And then costs, unfortunately, costs were slightly negative driven versus prior year. But obviously, we're continuing to look for cost productivity. So the margins were better this quarter, but we're continuing to see improvement there as we continue to focus on productivity.

Okay, fair enough. I appreciate the color. And then Can you give us an update on Alberta at this point in terms of, you know, the potential for project off-takes, how that's progressing, as well as any updates on the construction timing and costs? Thank you.

Yeah, the construction time and cost is still the same, John. We did the same estimate that we provided probably a year ago. So around, you know, $3.3 billion and start up, you know, first part of 2018. So we continue to work in that direction. I think we have a much higher level of certainty in this project than we had before in terms of scope and cost. The negotiations with other potential partners, offtakers, you know, continues. It's not something that we'll be able to talk about until we have something more definitive to share with you.

Got it. Thanks very much for the call.

Our next question comes from Vincent Andrews with Morgan Stanley.

Thank you, and good morning. Eduardo, I wanted to ask you on the fiscal fourth quarter call, you were asked about, you know, you spent $2 billion on Darrow so far, and how much of that could you recover? And I think you said you could recover about half of it through sales equipment and so forth. But I wanted to make sure that that was not interpreted entirely as the answer to this question. Maybe it is, so please tell us. If you decide for whatever reason not to move forward with Darrow, is it just that you sell the equipment and whatever else and you recover, you know, a billion dollars, the $2 billion spent? Or would there be other costs to air products, small or large, to not move forward with the project?

And then I have a follow-up. Yeah, I think what we – I try to say that nobody really can answer that question, right? So that 50%, at that point, I was like, yes, the number can be higher, it can be lower. It's impossible to determine what the value will be to recover if you don't go forward until you get that negotiation because at the end of the day is the value that that equipment has to a potential buyer, right? So, of course, we are looking at that in parallel. I would say that, you know, the assets that we are, you know, that we build already in some cases for this project, they're very specific for this project, you know, probably for the exception of the ammonia loop, which is, you know, quite standard and similar to other projects, so that asset would have a a better chance of getting a high market value. Air separation plants are also common, but this is a very high pressure and the plant that was designed and built for the U.S. and the U.S. codes and so has a limited market. So at the end of the day, no one can tell you exactly how much that will be if we don't go forward. I say that this is really the exposure that we have. This is the capital that was spent before we decided to stop new purchases in the project, which we did one month after I joined the company. So the only money we are spending in this project is really the equipment that is arriving that we purchased before that time.

Okay. And just as a follow up, I know you're intending to make a go no go decision on this by the middle of the year, but is that 100% firm date or now with this CBAM uncertainty, which let's just assume is very important to Yara's economics, you know, if there's a need to push that out while the EU finalizes whatever it is that they're going to do or not do, is it possible that the timing of final investment decision could move later into the year?

No, there is no 100% or anything in life, right? But I would say that, you know, our goal is around the middle of the year. The main issue for us continues to be the, you know, to make sure that we have a capital cost, that we feel, you know, we have high certainty of execution. So that is what we are working on. The issue of the CBAM, as I would try to explain that in our slides, you know, it's a very indirect, if something happens, it's an indirect impact. It is an indirect impact to be honest, right? The way this agreement would work, we would produce hydrogen and nitrogen, sell that to them. They would make ammonia. And from there, it becomes their accountability. They can take ammonia, sell the ammonia in the U.S., sell the ammonia in Asia or in Europe. If it goes to Europe, it still is subject to a very low CBAN tariff. the impact is really indirect if, you know, something happened with the CBAM, what happens with the gray sales. So, you know, this is a decision that Yaron has to make. Verbally, we understand from them that they believe is a low probability, but it's something that they need to take into account in their decision, and we wait for that. But at the end of the day, I would say that, you know, You know, 99% of the decision is related to the construction cost more than anything else.

Okay. Thank you for all the detail.

Our next question comes from James Hooper with Bernstein.

Morning, guys. Thanks for the question. First question is about the space opportunity. Clearly, you just signed. some contracts with NASA this week. Can you talk a little bit about the kind of the opportunity there, your opportunity with commercial space providers, how that business is performing and where you see the growth in Africa is? And then I've got to follow up to that.

Yeah, it's a very hot segment. It's a segment that products participate since the 60s, right, since we started supplying liquid hydrogen for NASA and continues to this date. I would say that probably over 2% of our total sales is in this segment, you know, in aerospace when you add all the products, you know, hydrogen, helium, and oxygen and nitrogen. So it continues to be a very important segment for us. Of course, the market is changing. There is more commercial launches. Some of them use hydrogen. Some of them do not use hydrogen. So we are working on these opportunities, and we are trying to grow our market share, but it's a very important market for us. But I think, Melissa, you're going to have more comments.

Yes, thanks, Eduardo. So having many conversations, because this has gotten a lot of attention lately. So based on the customer's reserve, it's our estimate that Air Products has about 40% to 50% of the total space market share in the U.S. And from a growth trajectory, I think our expectations is that for projected sales, we see about a 6% to 7% growth per year. So obviously a market where we have been focused on for many decades and something that we're going to continue to focus on.

Thank you very much. And then just on your volumes, it was interesting that European volumes were up 5% year on year. Is Europe back? Are we looking at some recovery here, or are we remaining cautious about European volumes?

We remain cautious. A lot of things go on this calculation, so we had some turnarounds last year, so there were a lot of turnarounds this year, so that created a good balance. you know, pay a win for us on the volume side. But, you know, things in Europe, they, you know, as reported, they are, you know, I'd say complicated at this point, but I would remind that our business in Europe is different from our business in other areas of the globe because it's really fully integrated into packaged gases and other areas. And, you know, like the other industrial gas companies, we see much more pressure in the large, customers and on-site than we see in the retail and the package gas and so forth. So, you know, it's still an important business for us, very profitable. We have a very experienced management team that is, you know, doing the blocking and tackling and being able to extract good results despite the economic environment we have there.

Thank you both.

We'll take our next question from Chris Parkinson with Wolf Research.

Great, thank you so much. Edward, now that you're, you know, a year in and you've had a time to evaluate, you know, prior pricing strategies as well as the cost front, you know, how do you see these things progressing throughout the year? I imagine you have a good handle on cost now, but also it seems like there's this divergence between kind of cost, you know, pricing improvements versus obviously some helium headwinds. And I'm just kind of curious on, you know, what the cadence of that narrowing is as we progress through the fiscal year. So, any color on those two topics would be greatly appreciated.

Thank you, Chris. You were breaking a little bit, but if I understand correctly, it's about the pricing opportunity. As you can see in the results on the first quarter, a lot of our gain coming from price and productivity. I think, again, this is the normal block and tackling of the business. When you operate in 40 countries and you have over 20,000 employees, that's what you do. I think Air Products has... a good management system and good management talent to continue to make progress in both price and productivity. I would say that we expect that going forward for the balance of the fiscal year that the results will be from those two aspects to be similar. to what we had in the first quarter. The situation heating is an exception that we are also working on to do the best we can in a long market. But I would say outside of heating, you know, we have the right tools, and we keep pushing, and we expect the same results we had in the first quarter.

And just as a quick follow-up, there's obviously a lot going on in the tech world right now, and just given the the scale that you have in Asia as well as some of those customers abroad. Can you perhaps just give us a little bit of insights in terms of how the investment community should be thinking about content when we're, you know, looking at things like N2, HBM, et cetera, et cetera, you know, in terms of purified nitrogen, you know, neon, all specialty rare gases. How should we be thinking about the growth in your customers relative to when we should be seeing that show up in year results, presumably throughout this year and obviously for many years to come? Thank you so much.

Thank you, Chris. Yeah, electronics is the star segment of the market nowadays. You know, of course, with AI, you can see the results of the cheap manufacturers, results of ASML and so forth. We see a lot of RFPs, a lot of inquires. It is a market that traditionally The products are getting, you know, the products are increasing size. They are getting bigger and bigger. And we used to have, you know, the products coming every, you know, two, three years. And what I think we've seen the last 24 months and will continue to see in the next 24 months is an acceleration of this, you know, investment decisions by, the large ship manufacturers. And we have very strong positions, as you know, in Asia. We continue to push hard on signing new business over there. We are executing projects that combine in one site and go up in capex to close to a billion dollars. And we see an opportunity for new projects in the same range of CapEx, you know, being decided in the next 12 months.

Yes. And one additional comment to your question, Chris, and you did mention that, you know, new assets. We absolutely are having new assets come on screen, as we talked about when we set our guidance. And additionally, as we talked about, this is a ramp, as you know, with electronics business. So we will see the majority of those contributions towards the back half of this year.

Thank you so much.

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

Thank you, and good morning. I wanted to unpack, if I could, the upcoming deconsolidation of NEOM. Can you comment on the expected timing of that event and the specific trigger? And then with regard to the financial impact, I appreciate the color that you provided on slide 10 with regard to your net debt balance and leverage ratio. I wanted to ask whether there would be any appreciable impact on your income statement as well moving through that event.

Yeah, thanks, Kevin. So we've been talking about the deconsolidation for quite a while now, but I think we need to unpack it a little bit more for our investor community. So because we are the EPC, or the Engineering, Securement, and Construction group, Air Products is, to the joint venture, we do consolidate that because we do make the key decisions during that period of time. So at this point in time, with that control aspect, we do consolidate. Once the joint venture is operational, however, the decisions are even amongst the three shareholders. So during operations, which as we've talked about is in the mid-27, we will then deconsolidate that joint venture. As you rightly mentioned, that means that the debt would come off of the full balance sheet and would be within the equity affiliate line. And so you will see the reduction in our debt profile at that point in time. As we lead up to the deconsolidation in 27, obviously the operating company will be adding resources. So we will see additional costs being run through the O&M as we lead up to the on-stream. And once that is deconsolidated, obviously you'll see that come off and we will only see the impact of one-third of that operating cost. So there will be a slight increase in operating costs as we ramp up getting closer to on-stream in 27, and then that would then be deconsolidated, and you'd only see the 33% through the equity affiliate line.

Understood. Very helpful. And then secondly, if I may, can you comment on the sequential price change for helium and whether or not your Asia price of negative one would have been flat or possibly positive if we were to carve out helium?

Yes, thanks for the question. So yes, we continue to see helium as a headwind, both the volume and price. For this quarter, on a global perspective, price was a 1% decrease from helium specifically. In Asia, Asia is an interesting market right now because of the macroeconomic headwinds. We would have seen price up However, because of the helium impact, we did see that negative in Asia. However, in Americas and Europe, the price would have been up quite more significantly, but the helium headwind did bring that down a bit. But Asia, without a doubt, is the largest impacted region.

Okay. Thank you so much.

Our next question comes from Mike Harrison with Seaport Research Partners.

Hi, good morning. I want to ask about Europe operating margin. It looks like you saw about 150 basis points of sequential decline from Q4 into Q1. I think the energy pass through maybe should have been a little bit favorable sequentially. The top line was pretty similar. Depreciation was lower. Is this maintenance costs that we're seeing there? Or maybe help us understand what was causing that sequential margin headwind? And how should we think about margin trajectory in Europe in the rest of the year?

Yes, thanks for the question, Mike. So, the specific margins for Europe actually is being affected by cost. And so, we have some significant productivity in that region, however, we did have sizable depreciation. So the depreciation year over year is, in fact, I believe, up a bit. That is largely some insourcing and some purchases of our supply chain assets that we are seeing a hit of depreciation and some fixed cost inflation. There is largely wage inflation that we're seeing in Europe that is shrinking the margin.

And there is also some seasonality in the quarter, which All right.

And then my other question is, if you can comment on what portion of your customers are running below take or pay minimums in terms of their volume consumption right now? And I'm just curious, is that most pronounced in Europe? Or maybe if you could comment on what you're seeing region by region in terms of take or pay minimums?

Yeah, we don't normally disclose that. We have some cases in Europe, but I would say that it is not a very large percentage of businesses.

So one of the things that we do track is really utilization. So if I think about utilization across the Americas, Europe, and Asia, it's pretty similar in the mid to high 70s. So that's pretty similar to what we saw in fiscal 25 as well. So we're not seeing a significant change in utilization, but they're

Take a pace, concert by concert. Yeah, it is. It's very good. Of course, the steel industry, the chemical industry in Europe is being affected, but it's not, you know, it's not affect every customer in every location the same way, right? So it's a question of value. your assets are and what customers you have. I think if you want to put this way, I don't think it's a question of luck. It's a question of the work that was done 20, 30 years ago, selecting the right customers. But so far, we're not having a lot of impact in Europe, with the caveat that our own site business in Europe is not as big as it is in Asia and the U.S.

We'll take our next question from John Roberts with Mizuho.

Thank you. Back to CBAM for ammonia. Is Section 27 a key issue to watch here, and do you know what the next step is on Section 27? I don't think it's approved yet.

Yeah, I'm not an expert on EU regulations. I don't know anyone is. But, you know, from what I understand, this is a proposal that has to be approved. And, you know, there are several levels of legislation in Europe. There are directives, which is like suggestions that the countries have to implement. You know, CBAM is more like a tariff. So it's a legislation also has to be approved. by the entire EU and any changes have to be approved as well. And as you probably know, the CBAM is connected to the CO2 ETS scheme. So it's really a compensation for European producers for the CO2 tax that they have to pay. And this CO2 ETS scheme is in place for probably 15 years now. And, you know, I would say that to make a change there, you will need to make a change in the entire CO2 ETF scheme. So that's why I think people are telling us that the probability is very, very low. But, again, our job is to run the business and make our decisions. And the regulatory is just a signal that we need to use to make those decisions.

Okay, and then in the U.S., is contracting for new electric power an issue at all in bidding for new ASU business with all the data center competition and so forth?

Yeah, no question we are seeing, you know, increases in power costs for new conflicts. You know, we have a very sophisticated power system. Procurement process in our products, as you can imagine, is the main input that we have in our air separation business. So it's a long-going relationship with suppliers. I would say that if you have something new today, you would need to go and negotiate the tariffs. At the end of the day, when we have like an on-site contract, as you know, this is a pass-through in the formulas that we have, so ends being in the customer side. And for the merchant product, any energy that we use in the energy to make liquid oxygen, liquid nitrogen, and so forth, We work very hard also to pass those costs to our customers. So it's not that we are completely immune to power, but we work very hard to make sure that we pass this cost to the market and try to be ready for any cost increase. There is no questions that the data centers, they are creating demand and they are creating distortions in the power market today. Thank you.

Our next question comes from Patrick Cunningham with Citi.

Hi, good morning. Just a few follow-ups related to prior questions on Neom. Is there any dependency on the relationship with Yara at Darrow? And are these no-go, no-go decisions being viewed separately? And do you foresee the same CBAM-related risks for Yara's appetite for the Neom offtake?

No, there are no concerns. dependence between the the two uh project or the two potential conflicts and uh again it's the same is the same answer from from the other one right the the uh the product from neon is will be green so that's going to be absolutely zero uh sigbam effect on that product The effect on other products coming to Europe would be an indirect effect on the overall market, and we need to see if that happens, what the effect is. But again, going back to my previous answer, it's very, very uncertain that there will be any impact on the CBM scheme today. And if there is, it's going to be an indirect impact on this project.

That's very helpful. And what do you anticipate the run rate contribution of the NEOM JV will be from an equity affiliates perspective? And should we expect that to be at a loss when the asset first ramps up given the debt profile and initial fixed cost burden?

No, it's not going to be at a loss. But, you know, we cannot disclose results from our joint ventures. We know that we own 33% or expect the results in this case. but then it's not going to be a loss. Thank you.

We'll take our next question from Josh Spector with UBS.

Yeah, hi, good morning. I guess I'll follow up on Darrow and CBAM and see if maybe you'll answer it a little bit differently at all or not. But when you think about, like, the decision here that Yara would need to make, I understand CBAM doesn't impact their products directly. But it does impact the economics for Yara, assuming they're intending to bring that into Europe. And, you know, if they say that we don't know what the regulation is going to be and we need another year to think about it, we want to see if anything's going to change. Is that time value something that you're willing to accept? Or does that then trigger we need to look at a plan B or some of these other options because we're not going to sit around for a year? How do you game theory that yourself? Yeah, it's a theoretical question at this point.

We didn't, let's say, think about that, and I need to see when that happens. I would just say that the way we look at this project, right, when I came on board here, you know, Air Products was building a full ammonia project, you know, and doing the CO2 sequestration itself, and was going to be an ammonia producer and seller. We stopped the project as it is, right? So today, the The base case is that, that we stopped the project. But at the same time, we said the project has positive attributes and has a chance of being a good project, so let's try to find – let's try to see if there is a solution to generate some value from this project. And I think we did the most difficult step at this point, which is to find a credible – uh you know really world-class partner that would be willing to take uh the commercial risk on the on the ammonia which is what what this is right there that buying the hydrogen and the nitrogen and making the ammonia so they're taking that commercial and operational risk of the ammonia so this is the most difficult uh piece of the puzzle here uh we need to to make sure that the capital cost is that the product is feasible for both parties so that the project the capital cost will be within the numbers that we assume to be with them. But, you know, I would say that, you know, at this point, this is more like which one is a plan A, which one is a plan B. It depends on how you see it. But, you know, where we are today, if nothing happens, we're going to go back to where we were 11 months ago, which is, you know, we're not going to go forward with the project that's proposed. So that is the situation. And I would say that – The way I look at this is that we have only two possibilities. We're not going to go forward or we're going to go forward with a good project. And those are the only two cases I'm working with. Of course, there's a lot of work to make sure that when you go forward that you are certain on your capital cost and the project is good. But those are the two outcomes. So I hope our shareholders are looking at this as a free option, you know, for a good project on top of the current base case, which is not going forward. Okay. Thank you.

Our next question comes from Matthew Dio with Bank of America.

Good morning. I have two, but so Uniper from Germany announced an agreement to offtake 500 KT of green ammonia from the new AM Green hydrogen project in India, which looks to be commissioning on, like, 2028. Can I ask if you bid on this project, and if you did, why you don't think you won, or if you didn't bid on it, why you didn't, considering kind of the profile at Neom. And then last, sorry to ask another one on Daryl, I guess, but from what I understand, the company's kind of bidding the construction across a few different EPCs to try to lock in fixed economics. Is there any reason to believe this strategy would be more successful than just choosing like one?

Okay. Yeah. two different questions, right? So, on the greener moment, right, you know, it's a complicated subject here. I would, you know, the way I like to think about this is, you know, if you want to make a ammonia starting from electrolysis, right? For every metric ton of ammonia, you need about 10 megawatts of power, right? So when I see people saying, you know, we're going to develop this project in a place like India, and we're going to have a price of ammonia, you know, and I read the same articles you probably read, so people talk about $600, $700, something like that. You need to, when you see a number like that, you need to realize that It's like exporting power from India. They're investing a lot of capital to, at the end of the day, export power from India at $60 a megawatt or $70 a megawatt, which is lower than the local price. So it's very difficult to understand the economics when people – talk about doing green hydrogen and green ammonia in this type of jurisdiction. When our project in Saudi Arabia, it's public information. You can look around. You know, Saudi Arabia has a very active renewable power market. and they sign agreements with power prices below $0.02 or $20 per megawatt. So we are within that system. You know, we are building our own renewable power. And our, let's say, if you want to calculate our internal power cost for our project is also below two cents per kilowatt or $20 per megawatt. So our project is under construction. We can show you the videos. We can take you there. The power economics makes sense. And I'm not going to make comments about what other people are doing and MOUs and that kind of stuff. uh there are a lot of activities like that in in europe a lot of announcements uh uh but you know the the the only real project being built at this point uh it's ours i i understand in india it's uh it's a little different because they're trying to use an existing facility and and i'm not doubting that they will at the end build something but uh i would say that uh know the the regulatory risk the the you know the the if something looks too good to be true normally it is right now to to have this kind of uh uh exporting power at this low price from a country like india you know it's it's a it's a question mark for me so so that's the the the green ammonia piece on the On the DERO side, your question about the EPCs, we, you know, we're not going to make a comment on what they're doing in our activities. I would say that, you know, in general, this project is a very large plot plan very well-defined blocks, so you have an air saturation plant, you have a hydrogen plant, you have an ammonia plant. So you can go in different directions, and it is a question of to determine what makes sense, you need to go through a process, and you need to understand the local market, what is the appetite of the ATCs and what alternatives they have. So we are looking at every case here, and we are trying to make sure that we do the best for our shareholders, for our customers, in this case for Yara. In fact, they will participate in the process with us, and we are not ready to say exactly how we're going to execute this project at this point. Understood. Thank you.

We'll take our last question from Lorex Alexander. Lawrence Alexander with Jefferies.

Good morning. A question around sort of AI-related productivity. You know, if it comes in better than expected or compared to expectations a few years ago, do the benefits accrue to your onsite business, or do your contracts, mean that you pass some or all of those benefits through to the customers. And then similarly, I guess for merchants, it would be, you know, more just sort of competitive dynamics in the local market. Is that fair?

Yeah, it's, you know, AI can be used everywhere, right? So when you talk about how you're using it, you know, and where the benefit will accrue, it depends on what the usage is, right? So if you say I'm using AI to lower my cost, power costs in the negotiations with my power suppliers. If I have an agreement with the customer that is a really pass-through on the cost, that will be somehow shared. If we're using AI to reduce our power consumption, normally we will capture that to our products because at the end of the day, what we do, we give the customer a guarantee of a maximum power consumption. So it's case by case. But that's a very specific application of AI. We're using a lot of AI to look at our, let's say, administration, our SG&A activities, our engineering activities, and those are internal costs, and those are not contractually charged. pass to customers. Although, like any other company, we try to be more efficient in order to be more competitive in the marketplace. So you can make the conclusion as well that in the long run, somehow these benefits will go to our customers. But it's very difficult to determine what share that will represent at the end. I hope that was clear. I'm not sure if that's exactly what you were asking.

Thank you. Okay.

This concludes our question and answer session. I'd like to turn the conference back over to Eduardo for any additional or closing remarks.

Thank you. I would like to, again, thank everyone for joining our call today. Appreciate your interest in our products, and we look forward to discussing our results with you again next quarter. Have a good and safe day. Thank you.

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