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 Mr. Sidd Manjeshwar.

Please go ahead..

Thank you, Katie. Good morning, everyone. Welcome to Air Products’ first quarter 2023 earnings results teleconference. This is Sidd Manjeshwar, Vice President of Investor Relations and Corporate Treasurer. I am pleased to be joined today by Seifi Ghasemi, our Chairman, President and CEO; Dr.

Samir Serhan, our Chief Operating Officer; Melissa Schaeffer, our Senior Vice President and Chief Financial Officer; Sean Major, our Executive Vice President, General Counsel and Secretary; and Simon Moore, our Vice President of Investor Relations, Corporate Relations and Sustainability.

As previously announced, he will be retiring at the end of March. After our comments, we will be pleased to take your questions. Our earnings release and the slides for this call are available on our Website at airproducts.com. This discussion contains forward-looking statements.

Please refer to the forward-looking statement disclosure that can be found in our earnings release and on Slide #2. In addition, throughout today’s discussion, we will refer to various financial measures.

Unless we specifically state otherwise, when we refer to earnings per share, operating income, operating margin, EBITDA, EBITDA margin, the effective tax rate and ROCE both on a total company and segment basis, we are referring to our adjusted non-GAAP financial measures, adjusted earnings per share, adjusted operating income, adjusted operating margin, adjusted EBITDA, adjusted EBITDA margin, adjusted effective tax rate and adjusted return on capital employed.

Reconciliations of these measures to our most directly comparable GAAP financial measures can be found on our Website in the relevant earnings release section. Now, I am pleased to turn the call over to Seifi..

Thank you, Sidd, and good day to everyone. Thank you for taking time from your very, very busy schedule to be on our call today. I am proud to say that the people at Air Products delivered great results this quarter despite the significant macroeconomic headwinds.

I would like to thank each of our talented, dedicated and motivated employees for their hard work. Now please turn to Slide #3. Our safety performance, which is always our highest priority. As you can see, we have made significant progress since 2014. But we always work hard to do better. Our goal is to achieve zero incidents and zero accidents.

Now please turn to Slide #4. For the first quarter of our fiscal year 2023, our earnings per share was $2.64, an improvement of 0.16 per share or 6% versus last year. But our underlying performance versus last year was much better than that.

The items that you need to consider to make a fair comparison versus last year are a $0.15 negative impact from currency, and a one-time gain of $0.20 in the first quarter of last year from the finalization of the Jazan ASU joint venture.

I would like to point out also that our guidance for the first quarter was to deliver earnings per share of 2.60 to 2.80. Our actual EPS is $2.64, which is within our guidance but at the lower end. The principal reason is that the Chinese and European economies were weaker than our expectation in early November, [indiscernible] (512) forecast.

Now, please turn to Slide #5. We are committed to recording our shareholders, while pursuing our long-term growth strategy.

I am pleased to say that we have again raised our quarterly dividend this time by 8% to $1.75 [ph] per share per quarter, or $7 a share on an annual basis, extending our record of more than 14 consecutive years of dividend increase.

We expect to pay out more than $1.5 billion to our shareholders in 2023, reflecting our commitment to return cash to our shareholders. Now, please go to Slide #6, [technical difficulty] which shows our EBITDA margin trend. While energy costs remain high, our margin improved this quarter.

Our team has worked hard on increasing prices to offset the higher energy costs in our merchant business, and we continue to work on productivity.

I would also like to point out that three quarters of the margin declined since the peak margin of around 42% is due to a higher energy cost pass-through in our upside business, which increases our sales but does not impact our profit. Now please turn to Slide #7.

In addition to delivering strong results, we also achieved several significant project milestones during the quarter. In December 2022, we were very excited to announce our $4 billion green hydrogen project in the United States.

This project will be located in Northern Texas, and is our latest mega-scale zero carbon, which means green hydrogen project since the announcement of our revolutionary NEOM green hydrogen project in 2020. And it will be by far the largest green hydrogen project in the United States.

The information about this project and the recording of our December paid net cash is -- for this project are available on our website. Now please turn to Slide #8.

We were pleased to announce in January 19, the completion of the second phase of the $12 million Jazan gasification and power project, which is 51% maturity owned by Air Products, and it is 60% project financed.

During the first quarter, with the first phase of this project, which was completed in October of 2021, Air Products contributed around $0.5 billion for the purchase of $7.1 billion of assets from Saudi Aramco.

In the second phase, which was just completed, Air Products contributed an additional $900 million for the purchase of $4.2 billion of additional assets. Our total cash contribution for this project is $2.5 billion.

As expected, the first phase of the project at the end was $0.80 to $0.85 per share on an annual basis, which significantly contributed to our results in fiscal year 2022. With the completion of the second phase, we now expect about a total of $1.35 per share of earning contribution on an annual basis.

This is fully in line [technical difficulty] the announced investors more than 3 years ago.

Now please turn to Slide #9, [indiscernible] to provide you an update on our great NEOM green hydrogen project, which is appropriate to give you an update, since we are very close to completing a major milestone, which is signing the definitive project financing agreements for this project.

And therefore, we wanted to give you an update, before you read about that in the next few weeks. We have been making excellent progress on this large-scale project to bringing green energy to the world. The engineering is now about 30% complete.

All major subcontracts for the project have been awarded including [indiscernible] the power plant [technical difficulty]. Land preparation is completed and construction has started. And the joint venture team is in place and executing the project. Now, please turn to Slide #10.

As you know, Air Products has a [indiscernible] ownership position of the NEOM production joint ventures. But importantly, and this is very important. We remain the sole offtaker of 100% of the green hydrogen produced in the form of green ammonia produced at this facility and an exclusive 30-year contract.

We continue to see significant opportunities to use this [indiscernible] to bring green hydrogen to consumers around the world. And as I said we are the sole offtaker and distributor of this product.

Then I want to emphasize that the offtake price for this green ammonia, it remains the same as when we negotiated the original project in the summer of 2020 when we announced the project.

This is a very key point than the fact that now we are project financing this project, and as a result, we are absorbing all of the financing charges and so on that has not changed the offtake price. Then, now please turn to Slide #11.

Initially the three partners [technical difficulty] which are Air Products, NEOM, which is owned by PIF; and ACWA Power, we intended to use our own cash to fund the project, the total project. Over the past 2 years, we’ve seen significant interest from the global financial institutions who see tremendous value proposition on this project.

Therefore, we got tendered [ph] and reconsidered and we decided that the best course of action to minimize our cash contribution and maximize the return on the cash is to do non-recourse project financing of this project. The partners will contribute 25% cash and the remaining 75% will be non-recourse project financing.

And obviously, if you are doing non-recourse project financing, you want to maximize the amount of money that you can borrow. Therefore, you put a lot of your ongoing cost and you bring it forward to the real present value and borrow against that. I would explain this a little bit more when we get to the detailed chart.

This means that Air Products -- this project financing means that now our cash contribution to this project will be $800 million, less than $800 million, which is significantly less than the $1.7 billion that we originally expected. That is what you would expect us to do, that is the ballpark point of project finance. Now please turn to Slide #12.

I’m pleased to say that the non-recourse financing is well underway and we are more than 2x over-subscribed from what we want to borrow. We have received commitments from over 20 global financial institutions, demonstrating their confidence in this project.

Later this month, we expect to complete what we call the dry close, which is the signing of the definitive financing agreements, and we expect the full financial close to be completed a few months later. We will obviously let you know as we make progress on the project finance.

Now please turn to Slide #13, so that I can provide you with an overview of the total project capital needs. First, the original $5 billion that we have mentioned before, for the capital required to build the facility. We have increased that -- it has increased by about $0.5 billion due to inflationary pressure that everybody expects.

Then in addition, we have further increased the investment by $1.2 billion to include [indiscernible] service from other people, but now we want to provide those services ourselves in order to make the project totally self-contained and we wouldn't be dependent on others.

These include power transmission lines and other infrastructure that was needed for the project. This increases the capital cost, but it decreases the operating cost and we decided that was a better trade-off.

But the key point was to make sure that the project is not dependent on other people doing [technical difficulty] that people have control over the whole thing so that [technical difficulty] we have everything that we need for the project to be operated.

Now the other item that I'm sure will be a subject of questions from people is the $1.8 billion for project financing costs. That is a big number, but it is really explaining why that is. Again, as I said, if you have project financing, you want to put and borrow as much money as you can.

First of all, about $1 billion of that $1.8 billion is the interest during construction. So we are spending money. We want to borrow that money. There is an interest to that borrowing. Therefore, that adds up for the [indiscernible] of the project to about $1 billion. We want to finance that and borrow against them.

Then we are using [technical difficulty] instead of leasing the land for 50 years, we decided to pay for the land upfront that reduces our ongoing cost, and we can finance that. That is a few hundred million dollars. Spares for the project. Usually you buy the spares as you go forward, we decided to buy all the sales upfront and finance it.

So those are the kind of costs that comprise the $1.8 billion. It makes a lot of sense, and that is the beauty of finance that you can [technical difficulty]. You have the flexibility of bringing forward a lot of your costs that will save your operating costs in the future. So all together, the total funding needed for the project is $8.5 billion.

Now please turn to Slide 14, which is the overview of the funding. As I described before, the $8.5 billion is made up $6.2 billion of non-recourse debt, which we wanted to maximize and $2.3 billion of cash from the three partners.

Therefore, obviously, the Air Products cash contributions [technical difficulty], which is less than $800 billion and this is as compared to the $1.7 billion than we originally expected. So overall, we are very pleased with where we are.

We are very pleased with the fact that our project financing [indiscernible], minimizing our cash flow, and we are very pleased that the prices that we are paying for the [indiscernible] has stayed the same as it was in 2020. We are very optimistic about projects and the prospects for a good return for the total supply chain as we go forward.

Now please turn to Slide 15. I would like to summarize the discussion by sharing some thoughts about our strategy. As I have mentioned before, there are two pillars for growth strategy of Air Products and sustainability is the foundation for both of them.

Through our core industrial gas business, the supply customers in dozens of industries with critical products and services that lower emissions and increase efficiency and productivity.

Through our Blue and Green hydrogen [technical difficulty] project of the future, we will commit more than $15 billion by 2027 to deliver clean hydrogen at a scale helping to drive the energy transition and moving [indiscernible].

These two pillars, which support Air Products for success put us in the heart of [indiscernible] [Audio Gap] needs for -- the Board's needs for sustainable energy and environmental solutions.

I'm proud to say that the people of Air Products have continued to drive results in the near-term and make excellent progress in executing our growth project as we move forward. Slide #16 summarizes our management principles, which I reiterate every quarter.

These principles are critical to Air Products' success and will continue to guide us in the future. Now I'm pleased to turn the call over to Melissa, our Chief Financial Officer.

Melissa?.

Thank you, Seifi. As Seifi mentioned earlier, we've delivered another set of incredible results in the quarter even with significant macroeconomic headwinds. Our commercial teams across the region continue to execute press actions and their efforts paid off.

Price droves the 25% operating income improvement despite a significant negative currency impact, and operating margin was also 300 basis points higher compared to last year. I also would like to thank the team at Air Products for their continued outstanding efforts. Now please turn to Slide 17 for a review of our first quarter results.

In comparison to last year, sales, volume and price were up nearly 10%. The 7% gain in price for the total company equaled a nearly 20% improvement in merchant price compared to last year, the fifth quarter in a row of double-digit increase.

Volumes were up 2% higher, driven by better onsite in merchants, but partially offset by lower sales equipment activities. Volumes were strong in America and Asia, but weaker in Europe. Currency translation from the strengthening U.S. dollar reduced sales by about 6% and lower operating income at 8%.

Despite this headwind, operating income jumped 25% and operating margin was 300 basis points higher, primarily driven by strong pricing. Operating income was higher across the region and particularly strong in America and Europe.

Improvements in EBITDA and EBITDA margins were not as significant as operating income and operating margins due to the prior year one-time items primarily related to the Jazan ASU joint venture finalization. ROCE has climbed steadily over the last 6 quarters, reaching 11.3%, which is 120 basis points higher than last year.

We expect ROCE to further improve as we bring new projects on stream and continue to put our cash on the balance sheet to work. Adjusting for cash, our ROCE would have been 13.3% this quarter. Sequentially, volume was weaker following a strong prior quarter, which also benefited from soft sales and a favorable contract [indiscernible].

Price continues to gain strength across the region. Merchant price improved 3% versus last quarter. EBITDA was down 5%, primarily due to weaker volumes, while EBITDA margin was up 200 basis points as positive price [indiscernible] cost pass-through more than offset the lower volume.

Now please turn to Slide 18 for a discussion of our earnings per share results. Our first quarter adjusted EPS was $2.64 per share this year, up $0.60 or 6% compared to last year. Strong price drove the improved results.

Price, net of variable costs contributed over $0.70 this quarter as our price actions more than offset the higher variable cost increases. Cost was $0.11 unfavorable primarily due to inflation and higher maintenance. Price, volume and cost together added $0.63 or a 25% increase compared to last year.

However, the negative $0.15 from currency and a roughly $0.20 of prior year one-time benefit associated with the finalization of the Jazan ASU joint venture moderates a strong underlying results. The Jazan item accounted for much of the $0.14 decline in equity affiliates' income and an unfavorable $0.10 in non-controlling interest.

The effective tax rate of 19.1% was 210 basis points unfavorable due to less tax benefit this year. We expect an effective tax rate of 19% to 20% in FY 2023. For the quarter, a non-service component of our defined benefit plans were favorable $0.04 last year and unfavorable $0.07 this year.

As I shared with you last quarter, we now exclude the component from our adjusted results. Now please turn to Slide 19. Our distributable cash flow continued to climb, driven by improving EBITDA. While cash expenses included interest, cash tax and maintenance CapEx remains relatively stable over the last 3 years.

Over the last 12 months, we generated close to $3.1 billion of distributable cash flow or almost $14 per share. From our distributable cash flow, we paid over 45% or over $1.4 billion as dividends to our shareholders while still had an almost $1.7 billion to invest for growth.

Our ability to grow distributable cash flow, especially in challenging conditions, demonstrates the strength and stability of our business. It enabled us to continue to create shareholder value by increasing dividend and deploying capital for high return projects. Slide 20 provides an update of our capital deployment.

As you can see, we have over $36 billion of capital deployment potential through fiscal 2027. The $36 billion includes over $8 billion of cash, additional debt capacity available today, about $17 billion, we expect to be available by 2027 and almost $12 billion already spent.

We still believe this capacity is conservative given the potential for additional EBITDA growth, which would generate additional cash flow and additional borrowing capacity. As always, we continue to focus on managing our debt balance to maintain our current targeted AA2 rating.

So you can see our backlog of nearly $20 billion will provide a substantial amount of growth in the future. However, please note this figure still includes the second phase of Jazan project that was completed in January as well as the capital required for NEOM at its original higher value as we work through the finalization of project financing.

Moreover, we will include the $4 billion Texas green hydrogen project when the project reaches final investment decision. We have already spent over 30% and committed 74% of the updated capacity we show on this slide. We have made great progress and still have substantial investment capacity remaining to invest in high return projects.

We believe that investing in these high return projects is the best way to create shareholder value for the long run. We continue to evaluate our capital deployment options and determine the best way to use available cash and trusted to us by our shareholders.

Now to begin the review of our business segment results, I'll turn the call back over to Seifi..

Thank you, Melissa. Now please turn to Slide #21 for our Asia first quarter results. Our businesses were able to deliver positive volume and price despite the negative COVID impact in certain parts of China. Volume improved7% supported by new assets.

This quarter, we benefited from more than 25 new small to mid-sized traditional industrial gas plants which came on stream across the region over the last years. Price was up 1% in total, which is 3% -- which translates to 3% in our merchant business.

Although underlying sales grew 8% versus last year and energy pass-through was a positive 2%, overall [indiscernible] offset by a 10% weaker currency, which is obviously translation. Negative currency also reduced operating income and EBITDA each by about 10%.

Operating income and EBITDA both improved versus prior year as better volume and price more than offset the negative COVID impact. Higher price and volume also drove margin improvement. Although China's government has relaxed its rules related to COVID, the subsequent high infection rates have impacted business activity.

We expect economic recovery in China to take time. We anticipate power across the region to continue to rise, and we are taking action, which I mean pricing action, to mitigate the impact. Sequentially results compared unfavorably to last quarter, which benefited from some specific spot sales.

At this point, I would like to turn the call over to Sidd to discuss our European results.

Sidd?.

Thank you, Seifi. Now please turn to Slide 22. As the chart shows, power costs for Europe moderated sequentially this quarter, but are still at a historically elevated level. Our commercial team has executed significant price actions to compensate to these costs in our merchant business and their hard work has paid off.

Although we have fully recovered the higher power costs for the quarter, we are keeping a close eye on the dynamic power market in this region. As a reminder, power costs in our merchant business is the primary focus when managing the escalating energy costs in Europe.

Our on-site business has contractual pass-through, which enables us to pass energy cost to our customers and almost all our national gas usage is for on-site hydrogen production. Now please turn to Slide 23 for a review of our Europe results.

Successful price actions, we have worked hard to implement the last few quarters, drove the significant improvement in Europe's results. Compared to prior year, price increased 14% for the regions corresponding to a 24% improvement in merchant pricing. Volume declined6%, reflecting challenging conditions in the region.

Demand for our hydrogen was weaker as customers continued to optimize their own hydrogen operations. Our merchant business was lower, partly due to the divestment of our business in Russia. Energy cost pass-through was up 9% due to higher natural gas costs although it had no impact in profit.

Operating income jumped nearly 50%, while EBITDA was up almost 30%, primarily due to strong price. Although unfavorable currencies reduced operating income and EBITDA, each by more than 10%. Price primarily drove the more than 400 basis point EBITDA margin increase.

This was net of the higher energy cost pass-through, which lowered the margin by about 200 basis points. Compared to the prior quarter, volume was unfavorable due to vehicle merchant this quarter and a favorable contract amendment in the prior quarter. Now I would like to turn the call over to Dr. Serhan, for a discussion of our other segments..

Thank you, Sidd. Now please turn to Slide 24 for a review of our Americas results. Underlying sales increased15% despite the adverse effect of severe weather in December. Price improved for the region by 9%. This is equivalent to a 26% increase in the merchant business.

Our team in the Americas has successfully raised the prices to cover the higher energy cost. Volume grew 6% primarily due to better merchant and on-site, volume also benefited from a new short-term agreement, which will benefit Americas results for the next few quarters. Operating income was up to almost 30% over last year.

And operating margin improved 300 basis points, driven primarily by the strong price. Volume also contributed to profits, but costs were unfavorable. EBITDA improved less than operating income because of our lower equity affiliate income due to unfavorable one-time items and lower medical oxygen volume in Mexico as the COVID impact subsided.

Sequentially, the price continued to gain strength. Merchant price was up 7%, but volume was down 3%, following a strong previous quarter. EBITDA margin improved by around 400 basis points, primarily due to lower energy cost pass-through which accounted for three quarters [indiscernible].

We expect our planned maintenance activity to increase next quarter and parallel with our customers' plan turnaround. Please now turn to Slide 26 for our Corporate segment. This segment includes our -- I'm sorry..

Samir you need to [multiple speakers]..

I'm sorry, review the Middle East results and India before going to that. So please let's go to Slide 25 first for a review of our Middle East and India segment. Sales and operating income in this segment are modest since our Middle East and India wholly owned operations are smaller in size.

However, the segment's EBITDA is significant, it includes the equity affiliates' income related to the Jazan gasification and power joint venture, our India joint venture, INOX Air Products and other joint ventures.

For the quarter, an acquisition benefited sales and operating income versus last year, but was partially offset by land maintenance activities.

Although our share of the ongoing Jazan gasification and power joint venture net profit added to the region's results, the equity affiliates' income declined by $28 million primarily due to the one-time benefit associated with the Jazan ASU joint venture finalization in the first quarter of last year.

As Seifi mentioned before, we have successfully completed the second phase of the Jazan gasification and power project, and we have begun to receive additional income in the second quarter. Now please turn to Slide 26 for our Corporate segment.

This segment includes our sales of equipment businesses as well as our centrally managed functions and corporate costs. For our sale of equipment activities, our LNG business historically has been the anchor, but our non-LNG related project activities have also grown in recent years to become major contributors to this segment.

The cadence of project activities and timing of sales and profit recognition can vary the segment results. Our ongoing effort to support our growth strategy has also increased the centrally managed functions and corporate costs.

For the quarter, the segment sales and profits were lower than last year, primarily due to lower sale of equipment project activities. We also continue to add resources to support our growth strategy. As mentioned before, inquiries for potential LNG projects have picked up recently. However, these projects take time to develop.

We're excited, however, that we have signed one new agreement in the quarter and working hard to sign additional new projects. At this point, I would like to return the call back over to Seifi to provide his closing comments.

Seifi?.

Thank you, Dr. Serhan. Now please turn to Slide #27. The outlook for the global economy remains uncertain. However, we remain confident in Air Products and the prospects that we have in the future and the stability of our business which is supported by our robust capital deployment strategy as you have seen.

Therefore, for fiscal year 2023, we have left our guidance unchanged despite the significant uncertainties that exists in the world. For the second quarter of fiscal year '23, which is usually our weakest quarter. Our earnings per share guidance is $2.50 to $2.70, up 7% to 15% over last year.

We still see our CapEx at $5 billion to $5.5 billion for the year, including the approximately $1 billion for the completion of the Jazan project that we just talked about. Now please turn to Slide #28. We include this slide in all our earnings call presentations.

It describes very clearly my view that an enterprise can only be successful for the long-term when the people in the enterprise are motivated and committed to emission.

At Air Products, our [indiscernible], our mission as a company is to bring people together so that they can collaborate and innovate solutions to the world's most significant energy, environmental and sustainability challenges.

We continue to build a diverse and inclusive culture that are more than 21,000 people feel they belong and matter and are motivated to achieve our goals. I believe Air Products is uniquely positioned to help the Board transition to a cleaner and better future, and we are putting our efforts toward that each and every day.

Now we are very pleased to answer your questions. Operator, we are ready for questions..

[Operator Instructions] We will go first to Christopher Parkinson with Mizuho..

Great. Thank you so much. Seifi, just given all the macro uncertainty that's prevailing across the globe, can you just give us your current assessments of where you think you stand as well as the operating rates for the regional merchant businesses? Thank you..

Thank you very much, Chris. Right now, obviously, it's very difficult under the current circumstances to predict what is going to happen in the next few quarters. But we feel very confident about our own operations and about our ability to keep our plants running and service our customers.

And as I look around the world, we obviously saw the Chinese economy a little bit weaker in the first quarter than we expected. Right now, my view on the Chinese economy is -- we have to wait and see how it comes out after the Chinese New Year.

We don't expect any kind of disaster or any bad news, but it's just a question of the rate of improvement how would that be? We are very well-positioned there.

We have taken action to increase prices and most important, as I said, we are benefiting from the fact that we have 20, 25 smaller projects that we usually don't announce, but they are standard industrial gas projects, they are coming on stream, and they are contributing. So we feel that we will be able to deliver on Asia in general.

In Europe, the economy again, was weaker than we expected in the first quarter. But right now, energy prices seem to have a stabilized. Power prices have stabilized, natural gas prices have not yet. But overall, we think that we should be okay in Europe.

And in the U.S., you saw our actions in respect to pricing last quarter, we got overall,7% -- overall for the whole company, we've got 7%. But in the U.S., we got almost 14% price increase, which translates to almost 19% -- 20% price increase on the merchant side. Latin America is always very big, so we don't talk about it too much.

So overall, we feel pretty confident that we should be able to deliver forecast that we have given you for the year..

That's helpful. And just as a quick follow-up, just given now that investors and your team has had an opportunity to digest the IRA.

Is there any key opportunity that's, let's say, specific to Air Products that you believe investors are missing? Is there something on the HEICO facility retrofits? Is there just anything else in terms of that materialization over the next several years that we all should be paying attention to? Thank you..

Number one, we reduced our CO2 emissions; and number two, that gives us an opportunity to have a lower carbon hydrogen that we can sell at higher prices. We will definitely do that. Then we are benefiting from the IRA [indiscernible] before the IRA, which was the project that we had announced before the IRA, which was the project in Louisiana.

We did that project with the economic space, no IRA benefit on $85 for CO2 capture. We've been accounting on about $50. So that additional $35 enhances the returns on that project. And then we will do significant amount of green projects in the United States.

We did announce the project in Northern Texas and we definitely are working on other mega projects to produce green hydrogen in the United States. The IRA credits for $3 for green hydrogen production.

First, the fact that if you make an integrated facility, you also get credit for the renewable power that you generate makes it very attractive to make these investments in the U.S.

We are extremely well-positioned with our pipeline in the Gulf Coast and with our know-how and with our distribution capabilities to do things that other people cannot do because anybody who can already take advantage of the credit if you can do something with the hydrogen.

I mean people can run around and say, okay, I'm going to build a plant to produce green electricity and produce hydrogen. But then what do you do with the hydrogen. Air Products is one of the very few companies who knows what to do with the hydrogen, the other hydrogen company.

Therefore, we are in a very unique position to take full advantage of the IRA registration. We are very pleased with that. That was a very significant step forward in the United States. And then the very good news for us is that, that has prompted other countries to take action.

And I think yesterday or the day before that, you saw an announcement from the European Union that they are going to have a program of about €280 billion to promote the same kind of things which would, obviously, be very good for us because we are a global company..

Okay, Chris. It's very helpful, Seifi. Thank you so much..

Thank you..

We will take our next question from David Begleiter with Deutsche Bank..

Thank you. Good morning. This is Anthony [indiscernible] on for David.

Seifi, you mentioned in your slides, your new capital structure and the changes on the capital costs and contributions to NEOM, what is the return on this project versus what you were expecting when you first announced the project in July of 2020?.

Well, the thing is that I have three partners, and I don't want to speak for them and disclose the return on the project.

But the thing that you have to take a look at is that we don't look at the return on the project because we are going to take the offtake and sell that and make money on that, and that is how we take a look at the return on the total investment.

So on that front, the return on that is going to be in accordance with what they have given you a guidance, which is for every dollar that we invest, you should expect about $0.10 of operating income. So you have to look at total supply chain from Air Products' point of view.

In terms of the specific return on the product, that is up to my partners to decide whether they want to disclose that or not. I don't want to disclose that because for us, that doesn't mean anything. It's the total supply chain.

The important thing that you need to focus on is the fact that we are off-taking the ammonia at the same price that it was negotiated in 2020.

Okay?.

Yes. Understood.

And as a follow-up on the green ammonia, if you did not lock in this price to purchase, how much higher do you think it would be today versus when the project comes on stream?.

Well, it depends on what you would have negotiated with our partners. I don't expect it to have been significantly different. But because -- I mean, you talked about additional capital cost, but as I said, a lot of the operating costs is being capitalized. So that necessarily doesn't affect the return on the project.

But again, I just don't -- I have two other partners, and I respect them. I don't want to disclose their financials there. But as I said, [indiscernible] from a product point of view, you need to look at the total supply chain..

[Indiscernible], okay..

Yes, thank you very much..

Thank you, sir. We will take our next question from John McNulty with BMO Capital Markets..

Yes, good morning. Thanks for taking my questions, Seifi so. Seifi, you seem excited about the price of the offtake for NEOM basically remaining flat.

So I guess, why is that? Are you seeing interest from buyers right now that are higher than what you thought they would be at the time that you originally signed into this contract? I guess, how should we be thinking about that?.

Well, I think that's one way of putting it. The thing that we see is significant interest in the product. And obviously, as a businessman, we would like to offtake anything that we buy at the most favorable price that they can get.

But I'm particularly interested in the reason I keep mentioning that because I just want to make sure that people don't think that, well, these guys said $5 billion, now it's $8.5 billion. Therefore, this -- the price of ammonia must have gone up. It did not.

And it just -- look one other thing, John, you know this better than I do see our project financing this thing with some of the biggest banks in the world, giving us money. They have looked at this project, they have looked at [indiscernible] of the, and they are bidding to finance it.

So I guess, they all think this is a good project and a good prospect, and they were going to get their money back.

You know what I mean?.

Yes. No, for sure. I guess, maybe looking at it from a slightly different angle. So when you think about like when I think about project financing, the benefit of it is that tend to juice the returns a little bit more, but it does take out some of the EPS on the -- tied to the equity that's being put to work because there's less equity involved.

I guess when you think about the total capital of the project overall, the distribution side as well as the actual production side and the economics around that.

I guess, how has that changed relative to what you thought originally with the project financing now in place?.

John, it has obviously improved because I'm putting less cash on the production side. So we are bit off. And as long as the price of ammonia is the same. So we have made an improvement. We have another $1 billion that we were going to invest to do other things..

Got it. Fair enough. Thanks very much, Seifi..

Thank you..

We will go next to John Roberts with Credit Suisse and thank you. ExxonMobil recently announced a blue hydrogen project in the Gulf Coast that includes ammonia as well.

And it looks like it has merchant ambitions there? Since refiners are a large customer for Air Products, help us understand, would you have bid for that project as well? Or how do we think about how your customers might play in the hydrogen and potentially ammonia market?.

Well, I mean, I can't comment on their strategy of Exxon and what they're going to do. But this is a competitive Board. If Exxon decides that they want to get into their merchant ammonia business and make blue ammonia to sell, then we will have an extra -- an additional competitor.

Hydrogen that they are going to produce a significant amount of that from what I understand is going to be used to replace the natural gas that they are using because the whole purpose of the project is to reduce their carbon emissions. So if they do that, now are they going to make so much hydrogen have extra amount to do merchant.

I don't know, I don't have any visibility on that and all of that. That to them to do what they want to do. We would have [technical difficulty] you know what we are doing and as I said, I'm sure other people will get attracted to these projects.

But it's one thing talking about these things is actually doing the details they just announced they're doing a fee. They have to wait until they do the fee, then they add their costs and then they find out what the total cost is and all of that. But it's a target up to them. They decided to do it themselves, which is fine..

Okay. And then since the Alberta blue hydrogen plant will be the first really big project up online, do you think you'll get a premium on all of the hydrogen out of that plant? Or do you think some of the hydrogen is going to be sold with the existing gray hydrogen market..

What the interesting thing is that you mentioned [indiscernible] our project in Canada, the customer for that project is Exxon.

We are, right now, almost sold out of that project, and they are getting a significant premium, yes, because Exxon through their subsidiary, which we have announced this publicly, so I'm not putting anything new to their ancillary, which is the inferior Chemical Limited, they are going to use the blue hydrogen we give them to produce renewable diesel that they're going to sell in California at premium prices.

And as a result, they are giving us a significant premium for the blue hydrogen that they are buying from us in Canada..

Thank you. We'll take our next question from Steve Byrne with Bank of America..

Yes. You had some pretty hefty merchant price increases in Europe and Americas. My question for you is how much of that had a surcharge in it given gas costs have dropped in both regions.

Could you see some sequential decline in pricing in those regions?.

What the question that you're asking, Steve, is very relevant. We obviously have increased the prices in order to recover the power cost. Obviously, at some point in time, if the power costs go down, then some of the customers would expect us to decrease those prices.

And we listen to that and we will make a decision based on supply-demand situation as we always do. So it is possible. But if the price declines in the future, then that would be as a result of power price declining, therefore, theoretically, there shouldn't be an impact on our bottom run..

Okay. And just a follow-up on NEOM. Has the design of it changed, is it still a couple of gigawatts of electrolyzer capacity or has this changed? Could you produce more than the 1.2 million tons of ammonia. It seems like you could battery backup.

Is that also enabling you to lead -- to have an unchanged ammonia price from this project?.

Steve, you're asking a very good question, which is subjective in general discussion cloud event. We are -- this is the first significant project that we are doing for green. We are obviously installing a significant amount of wind and solar capacity and we are installing a significant amount of electrolyzer capacity.

What these electrolyzers and wind and the solar we do actually might end up giving us the capability of making a lot more than the $1.2billion. But I don't want to get ahead of ourselves. I don't want to promise that, but you are on the right track that there might be an upside in that side.

And I personally understand there could be an upside, but we have to wait and see. Thank you..

Thank you..

We will take our next question from Mike Leithead with Barclays..

Great. Thanks. Good morning, guys. First question is on the -- on the new $8.5 billion kind of oven CapEx number. Can you just give us some comfort of framework around how walked in, that number is obviously, there is still about 70% or so, the engineering works left.

Just any comfort around now what you’re doing to make sure that number is not going to move again, say, in the next three years. .

At this point I can say that we had an off contingency there. And we have done enough work that I think that’s a pretty good number. But nothing just 100%, but I feel pretty good about that number at this stage..

Got it. Makes sense. And then ….

[Indiscernible] underlying, who is in charge of our -- all of our engineering and all of that. But I think [indiscernible] pretty comfortable that, that is a good number.

We spend a lot of time making sure that when we are doing project financing that we don't have to go back for additional financing, but we feel pretty good about the number at this stage. Besides the engineering, we haven't add the page made the major orders on the project.

So basically, that's also much then for like and even for construction for the green element that's also being replaced..

Great. Thank you. Yes. And just as a quick follow-on with the new capital structure, that obviously can sometimes come with some level of covenants or restrictions around distribution.

So just how should we think about the cash dividends from the project? Should they generally match income? Or are there some constraints or restrictions around the cash you can get back to their products..

For the cash income from the project itself, obviously the project will have a cash flow that we'll go to servicing the debt and if there is any extra of that, which I hope there is, that will come back to the shareholders. That's the major structure [ph]..

Got you..

Thank you..

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

Yes, good morning. With regard to Asia, you had healthy volume growth of 7%. But in the prepared remarks, I think you made a comment that you started 25 new assets in the region over the past year, which sounds like a fairly large number. So I was hoping you might be able to put that into context for us.

Looking ahead, would you expect the contributions from those startups to remain elevated or regressed by some amount? How would you describe the shape of that profile in Asia?.

Kevin, quite honestly, that's a very good question, [indiscernible], good morning. Should -- I did think this is a good opportunity for me to make a comment. At other times, people think that at Air Products, the only thing we do is make our project. We have our base business, and we are making good progress in our base business.

We are getting our share of all of these small products. We don't announce it every time we have a $50 million nitrogen generator, but these things do add up. We had about 25 of them [indiscernible] on the stream in Asia.

What they are doing is that they are helping us to deliver the volume increases despite the fact that you know that economic activity in China was almost -- it has gone from 6%, 7% back to about 2%, 3%. So we are getting the benefit of that.

And these things will help us in the future to make up for any weakness and therefore, continue to help us to deliver good results for that region despite the fact that China might be flat or slowing down. So these are the good things. They are going to contribute, and we are very excited about it..

Hey, thank you for that. And then secondly, if I may, in North America, you made a comment that volume benefited from a new short-term agreement.

Can you elaborate on that? What impact did that have? And how long might it persist?.

Well, I don't want to disclose the name of the customer and so on, but we did get an opportunity because we could serve customers that other people couldn't serve, so we did get that benefit.

But I would like to turn it over to Melissa to expand on that, Melissa?.

Yes. So thank you. So from a volume perspective in the Americas, that agreement was about 3% of the increase in the volume. Now we will see that over the next four quarters, be pretty consistent. So that's what we would see attributed to 2023..

That’s helpful. Thank you very much..

We will take our next question from Jeffrey Zekauskas with JPMorgan..

Thanks very much.

In the NEOM ammonia production project, did the net present value of your one-third ownership stake, in your mind change that is you had a net present value assessment? Is it different now? Or is it the same or lower or higher?.

Good morning, Jeff. We're saying that we had a net present value which was the discounting of all of the cash flows that we expect in the few years and now with the project financing is that higher or lower, I think it should be about the same or even better because we are doing project financing, Jeff..

Right. Because you're using more capital or the whole -- there's more capital that's going in. The second question is, have you determined how much ammonia you're going to make in your Louisiana project? And does that project -- is it necessary for there to be a substantial amount of ammonia for that project to go-forward..

Jeff, that's a very good question. We have disclosed publicly that, that project will produce about 1,850 ton a day approximately of partnership. That project is literally next to our pipeline.

So we are assessing how much of that we can put to the pipeline and sell because 1,850 tons of hydrogen is not that huge compared to the total sale of hydrogen that we have on our pipeline because our pipeline over there can do significantly more than that, significantly more than that.

Therefore, one scenario is that all of the customers on the pipeline due to environmental regulations or the registration develops and so on decide hey I want blue hydrogen. Then we can just [indiscernible] out of the hydrogen into the pipeline. Then it is possible that not all of them would convert.

Some of them would say, no, I was still okay, with gray hydrogen. Then we did have excess hydrogen to put and make it into ammonia. Therefore, what we are doing is that in terms of the actual building of the plant, we are building the plant to have ammonia facility that means you can build the ammonia plants.

And then we will have ultimate capacity to an ultimate flexibility to use as much of the hydrogen in the pipeline and whatever we can use, we make into ammonia. There are ammonia plants themselves, Jeff, in the context of the overall. Don't cause that much.

The ammonia plant, once you have the infrastructure, putting a 1.2 million ton ammonia plant by itself is only $250 million. So we are not going to lose anything significant by having basically cycle spare capacity. And then the other thing is, obviously, how the demand for blue ammonia developed as we go forward in the next few years.

So we are building a plan to give us the flexibility, and this is the beauty of the situation that Air Products has that nobody else has. Is that we can make through hydrogen, and we have total flexibility, but that we can send it as hydrogen or we can sell it as ammonia. Because of the unique situation because we have the pipeline.

And as a result of that, I think we can maximize the profitability of that better than anybody else then possibly can..

So you haven't determined how much ammonia you're going to make yet?.

Yes, I said we haven't determined how much ammonia we're going to sell..

[Indiscernible] how many ammonia plants you're going to build?.

Great. Thank you so much..

Thank you. Thank you very much, Jeff..

We will take our next question from PJ Juvekar with Citi..

Yes, good morning..

Good morning, PJ.

How are you?.

Good. Seifi, on the NEOM project, you had inflation and then you also had that $1.2 billion of increased sort of financing costs, et cetera. What is that -- and that is -- not the financing cost I'm sorry, there's the additional cost --additional scope, I should say, and you're going to build transmission lines yourself, et cetera.

What does that mean? Does that additional scope mean that the project could get delayed? Or do you think it's still on time for 2027?.

[Indiscernible] on time for 2027. The additional scope is something that we have been thinking and planning on it and then -- the progress on this project is that at the beginning, you go over there and you say, okay, I'm going to build the plant. All of the infrastructure is already there or it's going to be there, and therefore, we can draw on that.

As the project goes forward, you will start getting a little bit concerned about the ability of other people to build teams that you need. Therefore, with the project finance, we decided that we are going to do all of that that increases the capital, but it saves us operating costs, as I mentioned before..

Thank you. And there was earlier discussion about hydrogen price. The IRA gives $3 per kilogram benefit to green hydrogen. But how much of that you think you and the industry will have to pass it on to customers, so they get lower hydrogen price. And I think that's the ultimate goal of the government is to lower the hydrogen price.

So do you have any thoughts on how the industry or the hydrogen price evolves over time?.

Thank you. P.J. Obviously, that will be the case because if you are building a plant and we are going to get $3 for the green hydrogen. And as I said, that $3 is actually more because if you build an integrated facility once we are doing, that means that the wind and the solar is part of the project. You also get a benefit for the wind and solar.

So the total I think translated to per kilogram of hydrogen is more than $3. So we obviously -- when we do projects, we expect that we turn if you are getting the subsidy that improves the returns.

So we will pass-through some of that to the customer and we will achieve the goal of the government, which is the goal fundamentally the price of hydrogen so that people can convert. That is exactly the goal, and that is exactly what we have P.J..

Thank you very much. .

Thank you, sir..

We will take our next question from Mike Sison with Wells Fargo..

Hey, good morning. So on Slide 30, you talk about downstream hydrogen supply chain is about $2 billion between 25 to 28.

Is that $2 billion a number that could go up as new projects or you look for new opportunities in the supply chain? And any thoughts in terms of the timing between 25 and 28 ?.

Well, that was our estimate before about the $2 billion. But that number could be best, could be more, and let me just explain. It depends on the customers, it is possible that you can have -- because when you look at the customers, there are some customers that are like the mobility where you need a lot of infrastructure to serve it.

You have to bring the hydrogen to a port, have an ammonia tank, crack it, liquefied have the trucks to go and deliver to the gas stations and sell it today. That is one way of selling the hydrogen. Another way is that somebody develops ships that can use ammonia and they've on green ammonia.

And in that case, there is no infrastructure because the ship can dock in NEOM, put ammonia in it and then use it as fuel then there is no infraction cost.

Another customer could be somebody that you bring the ammonia to a port, you crack it and then you put it in a pipeline and that goes into a chemical plant or some other kind of a plant, and they use all of that, then you don't have to liquefy, you don't have to build the infrastructure for trucks and so on.

So because of that infrastructure is very much dependent on the exact kind of customers. Right now, our best estimate is that with the $2 billion, we will be able to build an office infrastructure to use the capacity of new. But that could be significantly less or it could be more depending on exact infrastructure.

But if it is more than that means that the infrastructure needed for the trucking is obviously more expensive, which means that the price of hydrogen at the fund is a lot higher than the price of selling if we didn't have to be qualified. So it will all adjust for itself.

Is that okay?.

Got it. Thank you..

We will take our next question from Vincent Andrews with Morgan Stanley..

Hi. This is Steve Haynes on for Vincent. Thanks for taking my question. Just wanted to ask a quick one on the other cost line and your EPS bridge, it was about $0.11 of headwind in the quarter. How should we kind of be thinking about that going forward? Thank you..

Well, the other costs, I'd like to have Melissa comment on that, Melissa?.

Yes, absolutely. So the other cost line, we had a number of components this quarter play into there. We had a sizable maintenance, both in the Americas as well as north India joint venture or India segment. So that added additional costs this quarter. We should see that go down in the next quarter.

Fixed cost inflation, however, is a driver and at 11%, and that will be consistent throughout this fiscal year..

Thank you..

Thank you. We will take our next question from Josh Spector with UBS..

Yes, hi. Thanks for taking my question. Just on the near-term, when I look at your next quarter guidance, and close based on your math, maybe to add $0.12 or so sequentially.

I was thinking there's maybe some merchant benefit as energy prices come down, maybe those volumes down a little bit, but December quarter wasn't super strong from a demand perspective.

So I guess why wouldn't earnings be up sequentially given some of the tailwinds? What am I missing?.

I don't think you're missing anything. Your logic is very correct. The only thing is that when we make guidance, we have to kind of be cautious to make sure that we deliver it. The part that we are very concerned about, and we don't have any visibility is what is going to happen in the Chinese and European economy.

I don't know how the Chinese economy is going to come out of the New Year holiday. And we don't have much visibility currency and how energy prices are going to develop in Europe.

That is why we are a little bit cautious, and you are very correct to kind of say, maybe you're being conservative, maybe you are, but we just wanted to make sure that we don't get ahead of ourselves..

[Indiscernible], appreciate that..

Sure, absolutely. Thank you..

Sorry, if you had more go ahead, but I was going to ask a second quickly, the Canada project financing, was that expected that anticipated in your economics? Does that change your cash [indiscernible]? I'm sorry, I didn't understand..

Yes. So thank you for asking that. So just to be clear, on our Alberta project, we have no project financing associated to that project..

Exactly. On the project financing, we do the [indiscernible] project by project. [Indiscernible] because it's a very complicated project and so on, difficult to finance. NEOM was pretty easy because there's an offtake price and so on, and we can calculate that.

Now with our project in [indiscernible], the $4 billion project that we announced, we will most probably look at project finance on that. But we made the decision a step by step, the options that Air Products has, which is [indiscernible] is that we have the option of using our own cash because we have the cash.

We have the option of raising money by going to the market as Air Products and raising bonds and then they have the option of project finance. So we take everything into consideration and come up with the best possible solution. So with new, with the partners and so on, we decided project finance was the best thing.

Obviously, for project finance, we are going to pay a higher interest than if we have gone and increased bonds, but that was a joint decision with other partners. Now for the project in Texas, we will probably do project finance. For the project in Louisiana, we probably would.

It depends -- and this is something that keeps our finance department and our treasury department busy trying to assess all of these things, and we do ask all of those questions. and we make the most optimum decision..

Okay, thank you..

Any more questions, operator?.

We will take our next question from Laurent Favre with BNP..

Okay. [technical difficulty]. Okay. Hello. Good morning, all. My question is on inflation or the inflation risk for the rest of the backlog. So if we take one from the $19.4 billion, there's about $15 billion less. I was wondering if you could talk about the risk that there.

We also see billion or $1.5 billion of extra costs and whether you have flexibility on selling prices to adjust for that to maintain returns? Thank you..

Well, thank you. The rest of our projects, obviously, some of them are the other projects that we have announced are actually in a much more advanced stage than new. So we have a pretty good feel for their cost and all of that. But I don't want to deny decide that there is inflation.

But we just don't think that the inflation thing is something that we cannot manage or it will significantly caused a struggle because with some of the projects, I mean, let's take the project in Louisiana.

The project in Louisiana, if there is inflation on our capital cost goes up, then they will price the ammonia and the hydrogen out of that facility accordingly.

So there is not a type of project that we have committed to a sales price for the product and now we have to keep the additional projects.[indiscernible], but most of those things are just about that. So that's why the thing we can manage..

Okay, thank you..

Thank you. Operator, we have time for one more question, please..

Thank you. We will take our final question from Laurence Alexander with Jefferies..

Hi. This is [indiscernible] on for Laurence. Thank you for taking my question. Just given a forecast that we'll be likely entering a recession. I just wanted to get a sense of how merchant volumes and pricing fared during the last recession. If you can give [indiscernible] overview of that, I would appreciate it. Thank you..

That’s a fantastic question. Good question. The quick thing is I can answer that very definitely because you have seen our results during the last -- the last recession obviously was in 2008, 2009 and the second one was during COVID.

And you saw what we have always said that Industrial gases business, we have another resulting industry because half of our business is on top. That doesn't get really affected by recession because they are [indiscernible]. And our picture volumes usually go down, but they do not go down significantly.

We take action to control our costs, and therefore, you can take a look at our actual results during 2009 and 2010 and 2008 over results in 2020 and2021, and you'll see that we held up pretty well..

Okay. Thank you..

Thank you very much and [indiscernible], I would like to joint everyone for joining our call today. We appreciate your interest, and we look forward to discussing our results with you again next quarter. As I said earlier, please stay safe and healthy and all the best to all of you. Thank you..

Thank you. That will conclude today's call. We appreciate your participation..