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    Air Products and Chemicals Inc (APD)

    Q2 2024 Earnings Summary

    Reported on Jan 10, 2025 (Before Market Open)
    Pre-Earnings Price$238.12Last close (Apr 29, 2024)
    Post-Earnings Price$232.58Open (Apr 30, 2024)
    Price Change
    $-5.54(-2.33%)

    What went well

    • Stronger than expected performance in the US and Europe, with US merchant pricing up 6%, demonstrating pricing power in an inflationary environment. ,
    • Unique positioning with real green hydrogen projects, such as the Saudi Arabia project, making APD the only company with real products being made to meet future demand in 2027-2028.
    • Significant demand expected for blue ammonia and blue hydrogen, including use of ammonia as fuel for ships starting January 2025 due to regulatory changes in Europe, and APD is ready to meet this demand with their Louisiana project.

    What went wrong

    • Weak performance in Asia due to challenging economic conditions in China and lower demand for merchant products. The company acknowledges that China has been weak in the first half and they have not included any improvement in their forecast.
    • Pressure on helium pricing in Asia, requiring the company to lower prices to stabilize the situation. They are adjusting to increased competition from Russian-sourced helium and have lowered prices, impacting margins.
    • Record high maintenance expenses impacting earnings due to significant turnaround activities in major facilities. The company indicates that this year is a heavier maintenance year, with significant expenses, especially in the U.S. and Europe.

    Q&A Summary

    1. Earnings Guidance and Q4 Ramp
      Q: What drives the steep earnings ramp in Q4?
      A: The lower guidance for Q3 is due to major turnarounds increasing maintenance costs in Europe and the U.S.. For Q4, we expect contributions from bringing a significant number of smaller plants online—we've already brought about 20 in the first half—and anticipate new clients coming on stream. We've also implemented productivity actions that should improve numbers, and since our business is seasonal, Q4 is typically our strongest quarter. Additionally, our LNG business is performing strongly and will ramp up in Q4.

    2. Louisiana Project Demand and Offtake Agreements
      Q: Is there demand for all the blue ammonia from the Louisiana project?
      A: Not all hydrogen will be converted to ammonia; some will supply our Gulf Coast pipeline due to significant demand for blue hydrogen. We're confident in strong demand for our real blue ammonia, mainly for decarbonizing power plants in Japan and Korea, and as fuel for ships facing new European carbon taxes starting January 2025.

    3. Delay in Signing Offtake Agreements
      Q: Have you signed any offtake agreements for NEOM or Louisiana projects?
      A: No, we haven't signed contracts yet by design. We're waiting to secure higher prices that reflect the value of being first movers in green and blue hydrogen. We won't commit until we can extract the right price to deserve returns beyond a typical project.

    4. Productivity Measures and Cost Reduction
      Q: What cost reduction actions are impacting margins?
      A: Company-wide, we're increasing efficiency by simplifying operations and reducing costs—essentially doing more with less. These actions include severance costs reflected in a $0.20 charge, with an expected annual savings run rate of about $75 million.

    5. Maintenance Costs Impacting Q3 Earnings
      Q: How will turnarounds affect Q3 volumes and margins?
      A: Major planned maintenance outages in Europe and the Americas will significantly increase maintenance expenses in Q3. This includes extensive work on hydrogen plants and facilities in Rotterdam, contributing to higher costs and impacting volumes.

    6. Jazan JV Earnings Contribution
      Q: Is the decline in equity affiliates' income from Jazan a one-time event?
      A: Yes, it's primarily due to timing—a higher interest expense this quarter and a prior-year one-time item. Jazan continues to deliver about $1.35 in earnings per share annually, and we expect consistent performance moving forward.

    7. Market Demand for Blue and Green Hydrogen
      Q: How confident are you in demand for your hydrogen projects?
      A: We're confident there's demand driven by regulations in Europe, California, Japan, and Korea. Our projects are real and will produce green and blue hydrogen when others might not have product available. We believe in extracting maximum value due to our unique position.

    8. Alberta Blue Hydrogen Project Update
      Q: Is the Alberta project on track, and how much volume is committed?
      A: Yes, it's still expected to start up in late 2025, and just about all the volume is committed. We have contracts in place and are confident in the project's success.

    9. Potential Spin-off of Hydrogen Business
      Q: Would you consider establishing market value for the hydrogen business through an IPO or spin-off?
      A: We're currently focused on executing $20 billion in projects and believe it's not the time for financial structuring that could distract management. Once we've secured long-term contracts and our hydrogen business generates substantial EBITDA and returns, we might consider such options.

    10. Helium Market Adjustments in Asia
      Q: Was the unfavorable business mix in Asia due to helium?
      A: Yes, we're adjusting to helium market conditions in China impacted by Russian supply. The situation has stabilized, and we expect stability for the remainder of the year.

    11. Electronics Market Outlook
      Q: What's the outlook for the electronics business?
      A: We see signs of the electronics business picking up, especially in Asia, with increased volumes in nitrogen, argon, and helium. However, we're not factoring this potential upside into our second-half outlook to remain conservative.

    12. Impact of Lower Natural Gas Prices
      Q: How do lower natural gas prices affect efficiency improvements?
      A: Lower natural gas prices reduce the benefits from efficiency improvements. The bonuses we receive from efficiencies are smaller when gas prices are low, affecting our margins modestly.

    13. European Volume Decline
      Q: What caused the volume decline in Europe?
      A: Planned maintenance outages and weaker merchant volumes decreased European volumes. However, the ramp-up of the Uzbekistan project contributed positively and is expected to generate around $0.35 per share annually.

    14. Cash Flow from Jazan JV
      Q: Do you receive cash commensurate with Jazan JV earnings?
      A: Yes, we receive regular dividends aligned with the earnings, though there may be timing differences in cash flow statements.

    15. NEOM and Louisiana Project Timelines
      Q: When do you expect to finalize agreements for hydrogen projects?
      A: The timeline is fluid; we'll sign contracts when we can secure the right price, whether in a few months or longer. Our plants are slated to come onstream in 2027-2028, and we're focused on maximizing long-term value.

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