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 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% compared to 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, $2.64, is within our guidance but at the lower end. The principal reason is that the Chinese and European economies were weaker than our expectations in early November, causing forecast revisions. Now, please turn to Slide #5. We are committed to rewarding 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 per share per quarter, or $7 a share on an annual basis, extending our record of more than 14 consecutive years of dividend increases. 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, 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 decline 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 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 associated net cash flow for this project are available on our website. Now please turn to Slide #8. We were pleased to announce 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 completed in October 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 earnings contribution on an annual basis. This is fully in line with what we announced more than three years ago. Now please turn to Slide #9 to provide you an update on our 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 bring green energy to the world. The engineering is now about 30% complete. All major subcontracts for the project have been awarded, including the power plant contracts. 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 an ownership position in the NEOM production joint ventures. But importantly, we remain the sole offtaker of 100% of the green hydrogen produced in the form of green ammonia at this facility under an exclusive 30-year contract. We continue to see significant opportunities to use this hydrogen to bring green energy to consumers around the world. And as I mentioned, we are the sole offtaker and distributor of this product. I want to emphasize that the offtake price for this green ammonia remains unchanged from when we negotiated the original project in the summer of 2020. This is a very key point considering that we are now financing this project, and as a result, we are absorbing all of the financing charges, yet this has not changed the offtake price. Now please turn to Slide #11. Initially, the three partners, which are Air Products, NEOM, owned by the Public Investment Fund, and ACWA Power, intended to use our own cash to fund the project. Over the past two years, we’ve seen significant interest from global financial institutions who see tremendous value in this project. Therefore, we tendered for project financing and reconsidered our approach, deciding that the best course of action to minimize our cash contribution and maximize our return on capital was to pursue non-recourse project financing. The partners will contribute 25% cash, with the remaining 75% coming from non-recourse project financing. By utilizing non-recourse financing, we aim to maximize the amount we can borrow. This means that Air Products' cash contribution to this project will be less than $800 million, significantly less than the $1.7 billion we originally expected. This is what you would expect with project financing. Now please turn to Slide #12. I am pleased to say that the non-recourse financing is well underway and we are more than twice 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 the dry close, which is the signing of the definitive financing agreements, followed by a full financial close a few months later. We will, of course, keep you informed as we make progress on the project finance. Now please turn to Slide #13, which provides an overview of the total project capital needs. The original estimate of $5 billion for building the facility has increased by about $0.5 billion due to inflationary pressures. Additionally, we have increased the investment by $1.2 billion for new infrastructure services to ensure that we are not dependent on others for project execution. This includes power transmission lines and other critical infrastructure that will bolster project efficiency. While this will increase capital costs, it will decrease operational costs, making it a better trade-off long term. The key point is to ensure that the project has full operational control and independence. I am sure this will be a topic for future questions. The $1.8 billion in project financing costs is significant, and I want to explain why. About $1 billion of that is interest during construction, which we want to finance and borrow against. We aim to reduce our ongoing costs. For instance, instead of leasing the land for 50 years, we're choosing to purchase it upfront, reducing our ongoing cost and allowing us to finance that. We also decided to purchase all spare parts upfront rather than acquiring them gradually over time, allowing us to finance that too. All of these expenditures total approximately $8.5 billion for the entire project. Now please turn to Slide #14 for an overview of the funding. As described before, the $8.5 billion is composed of $6.2 billion of non-recourse debt, which we aimed to maximize, and $2.3 billion of cash from the three partners. This means that Air Products' cash contributions will be less than $800 million, rather than the $1.7 billion that we initially expected. Overall, we are very pleased with the current status, minimizing our cash outflow, and maintaining the prices we are paying from 2020. We are optimistic about the project's prospects for a good return on the overall investment. Now please turn to Slide 15, where I would like to summarize the discussion by sharing some thoughts about our strategy. As I mentioned before, there are two pillars for Air Products' growth strategy, and sustainability is foundational to both. Through our core industrial gas business, we supply customers in various industries with critical products and services that lower emissions while improving efficiency and productivity. Through our Blue and Green hydrogen projects, we are committing more than $15 billion by 2027 to deliver clean hydrogen at scale, helping to drive the energy transition. These two pillars position Air Products at the forefront of the energy and environmental solutions market. I am proud to say that the people of Air Products have continued to deliver results in the near term while making excellent progress in executing our growth projects as we advance. Slide #16 summarizes our management principles, which are vital to Air Products' success and will continue to guide us into the future. Now I am 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 amid significant macroeconomic headwinds. Our commercial teams across the region continue to execute price actions, and their efforts have paid off. Price drove 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 would also 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 equals nearly a 20% improvement in merchant pricing compared to last year, marking the fifth quarter in a row of double-digit increases. Volumes rose by 2%, driven by better onsite performance in the merchant sector, though partially offset by lower sales in 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 by 8%. Despite these headwinds, operating income jumped 25%, and operating margin improved by 300 basis points, primarily driven by strong pricing. Operating income was higher across regions, particularly strong in America and Europe. Improvements in EBITDA and EBITDA margins were not as significant compared to 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 six quarters, reaching 11.3%, which is 120 basis points higher than last year. We expect ROCE to further improve as we bring new projects online and continue to optimize cash deployment. Adjusting for cash, our ROCE would have been 13.3% this quarter. Sequentially, volumes were weaker following a strong previous quarter, which benefited from soft sales and favorable contracts. Price continues to gain strength across the region. Merchant pricing improved 3% compared to the last quarter. EBITDA was down 5%, primarily due to weaker volumes, while EBITDA margin increased by 200 basis points as price increases more than offset lower volumes. Now please turn to Slide 18 for a discussion of our earnings per share results. Our first quarter adjusted EPS was $2.64, up $0.60 or 6% compared to last year. Strong pricing drove the improved results. Price, net of variable costs, contributed over $0.70 this quarter as our pricing actions more than offset the higher variable cost increases. Costs were $0.11 unfavorable primarily due to inflation and higher maintenance. Price, volume, and costs together contributed $0.63 or a 25% increase compared to last year. However, the negative $0.15 from currency and roughly $0.20 of prior year one-time benefit related to the finalization of the Jazan ASU joint venture moderated 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 fewer tax benefits 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 was favorable $0.04 last year and unfavorable $0.07 this year. As I shared with you last quarter, we now exclude this component from our adjusted results. Now please turn to Slide 19. Our distributable cash flow continued to climb, driven by improving EBITDA. Cash expenses, including interest, taxes, and maintenance CapEx, have remained relatively stable over the last three years. Over the last 12 months, we generated close to $3.1 billion of distributable cash flow or almost $14 per share. From this, we paid over 45% or more than $1.4 billion in dividends to our shareholders while still retaining almost $1.7 billion to invest for growth. Our ability to grow distributable cash flow, especially under challenging conditions, demonstrates the strength and stability of our business. This enables us to continue creating shareholder value by increasing dividends and deploying capital for high-return projects. Slide 20 provides an update on our capital deployment. As seen, we have over $36 billion of capital deployment potential through fiscal 2027. This includes over $8 billion of cash, additional debt capacity available today, and about $17 billion expected to be available by 2027. We have already spent almost $12 billion. This capacity is believed to be conservative given the potential for additional EBITDA growth, which would generate extra cash flow and borrowing capacity. We continue to focus on managing our debt balance to maintain our targeted AA2 rating. Our backlog of nearly $20 billion will provide substantial growth potential in the future. Please note this figure includes the second phase of the Jazan project completed in January and 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 once it reaches the final investment decision. We have already spent over 30% and committed 74% of the updated capacity 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 projects is the best way to create long-term shareholder value. Now, to begin reviewing 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 improved by 7%, supported by new assets. This quarter, we benefited from more than 25 new small to mid-sized traditional industrial gas plants that came on stream across the region over the last few years. Price increased 1% overall, which corresponds to a 3% rise in our merchant business. Although underlying sales grew 8% versus last year and energy pass-through positively contributed 2%, the overall performance was offset by a 10% weaker currency, which impacted translation. Negative currency also reduced operating income and EBITDA, each by about 10%. Operating income and EBITDA both improved compared to last year as better volume and price more than compensated for the negative COVID impact. Higher pricing and volume also contributed to margin improvements. 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 prices across the region to continue rising, and we are taking pricing actions to mitigate impacts. Compared to last quarter, results were unfavorable due to 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 for these costs in our merchant business, and their hard work has paid off. Although we 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 are pivotal when managing escalating energy costs in Europe. Our on-site business has contractual pass-throughs, enabling us to pass energy costs to our customers, and almost all our natural gas usage is for hydrogen production. Now please turn to Slide 23 for a review of our Europe results. Successful price actions implemented in the last few quarters significantly improved Europe's results. Compared to the prior year, price increased 14% for the region, resulting in a 24% improvement in merchant pricing. Volume declined by 6%, reflecting challenging conditions in the region. Demand for our hydrogen was weaker as customers optimized their hydrogen operations. Our merchant business was also lower, partly due to the divestment of our business in Russia. Energy cost pass-through was up 9% due to higher natural gas costs, though it did not impact profit. Operating income jumped nearly 50%, while EBITDA surged almost 30%, primarily due to strong pricing. Unfavorable currencies reduced operating income and EBITDA by over 10%. Price primarily drove the more than 400 basis point EBITDA margin increase, which netted out the higher energy cost pass-through that lowered the margin by about 200 basis points. Compared to the prior quarter, volume was unfavorable due to vehicle merchant sales this quarter and a favorable contract amendment in the last 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 increased by 15% despite the adverse effects of severe weather in December. Price improved for the region by 9%, which reflects a 26% increase in the merchant business. Our team in the Americas successfully raised prices to cover higher energy costs. Volume grew by 6%, mainly due to improved merchant and on-site performance, boosted by a new short-term agreement that will benefit the Americas' results for the next few quarters. Operating income surged nearly 30% over last year, and operating margin improved by 300 basis points, driven primarily by strong pricing. Volume also contributed to profits, although costs were unfavorable. EBITDA improved less than operating income due to lower equity affiliate income stemming from unfavorable one-time items and reduced medical oxygen volume in Mexico as the COVID impact subsided. Sequentially, pricing continued to strengthen. Merchant price rose by 7%, but volume fell by 3%, following a strong previous quarter. EBITDA margin improved by around 400 basis points, mainly due to lower energy cost pass-through, which accounted for three-quarters of it. We expect our planned maintenance activity to increase next quarter in conjunction with our customers' planned turnarounds. Please now 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.

Samir, you need to 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. However, the segment's EBITDA is significant, as it includes equity affiliates' income related to the Jazan gasification and power joint venture, our joint venture in India, INOX Air Products, and other joint ventures. For the quarter, an acquisition boosted sales and operating income versus last year, although this was partially offset by maintenance activities. While our share of net profit from the ongoing Jazan gasification and power joint venture added to the region's results, 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 have begun receiving 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 has historically been the anchor, but our non-LNG related project activities have also grown in recent years to become major contributors. The cadence of project activities and timing of sales and profit recognition can vary the segment results. Our ongoing efforts to support our growth strategy have 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 reduced sales from equipment project activities. However, we continue to see inquiries for potential LNG projects recently increasing. We're excited that we signed one new agreement in the quarter and are working hard to secure additional new projects. At this point, I would like to return the call back over to Seifi to provide his closing comments. Thank you, Dr. Serhan. Now please turn to Slide #27. The outlook for the global economy remains uncertain. However, we are confident in Air Products and the prospects that we have in the future, supported by our robust capital deployment strategy, as you've seen. Therefore, for fiscal year 2023, we have left our guidance unchanged despite the significant uncertainties that exist 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 anticipate our CapEx to be $5 billion to $5.5 billion for the year, including approximately $1 billion for the completion of the Jazan project we just discussed. Now please turn to Slide #28. We include this slide in all our earnings call presentations. It clearly describes my view that an enterprise can only be successful long-term when the people in the enterprise are motivated and committed to its mission. At Air Products, 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 where our more than 21,000 people feel they belong, are valued, and are motivated to achieve our goals. I believe Air Products is uniquely positioned to help facilitate a transition to a cleaner future, and we are dedicating efforts toward that every day. Now we are very pleased to answer your questions. Operator, we are ready for questions.

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 our ability to keep our plants running and service our customers. Looking globally, we did observe the Chinese economy moderating a bit more in the first quarter than we expected. Currently, my view on the Chinese economy is that we must wait and see how it unfolds after the Chinese New Year. We don't expect any kind of disaster or bad news; it’s more about the rate of improvement. We believe we are well-positioned there. We've taken action to increase prices, and importantly, we benefit from 20 to 25 smaller projects that contribute to our overall performance. So we believe we will be able to deliver on our forecasts for Asia in general. In Europe, the economy was also weaker than anticipated in the first quarter. However, energy prices seem to have stabilized. Power prices have stabilized, but natural gas prices have not yet. Overall, we think we should be okay in Europe. In the U.S., we implemented pricing strategies last quarter, achieving an overall increase of 7%, with nearly a 14% price increase in the U.S., translating to almost a 19% to 20% price increase in the merchant sectors. Latin America is typically less emphasized, so we don't discuss it as much. Overall, we feel confident that we will be able to deliver on our forecasts for the year.

That's helpful. And just a quick follow-up, given that now investors and your team has had an opportunity to digest the IRA, is there any key opportunity specific to Air Products that you believe investors are missing? Is there something on the HEICO facility retrofits? Is there anything else in terms of that materialization over the next several years that we should pay attention to? Thank you.

Hi, Chris. That's a very good question. I don't want to comment too much about the IRA benefits, as the law is available for everyone to read. However, the opportunities for Air Products that we will undoubtedly follow-through with include carbon capture on our existing facilities. This provides two benefits: Firstly, we reduce our CO2 emissions, and secondly, it enables us to offer lower-carbon hydrogen that can be sold at higher prices. We will certainly pursue this avenue. Before the IRA, we had made plans based on a project we announced in Louisiana. We accounted for that project economically at $85 for CO2 capture, and now with the IRA, we are looking at the benefits closer to $50. This additional $35 enhances the returns on that project. Furthermore, we are initiating significant green projects in the U.S., including the one in Northern Texas, and we are working on other mega projects to produce green hydrogen in the country. The IRA provides $3 per kg for green hydrogen production, and the benefit becomes greater when considering that integrated facilities also receive credits for renewable power generated, making these investments highly attractive in the U.S. Because of our pipeline expertise in the Gulf Coast and our distribution capabilities, we are uniquely positioned to capitalize on these benefits relative to others who may struggle with hydrogen utilization. Therefore, we are set to make the most of the IRA provisions, which represents a substantial forward movement for the U.S. Moreover, this creates a domino effect—other countries are following suit, and I think you saw an announcement from the European Union indicating a program valued at approximately €280 billion to encourage similar initiatives, which would also be advantageous for us as a global company.

That's very helpful, Seifi. Thank you so much.

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

Thank you. Good morning. This is Anthony on for David. Seifi, you mentioned in your slides the new capital structure and changes on the capital costs and contributions to NEOM. What is the return on this project compared to your initial expectations when you announced it in July 2020?

The thing is that I have three partners. I don't want to speak for them or disclose the return on the project. However, what we look at is that we don't just measure the return on the project; we look at overall profits from our offtake sales. So, per every dollar that we invest, you should expect about $0.10 of operating income, which is a guideline that we provided earlier. You should view this from a total supply chain perspective from Air Products' angle. Regarding the specific return on the product, it is up to my partners to decide if they want to disclose that information, which I prefer not to. The essential focus should be on the fact that we are off-taking the ammonia at the price we negotiated back in 2020.

Understood. 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 compared to when the project comes online?

The answer depends on what you would have negotiated with our partners. Nonetheless, I don't expect it to have varied significantly because, despite the cost increases, our operating costs are being capitalized. This won't significantly affect the project return. Once again, I respect my partners and prefer not to disclose their financials.

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. You seem excited about the offtake price for NEOM remaining flat. So why is that? Are you seeing interest from buyers right now that is higher than you expected at the time you originally signed this contract? How should we think about that?

I think that's one perspective. The significant interest we see in the product is encouraging. As a business, we naturally want to secure favorable prices for ammonia. However, I emphasize this because I want to clarify that the increase in our capital commitment does not imply that offtake prices have risen. They remain unchanged. Also, one important point is that we are securing project financing from some of the largest banks worldwide, who have evaluated this project and its prospects, and nonetheless decided to support it.

Yes, for sure. From a slightly different perspective in considering project financing, it does tend to enhance returns a bit more while reducing equity tied to income. In analyzing the total capital of the project, encompassing both distribution and production sides, how has that changed relative to your original expectations with the current project financing in place?

Indeed, it has improved since we are investing less cash at the production level. Therefore, we benefit. Remember, the important factor is that the price of ammonia remains the same.

We will take our next question from John Roberts with Credit Suisse.

ExxonMobil recently announced a blue hydrogen project in the Gulf Coast that includes ammonia as well. And it looks like it has merchant ambitions. Since refiners are large customers for Air Products, can you help us understand if you would consider bidding for that project as well? How should we think about how your customers might play in the hydrogen and potentially ammonia market?

I cannot comment on Exxon’s strategy or what they intend to do. This remains a competitive market. If Exxon decides to enter the merchant ammonia business, they will become a competitor. Hydrogen they intend to produce will likely replace natural gas, as the purpose is to mitigate carbon emissions. However, the scale at which they produce hydrogen for merchant sales is uncertain, and I have no visibility on that. Our business models and priorities won't change, and we are focused on aspects where we excel. It's important to remember that while discussing potential projects, actual execution will take time and will depend on total costs and market dynamics.

Okay. Since the Alberta blue hydrogen plant will become the first significant project online, will you get a premium on all hydrogen produced there? Or will some hydrogen be sold into the existing gray hydrogen market?

Interestingly, the customer for our Canadian project is Exxon. Currently, we are almost sold out of production there. They are commanding a substantial premium for the hydrogen as they plan to utilize it for renewable diesel production, which will then be sold in California at premium rates. Hence, they are willing to pay a significant premium for the blue hydrogen supplied to them.

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

You had substantial merchant price increases in Europe and Americas. How much of that included a surcharge, given that gas costs have dropped in those regions? Could you foresee some sequential downside in pricing in those regions?

Your question is very pertinent. We certainly increased prices to cover power costs. If energy prices decline, some customers would naturally expect us to lower those prices. We remain receptive to that, and decisions will be made based on supply and demand dynamics, as is our norm. Hence, there is a possibility of a price decline in the future, depending on power price trends, which theoretically shouldn’t impact our bottom line.

Regarding NEOM, has the design changed, or is it still a couple of gigawatts of electrolyzer capacity? Has that changed? Could you produce more than the 1.2 million tons of ammonia? Would battery backup enable any changes to the ammonia price?

Steve, you're asking a good question. We're currently pioneering this significant project in green hydrogen. We are going to install considerable wind and solar capacity along with electrolyzer capacity. This setup might give us a capacity to produce more than the initial estimate of 1.2 million tons of ammonia. However, I don't want to get ahead of ourselves or make promises; there is potential for an upside that we are carefully evaluating.

Thank you.

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

On the new $8.5 billion capital expenditure number, could you provide comfort regarding the stability of this number? There is still significant engineering work remaining. What guarantees can you provide that this number won't change again in the next few years?

Currently, we have built in contingencies into this estimate. We have done extensive work, thus I believe this is a robust estimate. However, nothing is ever 100% certain, but I feel confident about it within these parameters.

Just a quick follow-on regarding the new capital structure; it commonly includes covenants or distribution restrictions. How should we conceptualize cash dividends from the project? Will they generally match income, or are there constraints regarding cash available for Air Products?

From the cash income generated by the project, servicing debt will be a priority and any surplus will ultimately benefit the shareholders. That's the main structure we're working within.

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

Regarding Asia, you achieved a healthy volume growth rate of 7%. However, you stated that 25 new assets came online in that region last year. Can you give context to that? Looking ahead, can we expect contributions from these startups to remain elevated or could they regress?

Kevin, that is a fair question. It’s vital to clarify that while Air Products focuses heavily on major projects, our base business is also thriving. Our performance with the 25 new smaller projects is significant. They contribute well even amid fluctuations in China's economic growth, which has decreased from 6%-7% to about 2%-3%. These new assets will continue aiding volume growth and are a strong point of confidence for our future outlook.

Thanks for that. In North America, you mentioned volume growth was aided by a new short-term agreement—could you elaborate on that? How substantial was the impact, and for how long do you expect it to persist?

I won't disclose the customer's name, but we seized an opportunity to serve a client that others couldn't, which contributed positively. I would like to turn to Melissa for more detailed insights on that.

From a volume perspective in the Americas, this agreement accounted for about 3% of our volume increase. We expect consistent contributions from this for 2023 as planned.

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

In the NEOM ammonia production project, did the net present value of your one-third stake in the project change? Do you have any assessments regarding the changes in expected cash flows?

Good morning, Jeff. We've conducted a net present value analysis based on the cash flows we expect in the coming years. With the establishment of project financing, I believe the assessment should either remain stable or improve as we are now utilizing less capital.

Have you determined how much ammonia the Louisiana project is expected to yield, and is a substantial ammonia output critical for the project's advancement?

We've disclosed publicly that this project will yield approximately 1,850 tons daily of hydrogen. Proximity to our pipeline allows us to assess the optimal contribution of the hydrogen produced. The hydrogen produced will be significant, especially in meeting regulatory demands for blue hydrogen. Should some customers opt for gray hydrogen, we would still convert excess hydrogen to ammonia. The costing of ammonia plants is low; putting a 1.2 million ton ammonia plant involves only about $250 million. Therefore, we are not at risk of large losses, because our approach allows for flexibility. Our pipeline setup provides us advantages that many others lack.

Yes, we haven't determined the specifics of ammonia production yet.

Thank you very much.

Thank you.

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

Good morning.

Good morning, PJ. How are you?

I'm good, thanks. About the NEOM project, you had inflation, along with the added scope in costs for infrastructure. Does this additional scope suggest potential delays, or do you believe it's on track for 2027?

Our timeline remains intact for 2027. The additional scope is something we have been planning for, increasing our control over aspects that could jeopardize progress from other parties involved. While the initial investment cost increased, it improves our operational cost efficiency in the long run.

Thank you. Earlier discussions addressed the IRA, noting a $3 per kg benefit for green hydrogen. How much of that do you foresee passing onto customers to lower hydrogen prices, reflecting the government's goal?

Thanks, PJ. Certainly, as we construct facilities and receive the $3 credits for green hydrogen, we will then translate that into our customer pricing. If integrated, the credits for renewable power augment the value. Hence, part of the broader aim is to reduce hydrogen pricing, which is indeed aligned with government objectives.

Thank you very much.

Thank you, sir.

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

On Slide 30, you discuss the downstream hydrogen supply chain of about $2 billion between 2025 to 2028. Could this number increase as new projects emerge? Additionally, could you comment on timing?

That $2 billion was our initial estimate, but it could change. Customer demands shape the infrastructure we need. Infrastructure requirements differ from one customer to another. Whether it's hydrogen for mobility or a secure shipping infrastructure will determine our expenditures. We expect to achieve the estimated $2 billion construct; however, any variations in that might stem from regulatory compliance or operational efficiencies.

That's helpful, thank you.

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

Hi. This is Steve Haynes on behalf of Vincent. Thank you for taking my question. Regarding the other cost segment in your EPS bridge, it accounted for about $0.11 headwind this quarter. What should we expect going forward?

The other costs segment, I would like to have Melissa comment on that.

Certainly! In this quarter, various components directly influenced the other costs line. We saw notable maintenance expenses in the Americas and India, contributing additional costs. We anticipate a reduction in these for the next quarter. However, be aware that fixed cost inflation of about 11% will persist throughout this fiscal year.

Thank you.

We will take our last question from Josh Spector with UBS.

Hi, thanks for taking my question. When I examine your guidance for the next quarter, it appears that EPS could increase by about $0.12 sequentially. I anticipate some merchant benefits as energy prices fall, yet December’s quarter wasn’t very robust in terms of demand. Why wouldn’t earnings rise sequentially given the tailwinds you mentioned? What am I missing?

I believe you're accurately assessing the situation based on your reasoning, yet we exercise caution in our guidance to ensure delivery. Our primary concern is the lack of visibility regarding the Chinese and European economies. We cannot predict the performance post-Chinese New Year nor do we have clarity on energy price movements in Europe. This is why we are exercising such caution. You're absolutely correct, it may seem conservative, but we want to avoid potential overestimation.

Thank you for clarifying that; I appreciate it. On the Canada project financing, was this anticipated in your projections? How does that influence your cash flow assessment?

To clarify, we do not have any project financing tied to our Alberta project.

Exactly. Project financing varies per project. NEOM was simpler to finance since we had a clear offtake pricing model, which allowed us to calculate returns accurately. With the $4 billion Texas project, we will likely pursue project financing as well, but all decisions are made on a case-by-case basis, always seeking the optimal solution.

Okay, thank you.

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

Hello. Good morning, all. My question concerns inflation risk for the rest of the backlog. If we consider the $19.4 billion total, there's roughly $15 billion remaining. Could you outline the inflation risks here? Additionally, could you confirm if you have room for price adjustments to safeguard returns?

The remaining projects have solidified references, and we anticipate manageable inflation risks, considering some of these projects are advancing. While I won't dismiss inflation altogether, I can affirm it's manageable enough that we don't foresee it drastically affecting performance. For projects like Louisiana's, if capital costs increase, ammonia and hydrogen pricing will adjust accordingly. Our structures are inherently adaptable to ensure our profit margins remain intact.

Okay, thank you.

Thank you.

We will take our last question from Laurence Alexander with Jefferies.

Hi. This is on for Laurence. Given the forecast suggesting a likely recession ahead, how did merchant volumes and pricing perform during the last recession? Can you provide an overview?

That's an excellent question. We can certainly refer to our performance during previous recessions—specifically, 2008-2009 and the COVID-related downturn. Our results have consistently shown that the industrial gas segment is resilient. While our volumes may dip slightly, they don't drastically decline. We implement stringent cost control measures and maintain favorable performance in our industrial gases business.

Okay, thank you.

Thank you very much for joining our call today. We appreciate your interest and 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.