Good morning, and welcome to the Air Products First Quarter Earnings Release Conference Call. Today's call is being recorded at the request of Air Products. Please note that the 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. Eric Guter. Please go ahead, sir.

Thank you, Lisa. Good morning, everyone. Welcome to Air Products first quarter 2025 earnings results teleconference. This is Eric Guter, Vice President of Investor Relations. I am pleased to be joined today by Melissa Schaeffer, our Chief Financial Officer; and Sean Major, our Executive Vice President, General Counsel and Secretary. On today's call, I'm also pleased to welcome Air Products' Chairman of the Board, Wayne Smith; and Eduardo Menezes, Air Product's new CEO, effective tomorrow, February 7, 2025. Please turn to Slide 2, and let me now turn the call over to Wayne for a few brief remarks.

Thank you, Eric. Good morning, and welcome, everyone. Air Products Annual Meeting of Shareholders was held exactly two weeks ago and five new Directors were elected to our Board. The reconstituted Board met immediately, quickly coalesced, worked intensively, and made several key leadership decisions. First, I'm honored to have been elected as Chairman of the Board of Air Products where I've served as a Director since 2021, following my career in the chemicals industry, which included 11 years in industrial gases. Second, I'm honored to be working with our new Vice Chairman, Dennis Reilley. Dennis had a tremendous career in the industrial gas industry, leading Praxair as CEO. Prior to that, Dennis held executive roles at DuPont and Conoco in industries that are significant consumers of industrial gases. Finally, and most significantly, I'm very pleased to introduce our new CEO, Eduardo Menezes, who is on the call today. Eduardo brings more than 3.5 decades of international experience in all key sectors of industrial gases. At his last position, he was EVP of Linde for Europe, Middle-East and Africa with responsibility for operations in more than 40 countries, over $8 billion in sales, and more than 18,000 employees. He's lived and worked around the world. We all look forward to working with him, taking Air Products forward and maximizing value for shareholders. Let me now turn over the call to Eduardo to briefly introduce himself.

Thank you, Wayne. Air Products is a fantastic company with a bright future, and I'm honored to have the opportunity to work with the team to build on the Company's strong positions. I met several largest shareholders during the last few weeks to understand their perspectives and requests. Starting tomorrow, I will begin meeting with employees, customers, and business partners to move Air Products forward. Tomorrow is my first day as an Air Products employee, so I apologize if I'm not going to be able to take questions on this call. But I look forward to sharing my priorities as the new CEO of Air Products and to presenting the second fiscal quarter results on the next call. Now, I'll turn the call back to Wayne.

Thank you, Eduardo. Before turning the call back over to the management team, I would like to take a moment to thank the outstanding employees of Air Products, who have remained dedicated, energized, and focused throughout this process. I'd also like to thank Seifi Ghasemi for his countless contributions and leadership of Air Products over the past decade. We have a great foundation to build upon. Now, as you can appreciate, given the changes underway, the scope of today's call will be limited to a discussion of the quarterly results of the company and our outlook. We appreciate you may have a variety of questions, which extend beyond the results of the quarter, which will be addressed in due course. But for today, we kindly ask that questions be limited to and focused on the financial results that we disclosed this morning and our outlook for the remainder of the year. With that, let me turn it back over to Eric.

Thank you, Wayne. Our earnings release and the slides for this call are available on the earnings page of our website at investors.airproducts.com. Today's discussion contains forward-looking statements, including those about earnings and capital expenditure guidance, business outlook, and investment opportunities. Please refer to the cautionary note regarding forward-looking statements that is provided in our earnings release and on Slide 3. Additionally, throughout today's discussions, we will refer to various financial measures, including earnings per share, operating income, operating margin, EBITDA, EBITDA margin, the effective tax rate, and ROCE either on a total company or segment basis. Unless we specifically state otherwise, statements regarding these measures refer to our adjusted non-GAAP financial measures. Reconciliations of these measures to our most directly comparable GAAP financial measures can be found on our investor website in the relevant earnings release section. Now I'm pleased to turn the call over to Melissa.

Thank you, Eric, and good day to everyone. Please turn to Slide 4 of the materials we have posted on the website for this call. Safety is our number one priority without exception. We are proud of the continuous improvement we were able to achieve in this area, but our goal and efforts are always towards zero accidents and zero incidents. Now, please turn to Slide 5 for our first-quarter results. As we announced in January, first-quarter adjusted earnings per share of $2.86 exceeded the upper-end of our guidance range of $2.75 to $2.85, up 1% over last year, driven by results in the Americas. Our earnings per share improved despite the divestment of the LNG process technology and equipment business, which closed at the end of fiscal 2024. The LNG business contributed roughly $0.08 to our first-quarter earnings in 2024. Our adjusted EBITDA margin was up 140 basis points and our adjusted operating margin increased 80 basis points versus the prior year. Please turn to Slide 6 for our fiscal 2025 second-quarter and full-year outlook. We are maintaining our fiscal 2025 full-year guidance. We continue to monitor the strengthening U.S. dollar, tariffs, and the global helium market for potential impact for the remainder of the year. Consistent with our focus on driving productivity, we continue to evaluate actions to reduce our costs and improve our services to our customers. We expect our second-quarter adjusted earnings per share to be in the range of $2.75 to $2.85, which is up 1% to 4% reflective of the LNG divestiture. We are proud of the results this quarter. I am particularly grateful that our people stayed focused on the work at hand, demonstrating their unwavering commitment to our customers, shareholders, and all whom we serve. I would like to thank them for their support and continued efforts to position the company for long-term success. Now please turn to Slide 7 for a detailed review of our first-quarter results. Compared to last year, overall volume was down 2%, primarily due to the LNG business divestment. Volume in the Americas improved this quarter but was offset by the weakness in Europe. Total company price was up 1%, which equates to a 2% improvement for the merchant business driven by continued pricing strength in the Americas and Europe. Adjusted EBITDA improved 1%, primarily due to a better price, partially offset by higher costs and lower equity affiliate income. Adjusted EBITDA margin was up 140 basis points due to favorable business mix and price. Sequentially, volume was down following a strong finish to fiscal 2024 and the sale of the LNG business in September. Now please turn to Slide 8 for a discussion of our first-quarter adjusted earnings per share. Adjusted earnings per share of $2.86 increased $0.04 despite the $0.08 contribution from LNG in the prior year, which is reflected in our volume variance. Price, net of variable cost was favorable at $0.10, demonstrating continued strength in the Americas and Europe. The pricing improvement more than offset unfavorable other costs of $0.07. Lower prior year incentive compensation and inflation drove increased costs, which were partially offset by our productivity improvements. Now, please turn to Slide 9 for a brief discussion of our business segment results. You can find individual slides covering each of the business segments in the appendix. Looking at each business segment. Americas overall pricing was 2% higher with improvement across most product lines. This translates to a 4% merchant pricing gain for the region. The 3% volume improvement was driven by a significant non-recurring sale of helium to an existing merchant customer. These factors drove adjusted EBITDA 6% higher and improved adjusted EBITDA margin by 150 basis points. For our Asia segment, the 2% volume improvement was driven by contributions from new assets. Adjusted EBITDA increased 7%, primarily due to favorable volumes, costs, and equity affiliate income. Adjusted EBITDA margin was up 160 basis points. Looking at Europe results, broad-based pricing improved 1%. Volume was down 5% driven by lower onsite and continued weakness in merchant demand, primarily helium. Adjusted EBITDA was 3% lower as weaker volume was partially offset by higher price and favorable cost. The Uzbekistan project is undergoing planned facility upgrades during the first half of fiscal 2025. We expect the facility to return to normal operation and contribute near its full run-rate at the start of the third quarter. Moving to our Middle East and India segment. Lower merchant volume was a headwind for sales and adjusted EBITDA. Adjusted EBITDA was also negatively impacted by unfavorable equity affiliate income and cost. Finally, for our Corporate and Other segment, sales and profits were lower this quarter, primarily due to the sale of the LNG business. Thank you. And now we will be delighted to answer your questions. And as a reminder, we request that questions be limited to our financial results and our outlook.

And our first question comes from Chris Parkinson with Wolfe Research.

Great. Thank you so much for taking my question. Just very quickly, just given all the moving parts in Asia, how should the Street be thinking about obviously some of the past headwinds in the helium business and electronics recovery and just general macroeconomic conditions in China? Are there just general things we can do to triangulate the forward outlook from this point in time? Thank you so much.

Hi, Chris, great to hear from you. So, yes, let's talk about China. China was supported this quarter by new assets and productivity actions. But China is still a wait-and-see. So right now, we see no material improvement. The market still remains challenging. We obviously are watching tariffs as well as the China in-country stimulus impact. In the meantime, we remain focused on productivity and the things that we can manage and we're focusing on delivering to our customers.

Got it. And just as a quick follow up, can we just get a quick update on the Alberta project, please. Thank you.

So thanks, Chris. From a project perspective, at this point in time, I don't have any new updates from what we had previously shared on calls. When we have updates, obviously, we'll bring that information to you.

All good. Thank you.

Thanks, Chris.

And our next question comes from Duffy Fischer from Goldman Sachs.

Yes, good morning, guys. So at the midpoint of both your Q2 and the full-year, you need the second half to be about $1.50 per share better than the first half. Can you give us a walk, how much of that is seasonality and how much is stuff like the Uzbekistan plant coming back, and obviously, the helium going away, just some of the one-off stuff that helps us in the walk from first-half to second-half?

Yes. Hi, Duffy, thanks for the question. So the split for the first half and second half is relatively consistent to what we've seen in the past couple of quarters, about 1% difference. There is definitely seasonality in Q1 and in Q2 because of the Lunar New Year in China. As you mentioned, we do have several planned maintenance outages, obviously, Uzbekistan being the most significant one. For the second half, we are going to be focusing on pricing action, Uzbekistan coming back on-stream early in Q3. We're obviously going to be looking to capture volume opportunities and we are going to be executing the remainder of our productivity initiatives. We are though watching tariffs and seeing the impact from a customer perspective, obviously, watching this strengthening dollar and really just the general macro and geopolitical environment. So keeping an eye on all those things as we lead into the rest of the year.

Okay. And then if you looked at the Americas excluding that one-time sale of helium, what would price and volume have been in Q1?

Fantastic, Duffy. So let me just give you some generalizations about the Americas business. So pricing was strong across our product lines outside of helium, and hydrogen volumes remained strong, and they were very strong in our HEICO's business and we actually saw some improvement in our merchants.

Okay. Thank you.

Yes.

And we'll move to our next question from Steve Byrne with Bank of America.

Yes. Good morning. Can you provide a breakdown on the CapEx outlook for the fiscal year, the $4.5 billion to $5 billion? How do you expect that CapEx to be deployed by projects?

Yes, Steve, thank you for the question. We are not planning to split at $4.5 billion, but the majority will be allocated to our large projects. We have around $750 million set aside for ongoing maintenance, and approximately $1 billion is linked to our conventional industrial gas business. We still anticipate that $4.5 billion to $5 billion will be our target for this fiscal year.

Okay. Thank you, Melissa. And any update on the permitting project in the World Energy?

So at this point in time, as we've talked about, that project still is on hold, awaiting permits. When we've got new updates for that, obviously, I'll bring it to you.

Our next question comes from Jeff Zekauskas with JPMorgan.

Thanks very much. What was the helium EBITDA contribution in the Americas in the quarter if there was one?

So, Jeff, as always, we've not broken out helium. So I apologize…

I mean, regarding the sale.

I'm sorry. Fantastic.

Yes.

Yes, please continue, Jeff.

From the outsized sale, what was the benefit from that?

Yes. So from the one-time sale that what we're calling the non-recurring Americas sale, that is about a 10% EPS contribution for this quarter.

10% for the whole company, or 10% for that unit?

$0.10, sorry. $0.10 EPS.

0.10%? Okay.

Yes.

Great. And then lastly, can you talk about the overall helium market and what's happening with pricing? Is it different in the different geographic jurisdiction?

Yes. Let's talk about helium. Thanks, Jeff. So the helium market, as you're aware, is cyclical in nature. We've worked through these so-called ups and downs for many decades. At this moment, the market is long. We are seeing helium come from the Russian assets into Asia, which is making the market long. But we're continuing to manage that and optimize our helium business. And obviously, we are in a unique position to really reliably supply our customers.

Okay. Thank you.

Thank you, Jeff.

And our next question comes from David Begleiter with Deutsche Bank.

Thank you. Good morning. Melissa, in the Americas on volume ex-helium, were volumes down around 3%?

No. So helium was a contributor, but we really saw very strong merchant volumes. And our HEICO business, especially along the Gulf Coast continues to be very strong. So helium was a bit of a headwind outside of the one time, but again, merchant volumes were very strong and HEICO was strong as well.

Understood. And just in the Middle East and India, can you talk about the equity affiliate income decline and what drove that?

Sure, absolutely. Great question. So the equity affiliate income noise was really around our Jazan joint venture. Given the nature of that contract, we do see some fluctuations quarter by quarter, but the Jazan project is contributing as expected, and we do anticipate the contributions to be on par with what we saw in 2024.

Thank you.

Thank you, David.

And our next question comes from Mike Leithead with Barclays.

Great. Thanks. Good morning. Just on the 2Q guide, it looks like EPS is maybe about a nick or better sequentially if we back out the $0.10 or so from the helium non-recurring sale. Can you just speak high level what's sequentially getting better or worse as we think about modeling here?

Sure. For the second quarter, we are looking to see some headwinds from Uzbekistan, but we obviously have some seasonality going into Q1 in many of our geographies. So we will see improved volumes in the Americas. We're continuing to focus on pricing in Europe, especially with the higher power costs that we're seeing there. And as I mentioned, we are closing out the execution of our productivity programs that we had over the last couple of years. So those should really start to show through in many of our regional results.

Great. Thank you. And then just a quick clarification or confirmation. Is full-year guidance, it does not assume any contribution from the Alberta project this year. Is that correct?

That is correct.

And our next question comes from Patrick Cunningham with Citi.

Hi. Good morning. Melissa, you mentioned you're monitoring the tariff impact from customers. I'm just wondering what your latest thoughts are there. Any conversations with customers suggesting this could be maybe a short-term negative to production, but is there any sort of long-term benefit of higher manufacturing here in the Americas, for example?

Sure. Yes. Tariffs are definitely on everybody's mind, Patrick. So first, as you know, for the vast majority of our products, we're in-region for region. Industrial gas is a localized model. So likely from a supply chain and a localized customer perspective, that should have little impact. There could be an impact on projects. We anticipate relative to the size of our projects to be moderate. And of course, we have a global diversified supply chain to reduce that exposure. But as you note, we do need to consider the macro impact to our customers and the knock-on effect to these tariffs. So we're staying very close to them and updating our forecast to meet their new production needs.

Got it. Very helpful. The interest expense was slightly lower than expected, possibly down by $7 million or $8 million sequentially. Is there any additional interest being capitalized or any unusual factors this quarter? Or is this the rate we can anticipate moving forward?

So interest obviously has a little bit of movement based on the timing of the debt draw. So we did have capitalized interest associated with our NEOM projects as well as our other projects. The largest contribution of capitalized interest, of course, going to NEOM, but nothing else really significant other than that capitalized interest. Obviously, as we take our new debt, that will increase, but we'll look to maximize capitalized interest as much as we can on our significant projects.

Great. Thank you so much.

And we'll move to our next question from Josh Spector with UBS.

Yes, hi, good morning. I wanted to follow up on the second half bridge. I think in response to the earlier question, you talked about pricing actions. So specifically to that, I mean, I assume higher energy costs are having an impact negatively on 2Q. Is your comment about second half improvement that you recover some of that or do you have visibility to pricing actions beyond response to near-term energy that you have visibility to that you're baking into your guidance?

Josh, thanks. It's good to hear from you. So, as I mentioned, we are seeing power cost increase specifically in Europe. So, as you know, there is usually a month or a quarter depending on the customer delay in being able to capture that increase in power cost with pricing actions. So obviously, the teams are working very hard with our customer base to be able to quickly action on those pricing actions, but there is usually about a month or so to maybe even a quarter delay. So, we are looking to take those pricing actions likely into the second half of this fiscal year.

Okay, thanks. And can you just comment on what corporate cost is baked into your guide? I think the quarter came in a bit higher than we expected, so we're not sure what the right run rate is you're assuming there.

So, we did see this quarter a bit of a headwind, let's call it about $0.07. Now as I mentioned in my comments, there is some inflation baked in there. The other main driver of that is, obviously, we had tougher results last year, so we took incentive compensation down. So as we accrue for this year, you'll see a little bit of headwind with the incentive compensation accrual. And obviously, last year, we're looking to take the actions and there was a little bit of cost associated with our productivity actions, having individuals come on and then being able to exit other individuals in other geographies. So productivity actions will start to really flow through this year. And likely in the second half, you'll see that really ramp up.

Okay, thank you.

Thank you.

Our next question comes from John Roberts with Mizuho.

Thank you. And Wayne good to talk again and congratulations to Eduardo and Dennis. Wayne, how do you see the roles different between Chairman and Vice-Chairman?

Thanks, John, for your question. Listen, I think you can understand that we've got a lot of change going on right now. The Board really is coalescing and working nicely together, a lot to do. I think we can talk more on that in the future once we've got things moving along a little bit better. But thanks for the question, John.

Okay. And maybe Melissa, Uzbekistan is a relatively new plant, what upgrades does it need?

Yes, thanks for the question, John. So as I mentioned, Uzbekistan is going through a planned maintenance. The Uzbekistan asset, when we took that asset on, we did determine that there was a need for a turnaround to allow some of the improvements to bring the plant up to speed to Air Products' standard. So this is all part of the plan. We'll see that coming back on stream in Q3 and we'll see the full BFC run through the rest of the year. But again, was planned, was built into the original acquisition, pricing, and plan for the BFC moving forward.

Thank you.

And our next question comes from Laurence Alexander with Jefferies.

Hi, this is Daniel Rizzo for Laurence. Does your outlook for 2025 assume any improvement in like industrial activity or in consumer demand?

Thank you for the question. We are not expecting much improvement in global industrial production. The numbers indicate minimal significant improvement across various geographies. We anticipate around 2% average global growth, so we do not expect substantial improvements in industrial production throughout this year.

Can you remind us if the tariffs in 2017 and 2018 had any effect on your demand or your customers' production levels, especially in Asia where the focus was last time?

So I'm going to have to come back to you on that question. I was not CFO at that time, so I will have the teams come back to you with that answer on 2017 and 2018.

All right. Thank you very much.

Yes, thank you.

We'll move now to Kevin McCarthy with Vertical Research Partners.

Yes, thank you and good morning. I was wondering if you could provide an update on your blue hydrogen project in Louisiana. And specifically, I'm interested in the prospect for partnerships. I think in the past, you've discussed potentially bringing in an equity partner and/or partners for sequestration or blue ammonia offtake. I appreciate you've had your hands full perhaps in recent months, but wondering if there has been any progress made toward those ends. Thanks.

Yes, Kevin, good to hear from you. So as associated with our Louisiana project, it's being executed on the normal course, no significant updates on the project execution on the normal course as we projected. From a partnership perspective, you're right, we've been busy, but the teams have been focused on going out and having the right conversations with parties that would be interested in equity partnerships coupled with offtake. So we are having those active conversations focusing largely in Asia, Japan, and Korea on potential equity partnerships, but really are opening it up to other partnerships from an industry perspective as well. When we have an update and progress those discussions, obviously, we'll bring that forward to you.

Very good. And then secondly, Melissa, I think Air Products has signaled in the past that you would intend to be free-cash flow positive in fiscal 2027, I believe. Is that still the case? And perhaps you can elaborate on the free cash flow trajectory as you see it shaping up here through the management transition, if possible?

Great question. Yes. Let's talk about cash flow. So, we are still projecting to be net cash-flow positive in FY2027. That's still the forecast. We could look, as we just talked about, for opportunities for equity partnerships, potentially even project financing if the portfolio fits. And as those progress, obviously, as I said, I will keep you updated. And at this point in time, I look forward to working with Eduardo and the Board to understand what their plans are for the projects. And as we have updates from that perspective and how that affects our cash flow, obviously, we'll bring those forward as well. No changes at this point in time.

And our next question comes from Michael Sison with Wells Fargo.

Hi. This is Abigail filling in for Mike. You mentioned that pricing in Europe is higher due to increased energy prices. Are you planning to pursue higher pricing in the Americas and Asia as well?

Absolutely. So pricing is something that we focus on a day-to-day hourly basis, right. So our teams are actively working on pricing, and that is not just unique to Europe. Europe, I spiked out specifically because we are seeing power cost increase, but we are trying to maximize pricing and the balance of pricing and volume every single day with our customers. So absolutely the teams are looking to take pricing actions where they can in the Americas and in the Asia market as well.

Got it. Thanks. And are you able to give us a feel for the capital intensity of the Uzbekistan upgrade?

The situation is evolving, and it was part of the acquisition price negotiation. There won't be any additional capital expenditure required for these upgrades. This will act as a discount on the $100 million we have outstanding from the acquisition. Thus, the acquisition price remains unchanged, with no further capital outlay beyond what we've previously discussed. We anticipate it will be significantly lower, but again, this means no extra cost for Air Products. Thank you for your question.

All right. Got it. Thank you.

And we'll move to our next question from John McNulty from BMO Capital Markets.

Yes. Good morning. Thanks for taking my question. So I know Air Products had a number of cost-cutting and restructuring initiatives in kind of late '23 and then in '24 as well. Can you help us to think about how much in terms of the benefit of that we should see in 2025, and how it sequences through the year?

Yes, John, it's wonderful to hear from you, and I appreciate your question. You're correct that we've implemented two significant waves of cost productivity measures. Overall, we've reduced our workforce by about 5%. When looking at that on an annual basis, it amounts to around $75 million. However, it's important to consider that inflation and wage increases may offset some of those savings. Nevertheless, we expect the cost productivity initiatives to provide substantial support in the latter half of this fiscal year.

Got it. Okay. So at least as of now, $75 million through 2025, offset by some inflation. Am I understanding that right?

Proportional. So we'll see that ramp-up in the back half of the fiscal year. We are seeing some of that go through for Q1 and Q2, but not the full ramp.

Got it. Okay.

Yes. Starting in Q3, we will be fully ramped up, so you should consider the proportional contributions for Q3 and Q4. We had approximately 1.5 months of contributions in Q1; Q2 will see a decline, and we expect Q3 and Q4 to be fully ramped.

Got it. Okay. Thanks for the color.

Yes, absolutely. Thank you.

And ladies and gentlemen, that concludes today's question-and-answer session. At this time, I'll turn the conference back to our speakers for any additional or closing remarks.

Yes. Thank you. I would like to thank everyone again for joining our call today. We appreciate your interest in Air Products, and we look forward to discussing our results with you again next quarter. Please stay safe and healthy, and all the best and have a wonderful day.

And ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect and have a great day.