Good morning and welcome to Air Products First Quarter Earnings Release Conference Call. Today's call is being recorded at the request of Air Products. Please note that this presentation and the comments made on behalf of Air Products are subject to copyright by Air Products and all rights are reserved. Beginning today's call is Megan Britsch.

Hello and welcome to the First Quarter Fiscal 2026 Earnings Conference Call for Air Products. Our prepared remarks today will be led by Eduardo Menezes, Chief Executive Officer, and Melissa Schaefer, Chief Financial Officer. We have prepared presentation slides to supplement our remarks during the call, which are posted on the Investor Relations section of the Air Products website. During this call, we will make forward-looking statements, which are our expectations about the future. These statements are based on current expectations and assumptions that subject to various risks and uncertainties. Our actual results could materially differ from these statements due to these risks and uncertainties, including but not limited to those discussed on this call and in the forward-looking statements and risk factors sections of our reports filed with or furnished to the SEC. We do not undertake any duty to update any forward-looking statements. Please note in today's presentation we'll refer to various financial measures including earnings per share, capital expenditures, operating income, operating margin, the effective tax rate, ROC, and net debt to EBITDA, either on a total company or segment basis. Unless we specifically state otherwise, statements regarding these measures refer to our adjusted non-GAAP financial measures. Reconciliations of these measures to our most directly comparable GAAP financial measures can be found on our investor website in the relevant earnings release section. It's now my pleasure to turn the call over to Eduardo.

Thank you, Megan. Hello, and thank you for joining our call today. Please turn to slide three. Earlier today, we reported results for the first quarter of fiscal 2026. We delivered 12% improvement in adjusted operating income that was broad-based across our reporting segments. Earnings per share were $3.16, up 10% relative to the prior year on stronger productivity despite weak economic conditions. Our operating margin of 24.4% was also up, while return on capital of 11% was slightly lower than last year, but remained stable sequentially. I'm pleased with the progress that our global team is making to improve our bottom line results, and the first quarter represents a solid start to our fiscal year. I have now been at Air Products for a full year. In that time, we have taken significant actions to refocus on the core industrial gas business, including project cancellations, headcount optimization, and asset rationalization that are showing up in our results. Moving to slide four, we are focused on three key priorities for 2026, consistent with the longer-term strategy that we shared last year. One, unlock earnings growth. Two, optimize large projects. And three, maintain capital discipline. On unlocking earnings growth, we are affirming our full-year earnings guidance, which implies an improvement of 7 to 9 percent at the midpoint for the full fiscal year. EPS growth is expected to be achieved primarily through continued focus on pricing actions and productivity and new assets contribution. We are on track to deliver in line with these expectations despite continuing hidden headwinds in a sluggish macroeconomic environment that will limit volume growth for fiscal year. Despite these headwinds, we see pockets of resilience from key sectors, including refining, electronics, and aerospace. For example, earlier this week, we announced our latest supply contracts with NASA to provide liquid hydrogen to multiple U.S. facilities. On our second priority, we continue to make strides to optimize our large project portfolio. Coming into our products, I prioritize de-scoping and de-risking our clean energy project portfolio. Along this path, in December, we announced that we are in advanced negotiations with FIAR International on the low-emission ammonia projects in Saudi Arabia and the U.S. I will share more detail about our next steps in a minute. Finally, on our third priority, we continue to take actions to drive discipline in our capital allocation to improve our balance sheet position, while at the same time investing in strong base business growth and returning cash to shareholders. As we have previously indicated, we expect to reduce our capital expenditures by approximately $1 billion in fiscal 2026 and remain on track on that objective. Fiscal 2026 and the first part of 2027 are heavy CapEx periods for the clean energy projects in Canada and the Netherlands, and we expect CapEx to decline significantly after these projects go on stream. On return of cash to shareholders, we announced earlier this week that our Board has authorized an increase in our dividend, marking our 44th consecutive year of dividend increases. We remain committed to disciplined capital allocation that ensures that we are well-positioned to continue our strong track record of returning cash to our shareholders. Please turn to slide 5. In December, Air Products issued a joint press release with FIAR International announcing that we are in advanced negotiations for the low-emission ammonia projects in the U.S. and South Arabia. We believe that the potential collaboration provides a strong strategic fee based on complementary capabilities. The collaboration would connect the global industrial gas expertise of air products with the global ammonia supply network and world-leading crop nutrition and ammonia expertise of Yara. In Saudi Arabia, we are in advanced negotiations on a marketing and distribution agreement where Yara would distribute and commercialize all the renewable ammonia that is not used by our products to produce green hydrogen in Europe. We expect to have that agreement finalized in the first half of 2026. For the U.S. project in Louisiana, our goal is to have a traditional industrial gas project scope and return for our products. To that end, we are in negotiations for Yara to acquire the ammonia production and distribution assets from our Louisiana project and execute a 25-year hydrogen and nitrogen supply agreement for an industrial gas facility that we would build and own and operate by our products. Moving to slide six, I want to be very clear that we have set a high bar for moving forward with the Louisiana project, which aligns with our disciplined capital allocation strategy. Already, we have taken action to find a world-class partner for the ammonia production. In this way, we would have traditional industrial gas company scope with a long-term offtake agreement to supply hydrogen and nitrogen together. We also required a partner for the carbon capture and sequestration scope prior to taking a final investment decision. We have already launched an RFP process for the CO2 transport and storage scope in our inactive discussions with several key sequestration service providers. More importantly, we must have a highly reliable capital cost estimate based on agreements with reputable EPCs that meet our return requirements. A key FID requirement for air products is having a project return on the go-forward capital significantly higher than our traditional huddle rates. We expect to have full clarity on the project costs in the next few months. Overall, the project has many positive economic aspects, including location and the ability to receive 45-cube tax credits, which drives significantly higher returns per share for the project during the first 12 years of operation. We are monitoring recent reports related to fertilizer C-Band tariffs in Europe. C-Band came into effect on January 1, 2026, and proposals to modify the current scheme would need to be discussed and approved by the EU. Any change in the CBAM rules would have an indirect effect on our potential Louisiana project as only gray ammonia imports are subject to significant CBAM tariffs. Overall, IARA bears the regulatory risk related to CBAM changes if the project goes forward. We are following this subject closely with IARA and continue to work on the cost estimate. Please be assured that the Air Products Managing Team and Board will take the time needed and drive a very high level of diligence on the capital costs before we reach our own FIT. Now I will turn the call over to Melissa to discuss our financial results in great depth and review our 2026 outlook. Melissa?

Thank you, Eduardo. Hello and welcome to those joining our call today. Please move to slide 7 for a high-level summary of our first quarter financial results. With respect to sales, volume was flat as favorable on-site volume was offset by lower helium, which included a sizable, non-recurring helium sale in the Americas in the prior year, providing for tough comparisons in the first quarter. Price improved on non-helium merchant products, particularly in the Americas and Europe. Operating income was up 12%, and margin was up 140 basis points on business mix and non-helion price, offsetting tough year-on-year comparisons. Margin also improved despite a 50 basis point headwind from higher energy cost pass-through driven by the Americas. Lower costs also improved results, primarily driven by productivity, net of fixed cost inflation and lower maintenance. Earnings per share of $3.16, which grew 10 percent from prior year, exceeded the top end of our guidance range. Return on capital of 11 percent was lower versus prior year but stable sequentially as we continue to execute on our project backlog. Moving now to slide 8. Our first quarter earnings per share of $3.16 increased 30 cents or 10 percent from prior year. Despite continued helium headwinds, which include the prior year non-recurring helium sale in the Americas of approximately 10 cents, the base business continues to demonstrate strong resilience in an uncertain macroeconomic environment. Favorable on-site volume, non-Helium pricing action and ongoing productivity improvement drove results this quarter. Moving now to slide 9, I will provide an overview of our results by segment. You can find additional details of the quarterly segment results in the appendix. For the quarter, America's sales were up 4%, driven by higher energy pass-through. Operating income improved on price, onset volume, and lower maintenance, partially offset by prior year non-recurring items and fixed cost inflation. Sales in our Asia segment were up 2%, while operating income was up 7%. This improvement was driven by productivity and reduced depreciation from certain gasification assets held for sale, partially offset by lower helium. We saw a modest contribution from our new assets as they continued to ramp up, contributing further in the second half of the fiscal year. Europe sales and operating income both increased due to volume and price, as well as favorable currency. Higher volumes were driven by on-site, including a prior year turnaround and non-helium merchant. Operating income was also impacted by higher costs associated with depreciation and fixed cost inflation, despite productivity improvements. In our Middle East and India segment, operating income improved on lower costs while equity affiliate income remained flat. Lastly, the corporate and other segment results improved from lower costs, including productivity actions. Moving now to slide 10, we continue to generate strong cash flows from our base business. Our investments in both energy transition and traditional industrial gas projects remain on track with our expected capital spend for the fiscal year. Additionally, we return nearly $400 million in cash to our shareholders and increase the quarterly dividend marking the 44th consecutive year of dividend increases. As it relates to our leverage, our net debt to EBITDA ratio is 2.2 times. As a reminder, we are currently consolidating the joint venture's investment in the neon green hydrogen project on our balance sheet during the construction phase. And as previously communicated, we plan to deconsolidate once a project is on stream and being operated by the joint venture. Therefore, we have adjusted our leverage ratio to better represent air products investments. Please turn to slide 11, where we will review our outlook. We are maintaining our fiscal full-year guidance of $12.85 to $13.15, given uncertainty around the macroeconomic environment. We remain focused on delivering these results through pricing action and productivity while bringing new assets on stream, from which we expect increased contributions in the second half. For the second quarter of 2026, we expect to deliver earnings per share in the range of $2.95 to $3.10, representing a 10% to 15% improvement from the prior year. Our outlook assumes growth from pricing actions and productivity, partially offset by lower helium. As a reminder, we expect our second quarter earnings per share to be lower sequentially through the normal seasonality, particularly related to the Lunar New Year and higher planned maintenance. We are also maintaining our guidance for capital expenditures at approximately $4 billion in fiscal 2026, as we work to de-risk our Louisiana project and optimize our portfolio. Now we'll open up the call for questions. Operator?

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

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

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

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

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

Kind of, yeah. I would say that in general, we had a better than expected quarter. I think the volume from the aerospace segment in the Americas was very strong for helium for us in the last quarter uh other than that we continue to see the same trends uh we've seen before uh as we said we continue to try to increase our volumes for for new accounts and we're working very hard to uh you know increase our sales with new customers and new deals especially on the electronic side but i would say overall the the you know the information that we gave you in the beginning of the year that we would be down for the year around 4% no EPS effect is still our best forecast at this point.

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

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

We'll take our next question from Jeff Sikaskis with JPMorgan.

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

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

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

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

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

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

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

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

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

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

Got it. Thanks very much for the caller.

Our next question comes from Vincent Andrews with Morgan Stanley.

Thank you and good morning. Eduardo, I wanted to ask you on the fiscal fourth quarter call, you were asked about, you know, you spent $2 billion on Darrow so far, and how much of that could you recover? And I think you said you could recover about half of it through sales equipment and so forth. But I wanted to make sure that that was not interpreted entirely as the answer to this question. Maybe it is, so please tell us.

If you decide for whatever reason not to move forward with Darrow, is it just that you sell the equipment and whatever else, and you recover, you know, costs to air products um small or large um to not move forward with the project and then i have a follow-up yeah i i think what we we i try to say that we we nobody really can answer that question right so that that 50 this you know at that point was a guess you know the number can be higher can be lower it's impossible to to determine what the the value will be to to recover the the you know If you don't go forward until you get that negotiation, because at the end of the day is the value that that equipment has to a potential buyer, right? So, of course, we are looking at that in parallel. I would say that the assets that we build already in some cases for this project, they are very specific for this project. you know probably for the exception of the the ammonia loop which is you know quite standard and uh and similar to to other projects so that that asset would have a better chance of getting a high market value uh air separation plants are also you know common but this is a very high pressure and uh and the plant that was designed and built for for the u.s under you know u.s codes and so has a limited market. So at the end of the day, no one can tell exactly how much that will be recoverable if we don't go forward. I would say that this is really the exposure that we have, is the capital that was spent before we decided to stop new purchases in the project, which we did one month after I joined the company. So the only money we're spending in this project is really the equipment that is arriving that we purchased before that time.

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

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

Okay. Thank you for all the detail.

Our next question comes from James Hooper with Bernstein.

Morning, guys. Thanks for the question.

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

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

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

Thank you very much. And then just on your volumes, it was interesting that the European volumes were up 5% year on year.

Is Europe back? are we looking at some recovery here or is we remaining cautious about about European volumes now we remain cautious you know there's a lot of things go on this calculation so we have some turn around last year so there we have left in this turn around this year so that created a good you know they win for us in the volume side but you know things in Europe they you know as as reported They are, you know, let's say complicated at this point, but I would remind that, you know, our business in Europe is different from our business in other areas of the globe because it's really fully integrated into package gases and other areas. And, you know, like the other industrial gas companies, we see much more pressure in the large customers in our side than we see in the retail and the packaged gas and so forth. So, you know, it's still an important business for us, very profitable. We have a very experienced management team that is, you know, doing the blocking and tackling and being able to extract good results despite the economic environment we have there.

Thank you both.

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

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

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

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

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

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

Thank you so much.

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

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

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

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

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

Okay. Thank you so much.

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

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

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

And there is also some seasonality in the quarter, which is normal at this for this last quarter of the calendar.

All right. And then my other question is, if you can comment on what portion of your customers are running below take or pay minimums in terms of their volume consumption right now.

And I'm just curious, is that most pronounced in europe or maybe if you could comment on on what you're seeing region by region in terms of uh take or pay minimums yeah we don't we don't normally disclose that mike we we we have uh some cases in europe and uh but i would say that uh it is not a very large percentage of our business but listen so one of the things that we we do track is is really utilization so if i think about utilization across the americas europe and asia it's pretty similar in in the mid to high 70s um so that that's pretty similar to what we saw in fiscal 25 as well so we're not seeing a

significant change in in utilization but there there is take a pace contract by contract yeah of course the the steel industry the chemical industry in europe is uh is being affected but it's not a you know it's not affect every customer in in every location the same way right so it's a it's a question of where your assets are and what customers you have uh i think uh if you if you want to put this way we you know i don't think it's a question of luck it's a question of the work that was done 20 30 years ago selecting the right uh customers but uh so far we we're not having a lot of impact in Europe and with the caveat that you know we our our own site business in Europe is not as big as it is in Asia and in the US.

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

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

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

Okay.

And then in the U.S., is contracting for new electric power an issue at all and bidding for new ASU business with all the data center competition and so forth? yeah no question we are seeing uh uh you know increases in in uh in power costs for for new contracts you know we we have a very sophisticated uh power um procurement process in their products as you can imagine it's uh it's the main uh input that we have in our air separation business so it's a it's an ongoing relationship with uh with suppliers uh i would say that uh if you have something new today you would need to to uh go and negotiate the tariffs but at the end of the day when when when we have like an on-site uh contract as you know this is a this is a pass through the formulas that we have so ends being in the in the customer side and for the merchant product any energy that we use in the energy in the to to make liquid oxygen liquid nitrogen and so forth you know we we we work very hard also to pass those costs to our customers so uh it's not that we we are uh completely uh immune to to to power but we work very hard to make sure that we pass this cost to to the market and uh and try to be ready for any cost increase but there is no questions that, you know, the data centers, they are creating demand and they are creating distortions in the power market today.

Thank you.

Our next question comes from Patrick Cunningham with Citi.

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

No, there are no dependents between the two projects or the two potential contracts. And again, it's the same answer from the other one, right? The product from Neon will be green, So that's going to be absolutely zero CBAM effect on that product. You know, the effect on other products coming to Europe would be an indirect effect on the overall market. And we need to see if that happens, you know, what the effect is. But again, going back to my previous answer, it's, you know, very, very uncertain that there will be any impact on the CBAM scheme today. And if there is, it's going to be an indirect impact. on this project.

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

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

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

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

i need to see when when that happens i i would just say that the the way we look at this project right when i when i came on board here you know our products was building a full ammonia project you know and doing the co2 sequestration itself and was going to be an ammonia producer and sell We stop the project as it is. So today, the base case is that we stop the project. At the same time, we said the project has positive attributes and has a chance of being a good project. So let's try to find, let's try to see if there is a solution to generate some value from this project. And I think we did the most difficult step at this point, which is to find a credible, you know, really world-class partner that would be willing to take the commercial risk on the ammonia, which is what this is, right? And they're buying the hydrogen and the nitrogen and making the ammonia. So they're taking that commercial and operational risk of the ammonia. So this is the most difficult piece of the puzzle here. We need to make sure that the capital cost is that the product is feasible for both parties. So that the capital cost will be within the numbers that we assume to be with them. But I would say that at this point, this is more like which one is a plan A, which one is a plan B. It depends on how you see it, but, you know, where we are today, if nothing happens, we're going to go back to where we were 11 months ago, which is, you know, we're not going to go forward with the project as proposed. So that is the situation, and I would say that, you know, the way I look at this is that we have only two possibilities here, right? We're not going to go forward or we're going to go forward with a good project, right? And those are the only two cases I'm working with. Of course, there's a lot of work to make sure that when you go forward that you are certain on your capital cost and the project is good. But those are the two outcomes. So I hope our shareholders are looking at this as a free option, you know, for a good project on top of the current base case, which is not going forward.

Okay, thank you.

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

Good morning.

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

Okay, two different questions, right?

So on the green ammonia, right, you know, it's a complicated subject here. I would, you know, the way I like to think about this is, you know, if you want to make ammonia starting from electrolysis, right, for every metric ton of ammonia, you need about 10 megawatts of power, right? So when I see people saying, you know, we're going to develop this project in in a place like india and we're going to have a price of ammonia you know and then and i read the same articles you you probably read so people talk about six hundred dollars seven hundred dollars something like that you you you need to when you see a number like that you need to realize that it's like you know exporting power from india at investing a lot of capital to at the end of the day export power from india at sixty dollars a megawatt or 70 dollars a megawatt right so which is you know lower than the local price so it's it's very uh difficult to understand the economics when when people talk about uh doing uh green hydrogen and green ammonia in this type of jurisdiction right when our project in south arabia it's it's public information you can you can look around you know south arabia has a very active renewable power market and they sign agreements with power prices below two cents or twenty dollars per megawatt so so we are within that system uh you know we are building our own renewable power and our let's say if you if you want to calculate our internal power cost for our project is also below two cents per kilowatt or twenty dollars per megawatt so our project is under construction we can show you the videos, we can take you the power economics makes sense and I'm not going to make comments about what other people are doing and MOUs and that kind of stuff there are a lot of activities like that in Europe a lot of announcements but you know the only real project being built at this point is ours I understand in India it's a little different because they're trying to use an existing facility and I'm not doubting that they will at the end build something but I would say that the regulatory risk if something looks too good to be true normally it is to have this kind of exporting power at this low price from a country like India you know it's it's a it's a question mark for me so so that's the the the green ammonia piece on the on the daryl side your question about the epcs we we uh you know we we're not going to make a comment on on what we're doing in our activities i would say that you know the in general this this project is a is a very large block plant with uh you know very well defined uh blocks so have an air separation plant you have a hydrogen plant you have an ammonia plant so you can go uh in different directions and uh it is a question of uh you know to to to to determine what makes sense you need to go to a process and you need to understand the local market you know how what is the appetite of the the apcs and uh and what alternatives they have so we are looking at every case here and we are trying to make sure that we we do the best for our shareholders for yeah for our customer in this case for for yara and in fact they will participate in the process with us and uh we are not ready to say uh exactly how we're going to execute this project at this point understood thank you we'll take our last question from laurex alexander lawrence alexander with Jeffries.

Good morning. A question around AI-related productivity. If it comes in better than expected or compared to expectations a few years ago, do the benefits accrue to your on-site business or do your contracts mean that you pass some or all of those benefits through to the customers and then similarly i guess for merchants it would be you know more just sort of competitive dynamics in the local market is that fair yeah it's it's you know ai is is can be used everywhere right so when you when you talk about how you're using it you know and and where the benefit will accrue it depends on on what the usage is right so if you say i'm using ai to lower my

my power costs right in in the negotiations with my power suppliers if i have an agreement with the customer that is a really pass through on the on the on the cost that will be somehow shared if we're using ai to reduce our power consumption normally we will capture that to to our products because at the end of the day what we do we give the customer a guarantee of a maximum power consumption so it's case by case uh and but that's a very specific uh application of ai we're using a lot of uh uh ai to to look at our let's say administration our sgna activities our engineering activities and those are you know internal costs and and those are not you know contractually pass to customers although like any other uh company we try to be more efficient in order to be more more competitive in the marketplace so you can make the the conclusion as well that uh in the long run somehow this these benefits will go to our customers but you know it's a very difficult to determine you know what share uh you know that that will represent at the end And I hope that was clear.

I'm not sure if that's exactly what you were asking.

Thank you.

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

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

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