Earnings Call Transcript - APD Q4 2021

Operator, Operator

Good morning, and welcome to Air Products Fourth 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 the Air Products are subject to copyright by Air Products and all rights are reserved. Beginning today's call is Mr. Simon Moore.

Simon Moore, Vice President of Investor Relations, Corporate Relations and Sustainability

Thank you, Christina. Good morning, everyone. Welcome to Air Products' fourth quarter 2021 earnings results teleconference. This is Simon Moore, Vice President of Investor Relations, Corporate Relations and Sustainability. 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; and Sean Major, our Executive Vice President, General Counsel, and Secretary. After our comments, we'll 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 number 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, EBITDA, EBITDA margin, the effective tax rate, and ROCE, both on a company-wide and segment basis, we are referring to our adjusted non-GAAP financial measures, adjusted earnings per share, 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'm pleased to turn the call over to Seifi.

Seifi Ghasemi, Chairman, President, and CEO

Thank you, Simon, and good day to everyone. Thank you for taking time from your very busy schedule to be on our call today. Before we discuss the results, I would like to say that despite the well-known global challenges in 2020 and 2021, the talented, committed, and motivated people of Air Products demonstrated resilience and resolve, and delivered excellent results. And in addition, continued to execute our growth strategy. I want to thank every one of our employees for standing together, working hard, and delivering for our customers and shareholders. Now please turn to Slide number 3, where you can see some of our key highlights for this year. We delivered strong EPS this year, achieving 11% compounded annual growth since fiscal year 2014. And we increased the dividend for the 39th consecutive year. We've received recognition for outstanding sustainability performance, including a recent gain from EcoVadis for the fifth year in a row. Our growth strategy and sustainability strategy are one and the same. To that end, we have completed the asset acquisition and project financing transaction for the $12 billion Jazan joint venture with Aramco, ACWA Power, and Air Products Qudra, as we announced last week. In conjunction with the Government of Canada and the province of Alberta, we announced the new net-zero hydrogen energy complex in Edmonton, Alberta, Canada. This world-scale energy complex will begin with transformative 1 billion net-zero hydrogen production and the liquefaction expected on stream in 2024. Just a few weeks ago, we announced the $4.5 billion world-class clean energy complex in Louisiana. Air Products will build, own, and operate this mega project which should produce over 750 million standard cubic feet per day of blue hydrogen for local and global markets by 2026. We will also capture and permanently sequester 5 million metric tons per year of carbon dioxide, making it the largest carbon capture and sequestration facility in the world. By combining our core strengths and competencies, we have successfully developed, executed, and operated these large-scale gasification, carbon capture, and hydrogen projects to address the significant energy and environmental needs of the world. This is fully aligned with our higher purpose as a company. Now, please turn to Slide number 4, as always, safety is the most important focus for all of us at Air Products. Our goal will always be to achieve zero accidents and incidents. Despite the challenging COVID-19 conditions this year, our team has focused on working safely, following strict protocols to help protect our own employees, our customers, and our communities. We are pleased with the team's focus that improved our safety performance in fiscal year '21 versus last year. Slides number 5, 6, and 7, which we have shared with you many times before, include our goals, our management philosophy, and our five-point strategic plan. These are the principles that we follow every day, and they will continue to guide us in the future. Now please turn to Slide number 8, as we speak, world leaders are gathered in Glasgow to work on closing the gap between climate aspirations and climate action. We're actively engaged in this rapidly evolving global dialogue, and we are committed to ensuring that Air Products is best positioned to deliver on behalf of all of our stakeholders through this critical period of energy transition. We believe a successful energy transition requires the development and execution of large-scale mega projects. Without that, the job cannot be done. The scope and complexity of these projects require talented people with a variety of skills and backgrounds, from different parts of the world to work together as one team. This is the higher purpose of our company. We can overcome significant energy and environmental sustainability challenges with our focus and united effort to provide real solutions for our customers. Now please turn to Slide number 9, as I have said before, we believe that hydrogen is one of the energy sources of the future, along with electricity. We are scaling hydrogen production and developing infrastructure to ensure successful adoption as a sustainable fuel. Hydrogen will be the sustainable fuel of the future. Our customers count on us to deliver this hydrogen produced in a highly efficient manner. Meanwhile, we are making significant investments in new facilities to produce low carbon and carbon-free hydrogen made from hydrocarbons. By executing on new clean hydrogen projects in Alberta and Louisiana, we will be the leader in blue hydrogen, as well as green hydrogen as we continue to execute our innovative new green hydrogen projects in the Kingdom of Saudi Arabia. Now, with that background, I'm happy to turn the call over to Dr. Samir Serhan, our Chief Operating Officer, to talk about our major projects. Dr. Serhan?

Samir Serhan, Chief Operating Officer

Thank you, Seifi. Now, please turn to Slide 10, which highlights our key growth projects. We are committed to our growth strategy and continue to execute and pursue exciting projects around the world. In June, we announced the world-scale $1 billion net-zero hydrogen project in Alberta, Canada, with the strong support of the Canadian federal and local governments. This project will use natural gas to make net-zero hydrogen, which has the same zero carbon footprint as green hydrogen made from renewable energy. Ninety-five percent of the CO2 resulting from our net-zero project will be permanently sequestered, and the remaining 5% will be offset by exporting clean electricity produced by the hydrogen. The project provides a roadmap for hydrocarbon-based economies to significantly reduce their CO2 emissions. Just a few weeks ago, we had the honor of joining the Governor of Louisiana and state officials to announce our world-scale $4.5 billion blue hydrogen project. This will also be the world's largest permanent CO2 sequestration operation. This project will provide clean hydrogen to our customers along our 700-mile U.S. Gulf Coast hydrogen pipeline system and will also produce blue ammonia targeting heavy transport around the world. The pipeline will be able to carry a variety of carbon intensity hydrogen, including gray and blue. These two projects will use advanced gasification technologies available to Air Products to produce clean hydrogen while using hydrocarbon feedstock in a sustainable way. Both projects combine the three pillars of our growth strategy: gasification, carbon capture, and hydrogen. We have made good progress on our Jiutai project, and we expect the facility to be on stream in fiscal year '23. We also expect the Debang project to come on stream in fiscal year '23. Successful execution of the Gulf Coast ammonia project continues, with field construction on Air Products’ largest single-train 175 million standard cubic feet per day hydrogen steam methane reformer, a related 90 million standard cubic feet per day nitrogen ASU facility, and related utilities. Construction is also progressing well on the 30-mile hydrogen pipeline network expansion to our world's largest hydrogen pipeline network. The project on-stream schedule remains as originally planned for the first half of fiscal year '23. We're forging ahead in Indonesia and making good progress, despite some challenges due to COVID. We expect to complete this project in '25. For NEOM, as you can see in the picture on the slide, we are laying the groundwork for the project, preparing the land and doing detailed engineering. We're even more excited now about this project since our announcement last year. We're forecasting to export zero carbon hydrogen in the form of ammonia in 2026. In addition to our mega projects, Air Products has continued to make significant investments in small and mid-sized on-site generators, and our regional industrial gases business, with fiscal year '21 being a record year for investments in this category. These on-site plans typically have project investment values from $0.5 million to $50 million and cover a range of technologies from present oxygen VSA, Vacuum Swing Adsorption, and small and mid-sized PRISM ASUs. Specifically, fiscal year '21 was a record year for investments in our PRISM oxygen VSA product line, with new projects in North America, Europe, India, China, and South Korea, predominantly supplying several major glass manufacturers around the world. The oxygen VSAs are frequently integrated with Air Products’ oxy-fuel burner technology, which helps reduce emissions, provide fuel savings, improve productivity, and deliver operational savings for the customer. Now, I'm pleased to turn the call back to Seifi.

Seifi Ghasemi, Chairman, President, and CEO

Thank you, Dr. Serhan. Please turn to Slide number 11. As we shared with you last week, we, along with our joint venture partners, completed the asset acquisition and project financing transaction of the $12 billion air separation unit, gasification, and power joint venture with Aramco, ACWA Power, and Air Products Qudra in Jazan, Saudi Arabia, making a significant milestone after the hard work by our people, as well as our customers and partners. The project return is expected to be better than we originally envisioned. As we said last week, we expect Phase 1 of the project to contribute an annual run rate of $0.80 to $0.85 of earnings per share, starting as of last week. The project is expected to contribute about $1.35 to $1.40 for the first 10 years after Phase 2 closes. Now please turn to Slide number 12, which shows our EPS growth. We remain vigilant and motivated to deliver excellent financial results consistent with our strategy. As you can see, we have delivered 11% annual EPS growth on average since 2014, while laying a strong foundation for our future growth. The excellent results and key milestones we have achieved this year are just the beginning of our journey, delivering gasification, carbon capture, and hydrogen solutions to the world. I am very optimistic about our company's prospects, participating in a very meaningful way in the energy transition. Now, please turn to Slide number 13. As a reminder, we share our earnings growth directly with our investors. Both our EPS and dividends have grown by double digits since 2014. We are committed to delivering increased dividends while we continue to execute our growth opportunities. We have significant cash flow that supports our substantial dividends, and as you know, we have increased that now for the 39th consecutive year. Finally, Slide number 14, as always my favorite slide, shows that our EBITDA margins are up 1,100 basis points since 2014. Our margin is down in recent quarters, impacted by higher energy pass-through which increases our sales but doesn't impact profits. Two-thirds of the margin decline from our peak margin is due to the impact of higher energy pass-through. But, I do want to stress that we are determined and focused on improving our margins back to around 40% by increasing prices to cover significant increases in energy costs, and by improving productivity. Now, I'm happy to turn the call over to Melissa Schaeffer, our Senior Vice President and Chief Financial Officer to discuss our results in more detail. Melissa?

Melissa Schaeffer, Senior Vice President and Chief Financial Officer

Thank you, Seifi. We have made great strides executing our growth strategy this year, completing multiple projects and winning exciting new projects. At the same time, we continue to focus on our base business and delivered excellent results for the quarter and the year. We grew our EPS 8% this year, overcoming various external challenges and absorbing the cost of additional resources needed to support our growth strategy. Our distributable cash flow remained strong at $2.7 billion. Furthermore, the large-scale projects currently under development will substantially add to our earnings once we bring them on stream. I share Seifi’s conviction that for Air Products, the best is indeed yet to come. This is a testament to the hard work and commitment of the people of Air Products. And I too, want to thank them. Now please turn to Slide 15 for more details on our full year results. Sales grew 17% to more than $10 billion. Volume and price together gained 7%. The 5% volume growth was primarily driven by our EMEA and Global Gases segments. Although the adverse impact from the pandemic has eased throughout the year, it still had a negative impact on FY '21. Price improved every quarter in all three regions and across most major product lines. Overall, price increased 2% and our merchant price was up 5%. EBITDA was up 7%, approaching $4 billion, due to favorable price, currency, and equity affiliate income, which was partially offset by higher costs. EBITDA margin declined 330 basis points, of which 200 basis points are attributed to higher energy pass-through, which increases sales but negatively impacts margin. ROCE was 160 basis points lower. The increase in the denominator from our additional $5 billion debt raised last year reduced ROCE by about 300 basis points. Adjusting for the cash on our balance sheet, our ROCE would be 14.2%. We expect ROCE to improve as we deploy the cash and bring projects on stream. Now please turn to Slide 16 for discussion of full year EPS. Our full year adjusted EPS from continuing operations was up $0.64, or 8%. Price, net of variable cost was again strong, favorable $0.34, the fourth consecutive year of double-digit EPS net price improvement. Volume was flat as acquisitions, new plants, merchant recovery, and higher sales of equipment activity were offset by lower contributions from Lu’An. Different business mix caused volume to have a positive impact on sales but minimum impact on profits. Our costs were $0.46 unfavorable, primarily due to the addition of resources to support our future growth and higher planned maintenance costs. Currency was favorable by about $0.35, primarily driven by the Chinese RMB, Euro, British Pound, and South Korean Won. Our equity affiliate also had strong underlying business results, adding $0.23 with several joint ventures reporting stronger medical oxygen sales. Non-operating income was $0.16 favorable, primarily due to lower pension expense. Interest expense was $0.12 favorable due to the $5 billion of debt to support our future growth projects. Our effective tax rate of 18.9% was roughly equal to last year, and we expect an effective tax rate of 19% to 20% in FY 2022. Now please turn to Slide 17 for a brief discussion on our fourth-quarter results. Compared to last year, sales increased 22% to more than $2.8 billion. Volume, price, energy pass-through, and currencies were all up. Volume improved 9% as strong hydrogen and merchant demand and new assets more than offset reduced Lu’An contributions. Prices were up again with improvements in all three regions. This is the 17th consecutive quarter of year-over-year price gains. Overall, prices were up 3% in total, which equaled a 6% increase for the merchant business. We experienced significantly higher energy costs in our merchant business this quarter. The situation is particularly challenging in EMEA due to the extremely high natural gas and electricity costs. Our on-site business, about half of our total company sales, has contractual protection from energy costs fluctuations. We are actively executing additional price actions across product lines to recover the higher entry costs impacting our merchant business. EBITDA declined 11%, exceeding the $1 billion mark, as favorable volume, price, currency, and equity affiliate income more than offset higher costs. EBITDA margin declined 380 basis points, primarily due to higher energy pass-through, which negatively impacted margin by about 300 basis points. Sequentially, sales were up 9%, supported by 5% stronger volume and 1% higher price. EBITDA grew 7% sequentially as better volume, price, and equity affiliate income more than offset higher energy costs. Now please turn to Slide 18, our fourth-quarter adjusted EPS was $2.51, which is $0.32, or 15% above last year. Volume was favorable by $0.19, and price, net of variable costs, contributed $0.04, as our price increases exceeded variable cost inflation, driven by higher power costs. Like the prior few quarters, our plans to add resources and strengthen our organization to support growth have increased our costs. We also saw higher costs due to disruptions across the supply chain in all three regions. Currency and foreign exchange contributed $0.06, primarily due to the Chinese RMB and British Pound. Equity affiliate income added $0.09 on strong underlying business results. The $0.04 of non-operating income was primarily driven by lower pension expense. The effective tax rate of 18.1% was 130 basis points higher than last year due to last year’s higher share-based compensation benefits and a tax benefit associated with the PBF acquisition. Now please turn to Slide 19, the stability of our business allows us to continue to generate strong cash flow. Over the last 12 months, we generated about $2.7 billion of distributable cash flow or almost $12 per share. From our EBITDA of about $3.9 billion, we paid interest, taxes, and maintenance capital. Note that our maintenance capital is a little higher than usual, driven in part by spending on our new global headquarters, which is essentially now complete. From the distributable cash flow, we paid $0.45 or about $1.3 billion as dividends to our shareholders, and still have about $1.4 billion available for high return industrial gas investments. This strong cash flow, even in uncertain times, enables us to continue to create shareholder value through increasing dividends and capital deployments. Slide number 20 provides an update of our capital deployment. As we discussed last quarter, we've extended our time horizon another five years to fiscal 2027. We see tremendous project opportunities beyond 2022, and the investment potential far exceeding the original capacity of $15 billion. Based on this updated view, we see our capital deployment potential reaching approximately $34 billion through fiscal 2027. The $34 billion includes roughly $10 billion of cash and additional debt capacity available today, almost $17 billion we expect to be available by 2027, and about $7 billion already spent. We still believe this figure is conservative, given the potential for additional EBITDA growth, which generates additional cash flow and therefore additional borrowing capacity. We will continue to focus on managing our debt balance to maintain our current targeted AA2 rating. So you can see we have already spent 21% and have already committed 67% of the updated capacity we show here. I should note that this is as of September 30th, so does not reflect the closing of the Jazan Phase 1, but does include the Louisiana project. Before I turn the call back to Seifi, I would like to share with you that we plan to reorganize our reporting segments, starting in Q1 of FY ‘22. Our EMEA segment will be separated into Europe and a Middle East and India segment to reflect the addition of a significant Jazan project in the Middle East segment, and to provide more visibility for our geographic regions. In addition, our Global Gases and corporate segments will be combined. We will provide historical resegmented financial information before the year-end. Now to begin the review of our business segment results, I'll turn the call back over to Seifi.

Seifi Ghasemi, Chairman, President, and CEO

Thank you very much, Melissa. Now please turn to Slide number 21 for our Asia results. Sales increased 6% compared to last year, on 5% favorable currencies and 1% positive price increase, marking the 18th consecutive quarter of year-on-year price improvement in this region. Volumes were flat with new plants mostly outside of China, offsetting lower Lu’An contribution. Regarding Lu’An, there is no change from the previous updates that we have given you. The plant continues to operate at full capacity despite the coal shortage in China. As I mentioned last quarter, there is an interim supply agreement we are recognizing reduced fees to fiscal year '22 before we return to the full year fee in 2023. This quarter, China's effort to reduce energy usage and intensity, so-called dual control, had a modest adverse effect on our results. It reduced some merchant customers demand and caused isolated disruptions in operations. We continue to monitor this developing situation very closely. In the long term, though, we do see positive growth opportunities as China continues to focus on reducing its carbon intensity. EBITDA for this region grew 3%, supported by favorable currencies and price. Costs compared unfavorably, primarily due to higher variable energy costs and resources needed to support projects and startups, timing of China government incentives last year, and the disruption caused by its dual control policy to reduce energy consumption. Sequentially, EBITDA and margins were lower as higher costs more than offset favorable volumes. Price is up but rounded to zero. Now I'd like to turn the call over to Dr. Serhan to talk about our Americas results. Dr. Serhan?

Samir Serhan, Chief Operating Officer

Thank you, Seifi. Now please turn to Slide 22 for a review of our Americas results. Sales increased more than 20% versus last year, and EBITDA posted another double-digit gain. Volume grew 3%, primarily due to better hydrogen and merchant demand. Although Hurricane Ida interrupted our U.S. Gulf Coast operations this quarter, our team worked very hard to limit the impact on our business. While most of our merchant products have returned to pre-COVID levels, our hydrogen volume has increased but has not yet fully recovered. Demand for jet fuel, which consumes more hydrogen on a unit basis compared to gasoline, is still lagging. Also, the industry continued to use more light sweet crude, which requires less hydrogen. We are confident in the long-term growth of hydrogen demand, particularly in the U.S. Gulf Coast. Price for the quarter was again strong; the 4% gain for the region was equivalent to 10% on the merchant business. Price was better across all major products. This is the 13th consecutive quarter of year-on-year price improvement. Energy cost pass-through drove a 15% sales increase, with much higher natural gas prices. EBITDA was 16% ahead of last year, as positive volume, price, better equity affiliate income, and lower maintenance costs more than offset higher inflation. EBITDA margin was 230 basis points lower. However, energy costs pass-through negatively impacted EBITDA margin by approximately 500 basis points. In other words, EBITDA margin would have been significantly higher excluding energy pass-through. Sequentially, energy pass-through drove margin 250 basis points lower. Now, I would like to turn the call back over to Simon to discuss our other segments. Simon?

Simon Moore, Vice President of Investor Relations, Corporate Relations and Sustainability

Thank you, Dr. Serhan. Now please turn to Slide 23 for a review of our Europe, Middle East, and Africa region results. Our EMEA team delivered another set of outstanding results this quarter. Sales jumped 33% versus last year, and EBITDA was up 14%. Volume was strong, increasing 14% driven primarily by improved hydrogen and merchant demand and new assets. Our liquid bulk largely recovered from the pandemic, but packaged gases and hydrogen are still below pre-COVID levels. Price increase for the 15th consecutive quarter was higher across most major product lines and sub-regions. The 4% price gain for the region corresponds to a 6% improvement for the merchant business. Consistent with what most consumers and businesses are experiencing, our European business faced unprecedented energy cost escalation this quarter. Supply chain-related interruptions further exacerbated the difficult situation. Our team has done an excellent job coping with these challenges, executing pricing actions and keeping our customers supplied. As Melissa said, our on-site contracts allow us to pass through the higher energy costs. For our merchant business, we continue to work hard to recover the recent cost increases through additional pricing actions already underway. Currencies were favorable 3%, primarily due to the strong British Pound versus the U.S. dollar. EBITDA was up 14% to about $230 million, primarily due to strong volume, while better price, equity affiliate income, and favorable currencies offset most of the energy cost increase. EBITDA margin was down 560 basis points, with higher energy pass-through responsible for about 400 basis points. The remaining roughly 150 basis point reduction was mainly attributable to unfavorable costs, partially offset by favorable equity affiliate income and better volume. Compared to the prior quarter, sales climbed 8% primarily due to pass-through, while positive price and volume were offset by unfavorable currencies. Operating income was 3% below last quarter as the positive price and volume were more than offset by higher costs. Meanwhile, EBITDA was 8% higher due to the inclusion of positive equity affiliate income. As Melissa mentioned, we will separate the current EMEA segment into two segments, Europe and Middle East and India, starting next quarter. Now please turn to Slide 24, Global Gases, which includes our non-LNG sales equipment businesses as well as central costs. Sales and profit were up on higher project activities. Please turn to Slide 25, corporate, which includes LNG and other businesses as well as our corporate costs. Corporate segment sales were higher this quarter driven by increased project activities, as we continue to execute multiple large LNG and other projects. But profit was lower on higher corporate costs. Sequentially, sales and profits were better than last quarter. Again, as Melissa said, we will combine global and corporate starting next quarter. Now, to provide closing comments, I'll turn the call back to Seifi.

Seifi Ghasemi, Chairman, President, and CEO

Thank you very much, Simon. Air Products continues to deliver consistent results despite significant ongoing challenges in the world. Our volumes, price, and profit all grew in 2021. Overcoming the pandemic, the storms, supply chain disruptions, and rising costs globally, I truly believe that we have become an even stronger company and fully expect to deliver significant earnings growth as the economies around the world recover and our projects come on stream. Now, please turn to Slide number 26. For fiscal year 2022, our earnings per share guidance is $10.20 to $10.40, up 15% to 20% over last year. For quarter one of fiscal year '22, our earnings per share guidance is $2.45 to $2.55, up 16% to 20% over last year. This includes about two months of Phase 1 of the Jazan project. We see our CapEx at around $5.5 billion to $5 billion for fiscal year '22, including approximately $1.5 billion of Phase 1 of the Jazan project. Now, please turn to Slide number 27. We are confident that the security of employment and compensation that we provided to our employees during this difficult pandemic period positions us very well for the future. We demonstrated to our people that we support them in times of difficulty. We are committed to this approach since the only sustainable, long-term competitive advantage of any company is the degree of commitment and motivation of the people in the enterprise. The strong results and significant milestones we achieved this year are just part of our continued growth. As I said before, Air Products is supported by and supportive of the world’s focus on sustainability. Our customers choose Air Products because they know we can help them meet their sustainability goals, and we continue to innovate so that we can be a partner on their sustainability journey for the future. The world’s environmental and sustainability challenges are immense, huge issues that need to be addressed. And our growth strategy, which is focused on gasification, carbon capture, and hydrogen, is designed specifically to address these critical needs. We know that our continued success depends on the expertise, dedication, and commitment of our talented people around the world. We consistently have been adding resources around the world in order to position ourselves properly to meet the growth demand and the execution of the projects that we have undertaken. Rising through the energy challenges that face our world today, we are committed to having a diverse workforce, significant development of applications, and mega project expertise, and a collaborative spirit within our companies. I believe Air Products is uniquely positioned to help develop a world transition to a cleaner and better future. It's a better future we believe in and in which we are already totally invested. Now, we are pleased to answer any questions that you have.

Operator, Operator

We’ll take our first question from David Begleiter with Deutsche Bank.

David Begleiter, Analyst

Thank you. Good morning. Seifi, you had a couple of delays in your projects, most notably NEOM and Indonesia by roughly a year. Can you just talk about why those projects are being pushed out by a year?

Seifi Ghasemi, Chairman, President, and CEO

David, I wouldn't call them delays. I mean, these are mega projects. And we announced them to give our best judgment about when they come on stream, but all of these projects need to be permitted, they need government approvals, and all of that. So, each time we had a call to give you our latest estimate of what we think these projects can come on stream. So right now, our best estimate for these projects is the timeline we have given you. If we can move them forward, we will tell you. If there are further delays, we will let you know, because as I said, we cannot forecast everything because we depend on getting significant permits for a lot of these projects.

David Begleiter, Analyst

Understood. And just on the CapEx increase ex-Jazan, can you just talk about the pieces of that $5 billion to build-out increase? How much is maybe Alberta, how much is Louisiana, etc.? Thank you.

Seifi Ghasemi, Chairman, President, and CEO

Well, I'll bet on Louisiana I’m not going to consume a huge amount of capital next year. But it is all related to the projects that Dr. Serhan mentioned. I mean, people focus on our mega projects, and obviously, we are delighted to talk about it. But don't forget, we still have a base business, which is very resilient, and we are doing many projects. Actually, as Dr. Serhan mentioned, last year was a record year for our small and mid-sized projects. We are getting our fair share of the market on those projects, they are going to be executed, and they require capital.

David Begleiter, Analyst

Thank you very much.

Seifi Ghasemi, Chairman, President, and CEO

Thank you very much, David.

John McNulty, Analyst

Thanks for taking my question. So Seifi, with the huge spike in energy prices that you saw over in Europe, and I imagine maybe even a little bit in Asia as well. I guess, can you speak to how quickly you can offset it with regard to prices, something where, look, you automatically kind of put it all in? Or is it something that has to ease in over the next few quarters? I guess, how should we be thinking about that?

Seifi Ghasemi, Chairman, President, and CEO

Good morning, John. John, as you know very well, we have two parts to our business: on-site and merchant. On-site prices immediately increase due to pass-through clauses. Some of our packaged gases business has clauses, but many do not, and therefore, we need to go and increase prices and convince customers that energy prices have gone up. There is also a competitive environment where some have tried to use this as an excuse to gain market share, so we need to work to recover that. However, the speed of energy increases in August and September was unpredictable, making it difficult to adjust our prices quickly. The team is doing a fantastic job, especially in September and October, but we still have work to do. We may experience a delay of about a quarter in fully recovering the costs.

John McNulty, Analyst

Got it. So a quarter to catch up on that. Okay. And then, when thinking about where you expect to get the margins back up to around that 40% range, admitting that the rest of it really is more energy pass-through and isn't really a reflection of the business, could you speak to the timing of when you think you can get there? Is it something where we can see the margins approaching that by the end of 2022? Is it going to take longer than that? What measures will you need to see in order to get back to those 40% type levels?

Seifi Ghasemi, Chairman, President, and CEO

John, I would like to see those margins back to that level by next time we talk in January. We don't like seeing our margins go down. The pricing actions we implement are crucial, because margins depend on pricing. Volumes are important, but margin is about profit per unit of volume. We need to catch up with rising energy costs, and our goal is to report that our margins have returned to about 40% by next quarter or the quarter after. The extent of this will depend on our collective efforts, but we are committed to trying to achieve it as soon as possible.

John McNulty, Analyst

Got it. Thanks very much for the color. Appreciate it.

Seifi Ghasemi, Chairman, President, and CEO

Thank you, John.

Kevin McCarthy, Analyst

Yes, good morning, Seifi. Just to follow up on the previous question, can you talk about the level of price increases that you're seeking today in various regions to keep up with this energy inflation? Do you think that the pace of realization could differ versus history?

Seifi Ghasemi, Chairman, President, and CEO

Good morning, Kevin. What it means is that the pace of price increases you have seen what we have done in the past, it's about 18th or 19th consecutive quarters that we're getting 3%, 4%, or 5% price increases in different regions worldwide. So now, before we begin increasing prices to improve our margins, we have to increase prices to maintain our margins. Therefore, there is a significant sense of urgency around that. How successful we are will be reported to you next quarter. I don't want to forecast that, because there are many factors and activities involved. But the fact is that energy prices have gone up, and we need to recover those costs by increasing prices. Everybody faces this challenge, and if they cannot address it, they will see their margins decline. We also need to continue focusing on our productivity goals, and our people are aware of this, and we are all committed to it.

Kevin McCarthy, Analyst

Thank you for that. And Seifi, I wanted to ask your opinion on a high-level question related to clean hydrogen. One can look at this business and recognize it has vastly different growth potential than atmospheric gases and different capital requirements, different technology, discrete assets, etc. You could look at multiples for lithium producers or other high-growth businesses, and they're quite high today. This might argue for separating the business at some point in time. On the other hand, you've got a lot of benefits of integration, including inexpensive costs of capital and a high-quality balance sheet. As you consider all of these things, how do you think about how the business might develop over time and whether it will remain within the portfolio on an integrated basis for the long term?

Seifi Ghasemi, Chairman, President, and CEO

Kevin, you are asking me a very intelligent question. My answer to that is that our commitment is to create value for our shareholders. If, at some point in time, what you are suggesting represents a significant opportunity for substantially increasing shareholder value, we would consider that. However, I don't want to give the impression that we want to act on it tomorrow. We need to demonstrate the success of the hydrogen business and all of that. The question you're asking is good, and as a company and board, we always look at those options. When we would act on it would depend on circumstances, market conditions, development of the hydrogen business, etc. So, sorry to give you a general answer, but I hope you understand.

Kevin McCarthy, Analyst

I do, and sorry for putting you on the spot there. But certainly welcome those thoughts. Much appreciated.

Steve Byrne, Analyst

Yes, thank you. Just wanted to drill into your guidance a little bit. If I understood it correctly, and Jazan is in the 2022 guide, if you back out that 11 months' worth, it seems like kind of a mid-single digit EPS guide. Is there anything that you are expecting that is a particular headwind in the year? Or are you just being conservative here?

Seifi Ghasemi, Chairman, President, and CEO

Steve, first of all, good morning, and thanks for your question. I'm very happy that you're breaking it down how you are. We are showing that, first of all, I think we should get credit for Jazan. At the end of the day, that's part of the company and we're increasing the EPS by 15%. But if you want to look at this asset by saying, okay, I know you have done that, but the base business looks like is growing 6%. Well, that is the reality right now, because the base business, Kevin, as you know better than I do, is dependent on the growth of GDP or industrial production. And I'm not too excited about the prospects of GDP or industrial production growth anywhere globally. China, the world's largest growth engine, last quarter grew only 3%. Europe’s GDP and industrial production isn't growing either. In the U.S., not much is happening. Latin America is stagnant. So I think considering all these factors, including energy costs and our ability to recover costs related to supply chain disruptions, this is all real. Our job is to give reasonable guidance. We provided guidance for fiscal year 2021, the average of that was 902.5, and we delivered 902 despite hurricanes that we didn't forecast and power outages. It’s our responsibility to balance everything and provide the best judgment at the time. Right now, our best judgment is that indeed, you're right, overall, our base business is expected to grow about 6% or 7%. I hope it does better, but it’s our duty to offer a responsible forecast instead of dreaming that everything will be fine. Remember, COVID hasn't gone away either. So I apologize for the lengthy answer, but I hope that clarifies things.

Steve Byrne, Analyst

It does. Thank you, Seifi. And I did want to ask you a question about your blue hydrogen outlook. When we drill into the Alberta and Louisiana projects, it seems to us that most of the capital is focused on producing incremental hydrogen supply rather than carbon sequestration or capture. If that's accurate, what in your view drives the outlook for needing incremental hydrogen supply in these regions? Is it driven by renewable fuel?

Seifi Ghasemi, Chairman, President, and CEO

Kevin, there are two fundamental dynamics. We are talking here about 2026 when these projects will come on stream. Number one, we need increased hydrogen demand on the pipeline because we have new customers coming. We foresee the pipeline being sold out and therefore we need additional hydrogen produced. The second factor is that we believe there will be significant additional customers if we provide them blue hydrogen, which could incentivize them to convert and gain benefits. Also, a significant part of their production, especially in Canada, will be liquid, exporting to markets that require hydrogen fuel, where we could supply blue hydrogen, as we see a conversion trend towards hydrogen for mobility. In Louisiana, a significant portion of the hydrogen we produce will be converted to blue ammonia, which will be exported, mainly to Japan. Japan needs to decarbonize and they have limited alternatives for energy supply, so they will rely on imported blue ammonia to burn in their power plants, generating electricity to support their energy needs. That's the thinking behind the necessity for blue hydrogen. Thank you, Dr. Serhan. Yeah, thank you. Okay, I hope you've got your answer, Marc. Okay.

Marc Bianchi, Analyst

Hi. Thank you. I wanted to first start with the blue hydrogen projects that you have announced and using the technologies of ATR and POCs. You commented earlier that there's a competitive advantage of gasification that is at play there. Could you talk about that a little bit more, especially after we've heard from peers saying that they too can offer both technologies and even capture 95% of the CO2 through SMR?

Seifi Ghasemi, Chairman, President, and CEO

Marc, I'm very happy that you're asking me the question. Because the blue hydrogen projects that we have announced utilize new technology in Canada and another technology in Louisiana to capture and sequester 95% of the CO2. When it comes to SMR, the natural gas is utilized with steam methane reforming; we take some of the natural gas directly into the process, break down CH4 into CO and hydrogen, and then convert it into CO2. You can capture 95% of that, true. However, a lot of the natural gas is burned to heat the tubes containing the catalysts, much like combustion in a furnace or power plant. Theoretically, you can capture that CO2, but it will significantly raise costs. We can state that our technology enables CO2 capture in a cost-effective manner. But can CO2 be captured? Absolutely, anything can be captured but at a steep price. Our carbon capture is process-focused and cost-effective, while the combustion aspect is prohibitively expensive. I hope that helps, Marc.

Marc Bianchi, Analyst

That's helpful. Thank you, Seifi. Earlier, Dr. Serhan mentioned, I think, some increased confidence on NEOM versus last year. I'm curious what's behind that statement? Is there anything to say about perhaps customers being signed up? Or what's driving that statement?

Seifi Ghasemi, Chairman, President, and CEO

I'll have Dr. Serhan answer that, but he's not going to make comments about customers. However, he can explain why he feels better about the project compared to before. Dr. Serhan?

Samir Serhan, Chief Operating Officer

Thanks, Seifi. As we communicated before, this is really our first mover project in this world-scale production of green hydrogen. I can tell you we have around 30 different work streams going in parallel in developing, optimizing, producing products, and improving costs. This is where our additional confidence stems from; we believe we have a very good solution that meets competitive standards. We are aiming for 2026 to have it operational with a competitive, very low carbon intensity that meets specifications in various countries around the world.

Seifi Ghasemi, Chairman, President, and CEO

Thank you, Dr. Serhan. Yeah, thank you. Okay, I hope you've got your answer, Marc. Okay.

Bob Koort, Analyst

Yes, good morning. This is actually Mike here, sitting in for Bob. Just curious, is there a scenario where Lu’An could return to full fees before '23? And then, I guess on the other hand, what is the likelihood that that production could become permitted?

Seifi Ghasemi, Chairman, President, and CEO

I understood the first question and can confirm that the plant is running at full capacity. The agreement we have with them in terms of structure of the fees will not improve in 2022 versus the current rate. It will improve in 2023. As for the second part of your question, can the reduced fees continue? We don't anticipate that. I don't want to speculate what Lu’An will do as we progress, but right now, we don't expect those changes.

Unidentified Analyst, Analyst

Okay. Thank you.

Seifi Ghasemi, Chairman, President, and CEO

Thank you.

John Roberts, Analyst

Due to no response, we'll go to our next question from Vincent Andrews with Morgan Stanley.

Vincent Andrews, Analyst

Thank you, and good morning, everyone.

Seifi Ghasemi, Chairman, President, and CEO

Good morning, Vincent. How are you doing?

Vincent Andrews, Analyst

I'm very well. Thank you, Seifi. I'd be curious to get your thoughts on in the long term, not obviously where things are today. But, if you think in the medium to long term, what you think the cost of carbon is going to be? And maybe on a regional basis, you could talk about it. And to the extent you want to discuss what you're assuming when you think about looking at a new project that might be helpful too?

Seifi Ghasemi, Chairman, President, and CEO

Vincent, you're asking a very, very insightful question. Different parts of the world have different numbers. California has set $200 per ton of CO2 as an incentive. Canada is looking at $50 to $100 per ton. Other regions contain figures that fluctuate between $50, $75, $100, $150, and more. When we assess new projects, we try to consider profitability without overly relying on government incentives, due to the substantial carbon credits needed to meet their requirements. Significant incentives must be created for companies and individuals to shift to low carbon sources. We need realistic policy support for true transitions to renewable energy, and without this, the energy shift will be insufficient. Our growth strategy aligns with achieving these objectives.

Vincent Andrews, Analyst

I appreciate that answer. And yes, thank you very much. In the interest of time, I'll pass it along.

Jeff Zekauskas, Analyst

Thanks very much. Seifi, I was looking at your project commitments, and I didn't see any commitments in the electronics area through 2026. Is that something strategic where Air Products is moving away from the electronics area in favor of other opportunities? And when you look at your $4.5 billion or so in CapEx for next year, can you talk about what the big chunks you are going to spend?

Seifi Ghasemi, Chairman, President, and CEO

Jeff, good morning, first of all. I want to clarify that we are continuing to win significant projects in the electronics sector. We are executing projects for major electronic manufacturers like Intel, Samsung, and TSMC. While these commitments may not be categorized as mega projects, we are actively focused on the electronics sector and gaining market share. Regarding CapEx, I have been hesitant to provide a breakdown for security reasons, but please know that Air Products remains firmly committed to the electronics market. Thank you. Sure.

PJ Juvekar, Analyst

Yes, thank you. Seifi, I’ll ask one quick question. What's happening globally? We look at the narrative about COP26 in a move towards decarbonization and less investments in fossil fuels. Do you see a scenario where fossil fuel prices just keep going up as a result, similar to what has happened in Europe? And if that does happen, hypothetically, how will your projects in China and other parts of the world fare in an environment of higher energy prices? Thank you.

Seifi Ghasemi, Chairman, President, and CEO

Well, PJ, thank you very much for asking an excellent question. If hydrocarbon prices rise, it will help some projects, including those we have in China. For instance, one reason Lu’An operates at full capacity despite high coal prices is the economic feasibility of their diesel production, which allows them to profit from current oil prices at $84 per barrel. Also, higher hydrocarbon prices will make renewable energy comparatively more appealing, incentivizing shifts to cleaner alternatives. Thus, while higher fossil fuel prices raise challenges, they can simultaneously encourage transitions toward renewables and hydrogen, which align with our strategies. Thank you very much. I really appreciate that. Are there any other questions?

Operator, Operator

It appears there are no further questions at this time.

Seifi Ghasemi, Chairman, President, and CEO

Okay. With that, I would like to thank everybody who was on the call. We appreciate your insightful, and sometimes difficult questions, but that's the way it is. We do appreciate that, and we look forward to talking to you when we announce our first quarter results, sometime in January or early February. Thank you again, and have a very nice day.

Operator, Operator

That does conclude today's call. Thank you for your participation. You may now disconnect.