Earnings Call Transcript - APD Q4 2024

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 Air Products are subject to copyright by Air Products and all rights are reserved. Beginning today's call is Mr. Eric Guter. Please go ahead, sir.

Eric Guter, Vice President, Investor Relations

Thank you, Jessica. Good morning, everyone. Welcome to Air Products' fourth quarter 2024 earnings results teleconference. This is Eric Guter, Vice President of Investor Relations. I'm pleased today to be joined by Seifi Ghasemi, our Chairman, President and CEO; Melissa Schaeffer, our Chief Financial Officer; and Sean Major, our Executive Vice President, General Counsel and Secretary. After our comments, we will be pleased to take your questions. Our earnings release and the slides for this call are available on our website at www.airproducts.com. Today's discussion contains forward-looking statements, including those about earnings and capital expenditure guidance, business outlook and investment opportunities. Please refer to the cautionary note regarding forward-looking statements that is provided in our earnings release and on Slide 2. Additionally, throughout today's discussion, we will refer to various financial measures, including earnings per share, operating income, operating margin, EBITDA, EBITDA margin, the effective tax rate and ROCE, either on a total company or segment basis. Unless we specifically state otherwise, statements regarding these measures refer to our adjusted non-GAAP financial measures. Reconciliations of these measures to our most directly comparable GAAP financial measures can be found on our 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, Eric, and good day to everyone. Thank you for taking time from your busy schedules to join our call today. Please turn to Slide 4 of the material we have posted on our website for this call. Ten years ago, we set a goal for Air Products to be the safest, most diverse and most profitable industrial gas company in the world, delivering excellent service to our customers. I am very proud to say that thanks to the outstanding efforts of all of our talented, dedicated and committed people at Air Products, we are today the safest and most profitable industrial gas company in the world. We have achieved what we set out to do, and now we are ready to move forward. On Slide 5, I'd like to point to our safety track record, which is our number one priority. We have made significant progress on both our employee lost time injury rate and recordable injury rate since 2014. We are very proud of this improvement. We will continue to strive to achieve zero accidents and zero incidents as the ultimate goal. We believe that all incidents and accidents are preventable. Now please turn to Slide 6 for a look at our fourth quarter results. Our fourth quarter adjusted earnings per share of $3.56 was at the upper end of our guidance range of $3.33 to $3.63, up 13% over last year, driven by our three largest reporting segments. Both productivity and pricing actions contributed positively this quarter. We successfully completed the $1.8 billion sale of our LNG, process technology and equipment business to Honeywell at the end of September. The LNG business was part of our full fiscal year 2024 results, but with the sale, it will no longer contribute to our earnings going forward. Our adjusted EBITDA margin was up 460 basis points and our adjusted operating margin increased 350 basis points versus prior year. Please turn to Slide 7 for our fiscal year 2025 outlook, which is 2.5% higher than last year. We expect our ongoing business, which excludes the LNG business, to deliver adjusted earnings per share of $12.70 to $13, demonstrating an improvement of 6% to 9% over last year. We expect our first quarter adjusted earnings per share to be in the range of $2.75 to $2.85, which is flat to up to 4% when considering the LNG divestiture. As you know, our first quarter is typically our weakest quarter, impacted by seasonality. In addition, we are not forecasting any significant growth for this quarter due to our concerns about the economic activity in China. It is possible that economic activity in China might improve with actions that the Chinese government might take in the future, but we have not included that in our forecast. We are proud of our results this quarter, and I would like to thank the talented and dedicated people at Air Products for helping us to deliver these strong results. Working together, I am confident that we can achieve what we have put forth in our guidance for fiscal year 2025. Now please turn to Slide 8 where you can see our strong sustained performance over the long term. We have achieved a 10% annual growth rate in our adjusted earnings per share since 2014. We have delivered consistent results throughout significant ups and downs in the world economy. And as I just mentioned, we expect to continue that trajectory in fiscal year 2025 with adjusted EPS growth ranging from 6% to 9% on a like-for-like basis. Now please turn to Slide 9. Another top priority for us is to consistently return cash to our shareholders. Our sustained growth has enabled us to achieve a 9% annual growth rate in our dividend since 2014, and we plan to return about $1.6 billion of cash to our shareholders in dividend payments this year alone. We are proud of our record of increasing our quarterly dividend payments for 42 consecutive years. We take a balanced approach to determine our dividend, and we are confident that our sustained performance will enable us to continue rewarding shareholders through increased dividends while also meeting the cash needs of our growth strategy. Now please turn to Slide 10, which is my favorite slide, again demonstrating long-term performance. Our adjusted EBITDA margin has expanded by almost 2,000 basis points over the last 10 years. We are now at a 44% adjusted EBITDA margin. We lead the industry when it comes to adjusted EBITDA margin, and this track record demonstrates our focus on effectively running our base industrial gases business. Now I would like to turn the call over to Melissa Schaeffer, our Chief Financial Officer, to discuss our quarter four results. Melissa?

Melissa Schaeffer, Chief Financial Officer

Thank you, Seifi. Please turn to Slide 11 for a detailed review of our fourth quarter results. Compared to last year, volume and price each improved 1% with positive underlying sales in our three largest regional segments. Higher on-site volume, including new assets, more than offset lower demand for merchant products. Overall, price improved modestly driven by positive pricing results in the Americas and Europe. Declining natural gas prices, primarily in North America, resulted in 2% lower energy cost pass-through, which has no impact on profit. Adjusted EBITDA increased 12% on favorable volume and price, which contributed to over 450 basis point improvement to adjusted EBITDA margin. Sequentially, sales and EBITDA improved across most reporting segments, driven by favorable on-site volumes. Now please turn to Slide 12 for a discussion of our adjusted earnings per share. Our fourth quarter adjusted earnings per share of $3.56 was up $0.41 or 13% versus last year, driven by strong operating results. Overall, volume was up $0.15 on higher on-site partially offset by lower merchant demand. Price, net of variable costs, contributed $0.23 driven by both pricing gains and lower power costs. Cost was favorable $0.05 as our productivity actions more than offset the impact of inflation. Now please turn to Slide 13 for a brief discussion of our business segment results. You can find individual slides covering each of the business segments in the appendix. Looking at each business segment: Americas overall pricing was 3% higher, while volume was flat. This translated to a 6% merchant pricing gain for the region with improvement across the product line. Adjusted EBITDA increased 11% and adjusted EBITDA margin improved over 650 basis points in each case, primarily due to strong pricing and favorable mix driven by a one-time asset sale associated with an early contract termination at the request of the customer and higher hydrogen demand. Additionally, lower energy cost pass-through improved margin by approximately 200 basis points. Moving to our Asia segment, the 7% volume improvement was driven by our on-site business, including contributions from new assets. Adjusted EBITDA increased 21% and adjusted EBITDA margin improved almost 500 basis points, primarily due to favorable on-site volumes and costs. Looking at Europe's results, price was up 2% with broad-based improvement across the region. Volume was flat as a new asset in Uzbekistan offset weaker merchant demand. Adjusted EBITDA improved 17% and adjusted EBITDA margin increased nearly 500 basis points, mainly due to improved price. Switching to our Middle East and India segment, lower merchant volume negatively impacted sales and adjusted EBITDA. Unfavorable costs also contributed to lower adjusted EBITDA. For our Corporate and other segment, sales and profit were lower this quarter, primarily due to lower sales and higher cost estimates related to our sale of equipment activity. Finally, I'd like to close out the review of our performance and quarterly results on Slide 14. Our core industrial gas business remains as strong as ever, delivering significant EPS growth over the past decade and achieving industry-leading profitability and adjusted EBITDA margin. Air Products pioneered the on-site business model more than 80 years ago and about half of our business today is on site, proportionally higher than our peers. Our on-site business has contractual pass-throughs, which enables us to pass energy costs and other cost inflation to our customers. This, combined with our take-or-pay provisions in our customer contracts, enable the stability of our business. We generate strong and steady cash flow that supports reinvestment aligned with our disciplined capital allocation strategy. As we continue to show, this also fuels our ability to consistently return capital to shareholders with continued increases to our dividend. Through our core industrial gas business, we supply customers in dozens of industries with critical products and services, with the goal of being the safest, most diverse and most profitable industrial gas company in the world. Now I'll turn the call back over to Seifi.

Seifi Ghasemi, Chairman, President and CEO

Thank you, Melissa. Now I would like to take this opportunity to discuss our growth strategy. Please turn to Slide 16. Our growth strategy consists of two pillars: our excellent core industrial gases business and our developing clean energy business. Our core industrial gas business is an industry leader. It is a stable business and grows at GDP, or industrial production levels, around the world. We continue to optimize for maximum efficiency and invest strategically to maintain our market share. In '23 and '24, almost half of our capital investment was related to our core industrial gases business. Second, we see tremendous opportunity in clean hydrogen, driven by strong demand for decarbonization solutions that we are already seeing play out today. We are particularly optimistic about the use of blue hydrogen in the form of clean ammonia to minimize the use of coal in Asia's power plants. Another promising demand is the use of blue ammonia directly to power ships. Dozens of such ships are already on order or under construction. We are equally excited about the application of green hydrogen to meet Europe's emission reduction mandates across the heavy industrial and transport sectors. Green hydrogen has real demand today, and we expect to drive outside growth relative to our core industrial gas business over the long term. The two pillars of our growth strategy are complementary and interrelated, underpinned by our core competencies, technology and, of course, more than 65 years of hydrogen experience. We are committed to efficiently running and growing our core industrial gas business, while pursuing strategic high-growth and high-return opportunities in clean hydrogen. Now please turn to Slide 17. I want to expand on my comments about how we developed our clean hydrogen platform. Clean hydrogen is not a new business for Air Products. It's merely an extension of our existing core business. As I said, Air Products has been supplying hydrogen for more than 65 years, over which time we have developed key customer relationships that span both the private and public sectors. About 30 years ago, Air Products pioneered the on-site hydrogen business model with take-or-pay provisions and contractual pass-through, supplying hydrogen over decades to refineries in California. We then gradually expanded to the U.S. Gulf Coast, Canada and Europe. We capitalized on global desulfurization regulations to ultimately become the world's largest hydrogen supplier with the most extensive hydrogen pipeline system. Now we are well positioned to capitalize on the next phase of hydrogen development, which is clean hydrogen supported by the need to decarbonize hard-to-abate sectors. We moved first with focus and conviction to capture the important first-mover advantages, which I will talk more about in a moment. Consistent with our traditional hydrogen business, clean hydrogen offtake will also follow the on-site business model, and we anticipate these projects will provide attractive returns. Our strategic first-mover actions are now creating the opportunity for us to become the world's largest clean hydrogen supplier. Please turn to Slide 18. There are clear advantages in moving first. We have been able to secure optimum locations for renewable resources, including areas with strong sun and wind generation at the same time to produce low-cost green hydrogen. And for blue hydrogen, we have been able to gain access to the right geologies needed for carbon sequestration, which is the key enabler to making blue hydrogen. As mentioned, we also have been able to apply more than 65 years of hydrogen and technology expertise, which sets us apart. Finally, as we have demonstrated, the first mover gets the best seat at the table with customers to negotiate the best offtake agreements. On Slide 19, you can see an overview of the various regulatory drivers for clean hydrogen in Europe and Asia, focusing on heavy industry and transport sectors where battery electric meters are not effective. A wide range of industries need to decarbonize using clean hydrogen and we continue to extend our reach into these sectors. Now turning to Slide 20. Let me underscore the significant demand for clean hydrogen today. Various leading companies, including TotalEnergies as one key example, have issued requests for quotation requesting capacity requirements that far exceed the capacity of our green hydrogen project under construction in NEOM. Taking a step back, TotalEnergies' RFQ, as large as it is, 500,000 tonnes per day, accounts for only 10% of gray hydrogen now used by European refineries. And the output of our NEOM project is less than 5% of the gray hydrogen used by European refineries. And beyond refineries, there is demand for several other hard-to-abate sectors, including shipping and steelmaking. This strong demand in the market today gives us great confidence in our ability to load the green hydrogen facility under construction in NEOM. Turning to Slide 21. This demonstrates the sheer scale of the clean hydrogen industry in the coming years. Clean hydrogen is expected to be more than a $600 billion market by 2030 and eventually exceed $1 trillion by 2050. There is significant demand now, and that demand is expected to grow significantly over the long term. Air Products, capturing even a very small portion of that demand means that we will be well positioned to deliver significant growth. To demonstrate how large this market opportunity is, Air Products' currently approved clean hydrogen projects account for less than 1% of future market expectations. Before we discuss our key projects, please turn to Slide 22 with important takeaways about our strategy and disciplined approach to creating shareholder value. Our core industrial gases business remains fundamentally strong with industry-leading adjusted EBITDA margin and solid GDP and industrial production growth. We are adding to this strong foundation by pursuing attractive growth opportunities in clean hydrogen. Driven by decarbonization, future clean hydrogen demand is expected to be significant. We ultimately need to capture, as I said before, only a small portion of this anticipated high-growth market for our initial projects to be successful. We believe favorable supply-demand dynamics will enable an attractive return on green hydrogen. We are pursuing this strategy prudently and only approve new projects after securing anchor customers. As we have said before, we will not take any final investment decision on new projects until our current facilities are loaded at least 75% or more. We have focused teams within Air Products executing this two-pillar strategy. Our employees are dedicated to the ongoing success of both our core industrial gases business and our clean hydrogen business. Now I would like to take a moment to provide an update on our key project on Slide 24, where you can see an actual recent aerial photo of the NEOM project and its construction. I'd like to stress, this is a real project. It's not a computer-generated slide. It covers the ammonia production site, the electrolyzer facility and the jetty. Although this view covers a vast area, it does not capture the wind farms located 50 miles to the north near the Gulf of Aqaba, and the solar farms situated 40 miles to the west on the other side of the mountain range. We are full speed ahead on this project. Please turn to Slide 25. We have made immense progress on this green hydrogen project. Construction is about 60% complete, and we are on track to bring this facility on stream at the end of 2026. There are 18,000 workers on the site building this facility today. Importantly, roughly 35% of the total amount of the production has been contracted on a take-or-pay basis. Negotiations are underway for additional offtake which would exceed the production of the facility. NEOM has been financed by 23 banks providing more than 70% of the total capital needed. Air Products is investing about $800 million, or less than 10% of the total project cost. This is significantly less than the $1.7 billion that we originally projected for this project and illustrates our ability to execute highly successful project financing. Now please turn to Slide 26. In June of this year, we were delighted to announce a 15-year agreement to supply 70,000 tonnes of green hydrogen annually to TotalEnergies beginning in 2030. This was a milestone for us and the take-or-pay nature of this agreement will drive stability in growing our clean hydrogen business. This pioneering agreement validates our clean hydrogen strategy and demonstrates significant demand for green hydrogen with one of the largest energy companies in the world. Moving to Slide 27. Let me share the status of two other major clean hydrogen projects. First, our Canada Net-Zero Hydrogen Energy Project. We have committed 60% of the capacity on a long-term take-or-pay contract, and we are in active discussion for the remainder of the capacity. As for our Louisiana project, the Blue Hydrogen project, we have submitted for permits, which we expect to be issued in '25 and '26, and we have received major pieces of equipment already on the site in readiness for construction work. We are in active discussion for offtake from this facility, also in discussions with possible equity partnership and also assessing project financing for this project, and we will keep you updated as we move forward. Moving to Slide 28. As we have said before, we have put a sustainable aviation fuel project in Paramount, California on hold until we get our full permits. With regard to the proposed $4.5 billion joint venture to produce green hydrogen in Northern Texas, this project never reached final investment decision. It does not meet our established guidelines for new low-carbon project investments and therefore, we have stopped our involvement in this project, and we have sold our development rights to our partners. Finally, on Slide 29, you can see that we continue to focus on our core industrial gas business, which accounts for more than 50% of our total fiscal '23 to fiscal '25 CapEx. Much of that CapEx is focused on growth. Projects for core industrial gas business and clean hydrogen both need to meet or exceed our internal return targets. We regularly evaluate alternative funding opportunities to optimize our cash allocation. Beginning in 2027, we anticipate a meaningful decline in net debt-to-EBITDA ratio as well as possible net cash flow. Now for an update on succession planning. Please turn to Slide 33. As I discussed in our last earnings call, we have decided to bring into the company a fully qualified potential successor as President and a Member of our Board of Directors. This person should be well known to investors with a clear record of success, preferably a current or former CEO of a public company with significant international experience and relationships. This Board-driven process is being led by our Independent Director, Mr. Ed Monser, with the support of the full Board and an executive search firm. I'm happy to say that qualified candidates have already been identified, and we are anticipating announcing the President's name in the first half of fiscal year 2025. Now please turn to Slide 33. At Air Products, our two-pillar growth strategy includes running our core industrial gas business efficiently and continuing to invest and grow it. At the same time, leveraging our 65 years of hydrogen experience to serve the large high-growth clean hydrogen market. We expect our clean hydrogen projects to achieve higher returns than our core industrial gas business. And the thing tying all of this together is our relentless focus on thoughtful strategic capital allocation. Being a prudent steward of Air Products' capital has been and will continue to be our top priority. Now please turn to Slide 34. The people of Air Products are working hard every day to deliver for our customers, do so safely and deliver best-in-class profitability. Our operating discipline, combined with our focus on delivering shareholder value gives us confidence as we enter into the next chapter of our growth at Air Products. And now we will be delighted to answer your questions.

Operator, Operator

We'll move first to John McNulty with BMO Capital Markets.

John McNulty, Analyst, BMO Capital Markets

Yes, good morning, Seifi. Maybe I can start with something on the more immediate term. You've got some growth despite a difficult environment, looking out to 2025 versus 2024, I guess. Can you help us to kind of basket that a bit? How much comes from price? How much comes from some of the new projects that you've been gradually ramping through '24, and how much comes from core growth?

Seifi Ghasemi, Chairman, President and CEO

Good morning, John. Thank you for your question. John, for fiscal 2025, we obviously, one of our major concerns and unknowns is how demand develops in Asia. We have a pretty decent handle on our opportunities in the Middle East, in Europe and in America. The big unknown is China. That is why we have taken a conservative approach there. Things might change depending on what the Chinese government does, but we're going to be cautious. In terms of right now, our expectation for price overall is similar to last year, about 1% to 2% price increase. Our volume growth is very much adjusted to the expected GDP and industrial production growth forecasted for the different regions in the world, which is not that much. It's about sometimes 2%, 3% depending on which area you are. And then, we do not have too many significant large projects coming on stream, but we do have a lot of smaller projects coming on stream, which are going to contribute to our growth. We feel pretty good about our fiscal year guidance. I have to admit that we are very conservative on the first quarter, because of the immediate weakness that we see in China.

John McNulty, Analyst, BMO Capital Markets

Got it. Okay. No, that's helpful color. And then maybe I can just ask a question on Louisiana. So you kind of mentioned a bunch of things going on there. You're looking for offtake partners. You're also looking for equity partners and maybe even project financing, I guess. Can you speak to what you see as the ideal equity partnership arrangement that you are kind of pursuing at this point, and how we should be thinking about that?

Seifi Ghasemi, Chairman, President and CEO

Well, the ideal thing would be to have an equity partnership with somebody who is going to take the offtake. So that's kind of the obvious solution. But there are a lot of people who have raised significant funds, so-called clean funds and want to participate in equity with us. But our preference obviously would be with somebody who is going to take the offtake.

John McNulty, Analyst, BMO Capital Markets

So it's less about coming up with a partner to take on some of the manufacturing, or other certain parts of the project. It's more about coming up with a partner for the offtake. Am I thinking about that right?

Seifi Ghasemi, Chairman, President and CEO

No, I think we would be interested in partnering with people on the manufacturing part too — equity participation in the entire project.

John McNulty, Analyst, BMO Capital Markets

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

Operator, Operator

We'll move next to Jeff Zekauskas with JPMorgan.

Jeff Zekauskas, Analyst, JPMorgan

Thanks very much. I think that there are two prominent activists that seem to be involved in your products, and one of them published a large slide deck, maybe generally speaking, all about the de-risking of various projects. When you listen or look at the activist approach to Air Products, how do you reflect on it? Is it something that leads you to change your behavior in any way or not change your behavior? How do you assess the different new owners in Air Products and their ideas about the company?

Seifi Ghasemi, Chairman, President and CEO

Jeff, thank you for your question. Air Products has 220 million shares. We have many, many investors and we have respect for all of our investors. As you know very well, we meet very often with our investors, and we believe the view of all of the investors is as important as the view of one investor. So I don't want to single out the fact that we listened to a particular investor; we listen to all of our investors. The suggestions that have been made by all of our different investors are pretty consistent. They want us to focus on our base industrial gases business, which we are. And they also want to make sure that we are investing in the developing clean hydrogen business in a responsible way. And we are obviously doing that. And all of our investors throughout the years always ask about succession planning, and we have always been very diligent about succession planning, and we have now laid out very specifically what we want to do. So as I said, we listen to all of our shareholders, and we take their views very seriously and consider them and then act on them if necessary.

Jeff Zekauskas, Analyst, JPMorgan

Then for my follow-up, I think on Slide 20 you said you expect to fully load NEOM before the on-stream date. The commitment with Total I think is for 2030. So does this fully loading NEOM mean that it would be fully loaded for 2027, or does it mean that it would be fully loaded for 2030? In other words, from the assessment of the profit contribution of NEOM, should one expect a full loading for 2027 if you're mechanically complete at the end of 2026?

Seifi Ghasemi, Chairman, President and CEO

Jeff, we expect to fully load NEOM, and we are working toward that in 2027. Yes, that is our expectation. That is what we are working on. Because there are other customers beyond Total. Total gave us permission to announce their offtake publicly; we do not have such permission from other customers. When the time comes, we will announce that.

Jeff Zekauskas, Analyst, JPMorgan

Thank you so much.

Operator, Operator

We'll move next to Patrick Cunningham with Citi.

Patrick Cunningham, Analyst, Citi

Hi, good morning. I wanted to, with the LNG out of the business, what should we expect in terms of the corporate line for 2025? I know you've taken significant productivity actions. So what might be the offsets from cost reduction on the corporate line?

Seifi Ghasemi, Chairman, President and CEO

Well, that's a very good question and I'd like to give Melissa a chance to respond to that. Melissa?

Melissa Schaeffer, Chief Financial Officer

Yes. Hi. Thank you, Seifi. So LNG is about a 4% contributor or about $0.49 to the organization, obviously evenly distributed throughout the quarters with some timing based on delivery of the product. So we're seeing about a 4% headwind going into FY 2025 or again about $0.49 for the full year.

Seifi Ghasemi, Chairman, President and CEO

So if I may add to that, that means that during 2025, we obviously have taken and will continue to take actions in terms of productivity, and we obviously have growth from the, as I said, smaller projects. And we hope that the strong economic activity that we saw in the U.S. will continue in 2025, which we think it will. And in Europe we have opportunities for some of our on-sites to do a little bit better than they did last year.

Patrick Cunningham, Analyst, Citi

Okay, understood. Very high, very helpful. And could you provide a more general update on the World Energy Project? What is holding up the permitting process? Is there anything about the relationship or project budget that we should know there?

Seifi Ghasemi, Chairman, President and CEO

What is holding up the permit was the fact that the permit that was issued was challenged by some people who call themselves environmentalists, but they are opposing an environmentally friendly project. They objected to our permit. So that is what is holding it up. We have decided that we do not want to take the risk of building the project and continuing and then get challenged again. So we want to make sure we have all of the permits before we go forward. That's the reason we have put that project on hold. In terms of our relationship with our partners there, the relationship between Air Products and World Energy is excellent. We are working in concert, hand-in-hand to make that project a successful investment. At the same time, as I say on the slides, Air Products is looking at other alternatives for that project, because some people have expressed interest in buying us out of that project. And we obviously will listen to our alternatives.

Patrick Cunningham, Analyst, Citi

Understood. Thank you so much.

Operator, Operator

We'll move next to Steve Byrne with Bank of America.

Steve Byrne, Analyst, Bank of America

Yes, thank you. Wanted to just drill into NEOM a bit more, Seifi — four years ago, I believe you were talking about a downstream CapEx budget for NEOM of $2 billion. What is the status of that now given? I think back then your focus was Asia, it's now Europe. Do you have a strategy of what do you need to invest in Europe, to distribute the green ammonia, and then crack the hydrogen? Perhaps comment also on your ammonia cracking technology and the efficiency. And just lastly, that the 35% contracted seems more than total. Does that mean you've picked up other long-term take-or-pay contracts?

Seifi Ghasemi, Chairman, President and CEO

Well, thank you for your question. The amount of investment in the downstream obviously depends on who the final end customers are. But $2 billion order of magnitude for that is in the ballpark. But it might be a lot less than that, depending on who the actual customers are going to be in terms of distribution. As I said, there are a lot of ways to sell the product out of that plant. One is to take it, crack it and put it in a refinery. Another one is that some people might be interested in just buying the ammonia FOB NEOM and using it for applications that don't require cracking. So there are a lot of different possibilities there. As we finalize the contracts we will give you more visibility on that.

Steve Byrne, Analyst, Bank of America

And maybe just one more on this. Europe prefers the pathway forward being green, not blue. If that were to change for economic reasons, what would be your end market outlook for NEOM under that kind of a scenario?

Seifi Ghasemi, Chairman, President and CEO

First of all, we are committed to low carbon hydrogen, green and blue. That is why we are doing the project in NEOM for green and the project in Louisiana for blue. Because we think the lowest cost place to produce green is in northern Saudi Arabia, and the lowest cost place to produce blue is in the U.S. Gulf Coast. No place in the world can compete with the U.S. Gulf Coast, because of the low natural gas. But more importantly, when people talk about blue, they need to keep in mind, you can only make blue if you have a place to sequester the CO2, and it is not that easy to find those places. So we are committed to both of them. We look at those opportunities equally. We don't have a preference for one or another.

Operator, Operator

We'll move next to David Begleiter with Deutsche Bank.

David Huang, Analyst, Deutsche Bank (on behalf of David Begleiter)

Hi, this is David Huang here for Dave. I guess one of the concerns investors have is on your large headcount increase since you started the journey in Green Hydrogen. How much of the headcount increase through the years is related to the Clean Hydrogen projects? And if you can talk about how the staff is being deployed to support these projects? And additionally, given the SAF project that's on hold and you're no longer pursuing the Texas project, are there any opportunities to reduce some costs here in the near term? And how should we think about this scale if you have any of those plans?

Seifi Ghasemi, Chairman, President and CEO

The big headcount increase was in order to engineer NEOM and our Blue Hydrogen project and several other projects that we had. Those headcounts are going to come down, but they are not going to affect our bottom line because those costs were capitalized as part of the capital. So our earnings per share and so on were not affected by those increases. We did have increased costs, significant increased costs in terms of development costs while we were developing those projects. Those costs are going to come down. I am sure that you have taken a look at our SG&A line and you see that our SG&A for the quarter is less than last year's quarter and for the year it's less than last year. So the headcount that went up is going to come down. But in terms of our bottom line, we are going to continue to march toward the 8%, 9%, 10% growth on EPS as we have done in the past 10 years.

David Huang, Analyst, Deutsche Bank (on behalf of David Begleiter)

Okay.

Seifi Ghasemi, Chairman, President and CEO

At this point in time, other than NEOM, where most of the engineering is basically done, we are working on engineering on our project in Louisiana and one or two other projects in Texas and our Edmonton project. Other than that, we are not working on any other major project. As you just saw, we just cancelled any commitment or any engineering effort that we were doing on the North Texas Green Hydrogen project because it did not meet our criteria, which was that we do not make final investment decision until we have an anchor customer and until we have loaded 75% of our existing facilities. So as a result, there are not too many other projects in the pipeline. We always think about these things and so on. But we will only move on those once those criteria are met.

David Huang, Analyst, Deutsche Bank (on behalf of David Begleiter)

And then just another question on Alberta. Just to clarify, this is not included in your FY '25 guidance, and if not, when do you expect the plant to start up?

Seifi Ghasemi, Chairman, President and CEO

No significant income is included in our fiscal year 2025 income for that project.

Operator, Operator

We'll move next to John Roberts with Mizuho.

John Roberts, Analyst, Mizuho

Thanks, Seifi. I'm guessing the board has already been maintaining some level of contact with potential president candidates that could be available on short notice, especially since the departure of Dr. Serhan. Do you think the search for a President could be over before the proxy is filed for the shareholder meeting? Slide 31 suggests it could go beyond the shareholder meeting.

Seifi Ghasemi, Chairman, President and CEO

Well, at this point in time, I do not expect us to name a President until March, April or May. We have identified very highly qualified people. They are being interviewed by our board and going through the process. Choosing a President for Air Products requires the board to feel very comfortable and they need to meet the criteria that I set out — we want people who have been CEOs of public companies; people who have not been CEOs of public companies do not qualify. The process is underway. I just wanted to give you an update. We have no expectation of announcing a President before, as I said, March, April or May, depending on the availability of the people, because if these people are CEOs of current companies, they have obligations and need time to unwind their present positions. You can't just snap your fingers and have them start.

John Roberts, Analyst, Mizuho

That's all I have. Thank you.

Operator, Operator

We'll move next to Chris Parkinson with Wolfe Research.

Chris Parkinson, Analyst, Wolfe Research

Great. Thank you so much, Seifi. Regarding the Louisiana project, obviously it's fairly sizable and there's a lot of focus on both manufacturing as well as the offtake agreements in terms of redistributing potentially some of that project risk. However, one of the things that's been on my mind and I think a lot of investors has been — given the size of the facility, just the construction outlay and how to think about the various units going into that relative to the size of everything else that's been done in the United States over the last decade or decade and a half. Can you perhaps just give us a little more detail on the various stages on how we should be thinking about that development or evolution of that project and whether or not it has to be all at once or you're thinking about it in various stages, perhaps one through three? Any color there would be particularly helpful? Thank you.

Seifi Ghasemi, Chairman, President and CEO

Thank you, Chris, for your thoughtful question. The project in Louisiana — the most important part of that project was finding a place that is credible and proven that you can sequester CO2. We have achieved that. We have identified sites. We have the rights to that. We have done extensive work, spent about $75 million with seismic studies and so on to prove that it is possible to sequester CO2 in there. We have submitted all of that to the Louisiana Department of Environmental Resources for an application for a Class VI well. We have gotten feedback that our application is complete. That means that they accept that we have done all of the work and now we need to wait until they make their assessment and issue the final permit for us to construct that. That was the major risk for that project. The rest of the project is making the hydrogen — that we know how to do — it is POX units, our own technology. We have similar units in operation around the world, and therefore there is no technology risk there. And then the ammonia plant is the ammonia plant. Everybody is very familiar with ammonia plants. So we are not taking any technology risk. The CO2 sequestration is secure. Now it is the question of how fast we build this thing. We have said previously that this project we expect to come on stream sometime in 2028, depending on the timing of the permits. We feel pretty good about that. We feel pretty good about the publicly announced capital estimate, about $7 billion. Right now our task is we don't want to spend $7 billion of Air Products capital into the project. So the issue is, how do we finance this thing? Do we finance it the way we financed NEOM? Do we bring in an equity partner? Those are the things that we are evaluating. In the meantime, we are not in a hurry. We have time. We have done most of the engineering. We are going to start bringing contractors where the engineering is done so that we can get lump sum prices from the contractors. So we are executing this project in a very prudent way and trying to find the optimum way for us to finance the project. In terms of the demand for the product, we feel very good about that, because the demand is not only decarbonizing and reducing the use of coal in Asia, but another significant demand which is developing, as I mentioned in my prepared remarks, is ammonia as a direct fuel for ships. Low-carbon ammonia used as a direct fuel for ships significantly reduces emissions. It helps ships comply and it is very attractive to the people who ship their product because that helps them decarbonize their Scope 3 emissions. So we feel very good about that project. As we move forward, we'll update you about the progress on all of those fronts.

Chris Parkinson, Analyst, Wolfe Research

It's very helpful. And just a quick one here is, regarding the CapEx of NEOM, the $2 billion for downstream — you mentioned there could be a material difference between the initial expectation and the current approach. If we just took something such as the Total agreement and said, hey, that's roughly one third of the production, let's call that of the original amount, $667 million, what is the difference roughly, just purely roughly, of that implied number of the legacy thought process and what you could be looking at today? Is that like a 10% difference to refineries in Europe or is that something that could be more significant like a 30% or 40% difference in terms of how we're thinking about the offtake CapEx of the project?

Seifi Ghasemi, Chairman, President and CEO

Originally when we announced the project, we said that we would need $3.7 billion of capital. We broke it down to $1.7 billion invested in the production and $2 billion for the downstream terminals to sell it. What we are saying is that the $1.7 billion investment in the production is now $800 million, because we were able to successfully project finance this. The $2 billion for the downstream part — I cannot make a commitment exactly what that would be, whether it's half of it or 10% lower and so on — until we finalize who the offtakers are. So overall, in terms of our total commitment from before, the number has not really changed materially; the structure has changed.

Chris Parkinson, Analyst, Wolfe Research

Thank you very much, as always.

Operator, Operator

We'll move next to Mike Sison with Wells Fargo.

Mike Sison, Analyst, Wells Fargo

Hi, good morning, Seifi. Traditional hydrogen projects historically you tended to sell that out with offtakes when you sign them. Was that the case when you created the business 60 to 65 years ago? And do you think at some point for the clean hydrogen projects that demand will be big enough that when you announce a project you'll have offtakes immediately?

Seifi Ghasemi, Chairman, President and CEO

That is kind of what I was trying to allude to when I said that in the future we will not take an FID on any clean hydrogen project until we have an anchor customer. Just like our industrial gases business, when we go and sell oxygen to a steel plant, we build the air separation unit. Fifty percent of the offtake is guaranteed with a take-or-pay to the steelmaker and then the other 50% is merchant. So we are saying that in the future we are not going to announce a project without having and telling you a clear view of who will take 50%, 60% of the product on a long-term basis. That's our approach going forward.

Mike Sison, Analyst, Wells Fargo

That's great. And then just a quick follow up. When you think about your earnings growth for '25, 6% to 9%, I understand the economic environment isn't great. But if you think about longer term and you execute well on your growth strategy, '26, '27, '28, what do you think that growth rate should kick up to as your clean energy projects kick in with the growth from your core industrial gas business?

Seifi Ghasemi, Chairman, President and CEO

If we put everything together and things work out the way we expect, we think we will be able to deliver about 9% to 10% in '25 and '26, and then '27 and '28 can be significantly higher than that because these projects coming on stream with the kind of volumes that they are talking about could deliver significant growth higher than 10%. That's why I feel confident to say that for the next 10 years, considering what is going on, I think Air Products will deliver at least 10% growth in EPS as we go forward, at least.

Operator, Operator

We'll move next to Josh Spector with UBS.

Josh Spector, Analyst, UBS

Yes, hi, good morning. I wanted to ask a question on the NEOM offtake. There's just been some chatter more recently around some finer details about that contract. You highlighted take-or-pay, and you mentioned you're comfortable with the returns. I guess some of the questions have been if there's any qualifying events, be it regulatory or credits, that need to be put in place before that contract goes into effect, or whether what you have today is ironclad. Is there anything that needs to happen for that to hit your return targets?

Seifi Ghasemi, Chairman, President and CEO

That's a detailed question about the contract. We are continuing to negotiate the details, but I will turn it over to our Chief Legal Officer, Sean Major, who was instrumental in negotiating that contract, to amplify on that.

Sean Major, Executive Vice President, General Counsel and Secretary

Thank you, Seifi. We are generally comfortable with that contract. It's consistent with similar offtake agreements, and we're fully confident that it will be fully operational consistent with the terms of the agreement.

Josh Spector, Analyst, UBS

Appreciate that. And on your approach to project returns when using leverage or not using leverage: do you expect that when you employ project financing, are you targeting a higher equity return, or is that still in the framework that you would target greater than 10% unlevered? How should investors work that into a framework of what the flow through is on Air Products' equity return from investments?

Seifi Ghasemi, Chairman, President and CEO

We evaluate projects on the basis of unlevered IRR. That is our criteria. Then later on, if we are able to project finance it, hopefully the financing is less than our cost of capital and therefore the return on equity will be higher than the IRR. So we do not approve projects on the basis of leverage. It is all unlevered. If we finance it, it will improve the return on equity that Air Products has put into the project.

Operator, Operator

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

Kevin McCarthy, Analyst, Vertical Research Partners

Yes, thank you and good morning. Seifi, on Slide 29, you indicate that you would expect to return to a positive net cash flow position starting in 2027. I was wondering if you could elaborate on some of the assumptions behind that goal. For example, would it be contingent upon bringing in a partner and/or project financing in Louisiana, or could you get there on an organic basis without those actions? Perhaps there are other assumptions you might like to speak to.

Melissa Schaeffer, Chief Financial Officer

Thank you, Kevin. Our current assumption does not have project financing or equity partnership built into the assumptions. This is purely the timing of our on-streams and the ramp-up of those projects. So again, no project financing or equity partnerships built into those assumptions.

Kevin McCarthy, Analyst, Vertical Research Partners

Thank you, Seifi. Also on Slides 21 and 22, you provide some detail regarding the future growth of clean hydrogen. Some peers have talked about attenuation of timelines and uncertainties on regulatory and economic side. How does your internal view today compare with the Deloitte 2023 forecast cited on the slide? Is it better, worse, or similar given your unique insights and conversations worldwide?

Seifi Ghasemi, Chairman, President and CEO

Excellent question. We are actually more bullish than the projections on those slides. The reason is that we have actual customers engaged with real projects. Being the first mover gives us better visibility. Customers who want to commit to decarbonization are talking to us because we have real projects and real execution. We can show them NEOM; that helps convert interest into firm commitments. So we see demand growing every day as more people engage with us. That is one of the advantages of being the first mover.

Operator, Operator

We'll go next to Mike Leithead with Barclays.

Mike Leithead, Analyst, Barclays

Great, thank you. First, Melissa — you made a comment about a one-time asset sale benefit in the Americas. Did I hear that correctly? And just how much of an impact was that?

Melissa Schaeffer, Chief Financial Officer

Seifi is right. It was not material to our overall results. This was a normal cancellation of a project where we then sold the asset. Very immaterial to our overall results and something that is in the normal course of our quarter-to-quarter business.

Mike Leithead, Analyst, Barclays

Seifi, I wanted to go back to World Energy. You said your relationship there is excellent, but there was a lawsuit that became public about two weeks ago that shows Air Products is owed a good amount of money that World Energy has since defaulted on. How do we square that?

Seifi Ghasemi, Chairman, President and CEO

That is normal course of business. It's a guarantee about certain payment; it is insignificant, but it becomes public. We always protect our rights, but that doesn't mean there is a bad relationship between Air Products and World Energy. It's routine. I'll have Sean comment further.

Sean Major, Executive Vice President, General Counsel and Secretary

Thanks, Seifi. That particular piece of litigation does not involve World Energy and our relationship with World Energy continues to be very strong and robust.

Operator, Operator

We will go to Duffy Fischer with Goldman Sachs.

Duffy Fischer, Analyst, Goldman Sachs

Yes. Good morning, guys. First question is around the Asia business. Price being down — is that more an indication of what's happening generally with supply/demand being a bit out of whack? Or is that still the hangover from helium prices falling and hurting pricing overall in Asia?

Seifi Ghasemi, Chairman, President and CEO

It is a combination of both. It is supply-demand and there is some impact from helium, because of the helium coming from Russia.

Duffy Fischer, Analyst, Goldman Sachs

Okay. Thank you. And on the headcount comment you made: headcount is up about 4,000 people in the last several years. None of that headcount is really running through the P&L in the EPS that you delivered last year because the vast majority is being capitalized, correct? Or is there some percentage split between what's capitalized and what's running through the P&L?

Melissa Schaeffer, Chief Financial Officer

The vast majority is capitalized because most of the growth was in our project delivery organization. There are portions that are project development and support, which are not capitalized, but the large portion was capitalized. I also want to note we took productivity actions over the last two years, reducing headcount by almost 1,000. We are being diligent and reducing headcount where appropriate.

Operator, Operator

We'll move next to Laurence Alexander with Jefferies.

Laurence Alexander, Analyst, Jefferies

Good morning. One short-term question on merchant pricing that you're seeing in North America. What are you using for next year's outlook as to how solid pricing will be? And can you elaborate on the dynamics there? Secondly, you made a comment around being first mover and getting better contracts than you would otherwise expect. Can you give examples of contractual differences you have been able to capture that others likely wouldn't?

Seifi Ghasemi, Chairman, President and CEO

With respect to our pricing assumption for 2025, that's a forward-looking statement and we typically do not comment in detail on future pricing. Regarding contracts, being the first mover and having product availability gives us leverage. Customers need assurance that green hydrogen will be available in the volumes and timing required for regulatory compliance. If we are the only supplier with commercial-scale green hydrogen by 2030, we will be in a better position to negotiate offtake agreements than competitors who might only have hypothetical projects many years out. Permitting and project timelines are long — our NEOM project started development years ago and will come on stream in 2027 — so having real execution gives us an advantage at the negotiating table. Operator, we have time for two other questions, please.

Operator, Operator

We have one more question holding. We'll go to Sebastian Bray with Berenberg.

Sebastian Bray, Analyst, Berenberg

Hello, good morning and thank you for taking my questions. I have two please. First is on the Middle East segment. Jazan seems to be a bit light — the whole Middle East and India line was a little bit shy of consensus expectations. Is there anything at Jazan that makes that business less profitable in 2024 than in previous years, has anything shifted in the contract? Second, more philosophical: the company has scaled up significantly with many personnel across the hydrogen chain. If you hit net cash flow positive by 2027, that implies you do NEOM and Louisiana but maybe not other big projects in the meantime. How will you continue to utilize the expertise of all these people? Or will they remain focused on the two projects?

Seifi Ghasemi, Chairman, President and CEO

I'll answer the second question first. It is not a correct assumption that we are doing everything in-house. We will engage external specialists where appropriate. We are not experts in carbon sequestration; we will use firms with that expertise while we oversee the process. For engineering, we use large engineering firms. We retain the core people for key technologies and systems integration — the know-how of putting complex systems together is what we hold internally. Now I'll turn to Melissa to comment on the Middle East segment.

Melissa Schaeffer, Chief Financial Officer

Thank you, Seifi. On Middle East and India, what you're seeing is a decline in merchant demand coupled with slightly down pricing largely in the United Arab Emirates. As it relates to our Jazan joint venture, that is performing as expected. We are essentially flat year-over-year and continue to see good results in Jazan.

Sebastian Bray, Analyst, Berenberg

Thank you.

Operator, Operator

We don't have any further questions at this time. Seifi, would you like to make any closing remarks?

Seifi Ghasemi, Chairman, President and CEO

Okay. Well, thank you. At this time, I would like to thank everybody for participating in our call. I appreciate you taking time to listen to our presentation, which was a little bit longer than usual. I appreciate that, and we look forward to talking to you next quarter. In the meantime, have a great day, good health and success. Thanks, everybody.

Operator, Operator

Thank you. Ladies and gentlemen, that will conclude today's call. We thank you for your participation. You may disconnect at this time.