Earnings Call Transcript - APD Q2 2024

Operator, Operator

Good morning, and welcome to Air Products' Second Quarter Earnings Release Conference Call. Today's call is being recorded at the request of Air Products. Please note that this presentation and the comments made on behalf of Air Products are subject to copyright by Air Products and all rights are reserved. Beginning today's call is Mr. Sidd Manjeshwar, please go ahead.

Siddharth Manjeshwar, Vice President of Investor Relations

Thank you, Katie. Good morning, everyone. Welcome to Air Products' second quarter 2024 earnings results teleconference. This is Sidd Manjeshwar, Vice President of Investor Relations. 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 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 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 both on a total company and 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 with that, I'm pleased to turn the call over to Seifi.

Seifollah Ghasemi, Chairman, President and CEO

Thank you, Sidd, and good day to everyone. Thank you for taking time from your busy schedule to be on our call today. As you know, I always start with safety, which is our top priority at Air Products. Slide #3 includes our employee lost time injury rate and recordable injury rates in the first half of fiscal year 2024. Both of these rates were at their lowest levels since 2014 and the best in the industry. This is great progress, but our ultimate goal will always be 0 accidents and 0 incidents. Slide #4 outlines our management philosophy. We believe strongly in these principles, and they will continue to guide us as we move Air Products forward like we have done in the past 10 years. Now please turn to Slide #5. Our second quarter adjusted earnings per share of $2.85 exceeded the upper end of our previous guidance range and improved 4% compared to last year on strong results in the Americas and Europe. We continue to effectively manage our current business while simultaneously executing our growth projects. We are focused on reducing costs and improving pricing in this inflationary environment. Our industrial gases business and broad-scale low-carbon hydrogen projects are driving sustainability, enabling customers to decarbonize and generating a cleaner future for our world. Now please turn to Slide #6 for a review of our third quarter and full year guidance. For the third quarter of fiscal year 2024, our adjusted earnings per share guidance is $3 to $3.05. Our earnings are generally higher in the second half of our fiscal year. We are maintaining our full-year guidance of $12.20 to $12.50 per share as we continue to monitor economic uncertainties, including China's economy and activities in the electronic industry throughout Asia. We continue to expect our CapEx to be in the range of $5 billion to $5.5 billion in fiscal year 2024. Now please turn to Slide #7. Our adjusted earnings per share has improved an average of more than 10% annually since 2014, a trend we are committed to continue. Now please turn to Slide #8. We take a balanced approach to determine our dividend, considering various factors including yield, payout and peer benchmarks while investing for growth and maintaining our A/A2 credit rating. In January, we again increased our dividend to $1.77 per share per quarter, extending our record of 42 consecutive years of dividend increase. We expect to return approximately $1.6 billion to our shareholders through dividends in 2024. Slide #9 shows our EBITDA margin trend, always my favorite slide. Our margins have again climbed above 40%, leading the industry and reflecting our commitment to creating shareholder value. At this point, I would like to remind our shareholders that almost 10 years ago, on my first call as Chairman and CEO of Air Products, I promised you that we would make Air Products the safest and most profitable industrial gas company in the world, and we have delivered on that. On the same call 10 years ago, I also promised we would increase our earnings per share on average by 10% every year. And as you see on Slide 7, we have delivered on that too for the last 10 years. So today, I want to set the goal for the next 10 years. Air Products will continue to be the safest, most diverse and most profitable industrial gas company in the world and, as we have done before, deliver earnings per share growth of at least 10% per year on average for the next 10 years. We have done it before, and we will do it again. I have total confidence, and I want to stress this, I have total confidence in the ability of the talented, dedicated, motivated and committed people of Air Products to execute our bold and forward-looking strategy and deliver significant value to our shareholders. I want to thank every one of them for their hard work, commitment and dedication. I'm very proud to be part of this team. Now I would like to turn the call over to Melissa, our Chief Financial Officer, to make remarks about the second quarter. Melissa?

Melissa Schaeffer, Chief Financial Officer

Thank you, Seifi. Now please turn to Slide 10 for a review of our second quarter results. Compared to last year, on-site activities were robust driven by higher demand for hydrogen and contributions from new assets. The volume was down 2% primarily due to lower demand for merchant products. Price contributed 1%. The combined impact of pricing and lower power costs across most regions resulted in strong contribution margins. The declining natural gas prices in Europe and North America resulted in lower energy cost pass-through, which has no impact on profit but contributed to higher margins. EBITDA improved 4% as higher contribution margin and lower costs more than offset lower affiliate income. EBITDA margin exceeded 40%, with lower energy cost pass-through contributing about half of the nearly 500 basis point improvement. ROCE of 11% was relatively flat. Adjusted for cash, our ROCE would have been about 13%. Sequentially, results improved driven primarily by favorable pricing and lower costs despite the seasonal slowdown due to the Lunar New Year in Asia and planned maintenance outages. Now please turn to Slide 11 for a discussion of our earnings per share. Our second quarter GAAP earnings per share was $2.57, which included a $0.20 charge for productivity actions. Our adjusted earnings per share was $2.85, up $0.11 or 4% compared to last year, primarily due to favorable pricing and costs, partially offset by unfavorable volume and equity affiliate income. Overall, volume was down $0.07 on lower merchant demand and planned maintenance outages. Price, net of variable cost, contributed $0.16 this quarter driven by both pricing actions and lower power costs. Other costs were $0.12 favorable, demonstrating the team's commitment to managing costs, while we continue to support our growth strategy. Currency impact was a negative $0.03, mainly due to a weaker Chinese RMB. Equity affiliate income was $0.08 unfavorable, driven by lower contributions from affiliates in Europe and the Middle East, partially offset by higher income in America. We successfully issued $2.5 billion of green bonds in February to help fund our growth projects. This additional debt contributed to higher interest expense of $0.07. The remaining items, including favorable non-controlling interests, the tax rate and non-operating expense together had a positive $0.08 impact. To echo Seifi's statement, I would like to express my appreciation to the entire Air Products team for their commitment to our company. Now to begin the review of our business segment results, I'll turn the call to Dr. Serhan.

Samir Serhan, Chief Operating Officer

Thank you, Melissa. Please turn to Slide 12 for a review of our Americas segment results. Compared to last year, underlying sales were positive with price and volume together up 4%. Merchant pricing was 6% higher, which corresponded to a 3% overall price improvement for the region. Volumes grew 1% as strong demand for hydrogen more than offset weaker merchant volume. EBITDA was up 15% driven by higher price, volume and equity affiliates' income. Of the 1,000 basis point improvement to the EBITDA margin, roughly half was attributable to lower energy cost pass-through. Sequentially, EBITDA was 5% higher, mainly due to higher price and equity affiliate income. Now please turn to Slide 13 for a review of our Asia segment results. Compared to last year, volumes were roughly flat as higher on-site volumes, including new assets, were offset by lower demand for merchant products while price remained stable. As Seifi mentioned, we continue to see challenging economic conditions in China. However, we are beginning to see some potential improvement in the electronics market. Currencies were down 4% unfavorable, primarily attributable to the weaker Chinese RMB. EBITDA and EBITDA margin were unfavorable, primarily driven by business mix. Sequentially, volume was 2% lower due to the Lunar New Year slowdown. However, EBITDA was flat as a result of lower cost and higher equity affiliate income. Please turn to Slide 14 for a review of our Europe segment results. Sales declined 11% compared to last year, with lower energy cost pass-through and volume shortfall each contributing about half of the total. Weaker merchant demand and planned maintenance outage drove lower volume, partially offset by contribution from our Uzbekistan project. Merchant pricing was stable, and combined with declining power cost, it drove improved contribution margin. EBITDA was up 5% as the improved contribution margin and lower cost more than compensated for lower equity affiliate income. EBITDA margin improved over 600 basis points. Approximately half of this was due to the impact of lower energy cost pass-through. Sequentially, results were stable as favorable contribution margin and cost offset the planned maintenance volume impacts and lower equity affiliate income. Now please turn to Slide 15 for a review of our Middle East and India segment results. Despite lower sales volume, operating income improved compared to last year due to lower costs. Equity affiliate income from the Jazan joint venture was lower due to higher interest and other operating costs. Please now turn to Slide 16 for our Corporate and Other segment results. This segment includes our sale of equipment businesses as well as our centrally managed functions and corporate costs. Sales were down primarily due to lower non-LNG sale of equipment activities. However, lower costs and contribution from LNG resulted in a stable EBITDA. Our activities related to the LNG equipment and technology business are robust, and we expect our LNG-related projects to improve the results of this segment moving forward. Before I turn the call back to Seifi, I would also like to say thanks to our teams around the world. We're continuing to improve our results. Now I would like to turn the call back to Seifi to provide his closing remarks.

Seifollah Ghasemi, Chairman, President and CEO

Thank you, Dr. Serhan. Now please turn to Slide #17, Air Products has a great business model and continues to operate from a position of financial strength. While we execute our bold growth strategy in this challenging and continuously changing macroeconomic and geopolitical environment, our organization must remain flexible and agile. On a daily basis, our employees are committed to taking action that improves our safety performance, simplifies work and reduces costs, so that together we can deliver productivity to the bottom line and continue to earn the right to grow as we pursue our strategy. We appreciate the dedicated service of all the people who are contributing to Air Products' success and the leaders who are motivating and developing our people. As I always say, our real competitive advantage is the degree of motivation and commitment of the people in the company. I am honored every day to be working alongside this team as we focus on delivering near-term results while executing our long-term growth strategy. At this point, we obviously will be delighted to answer your questions. Operator, we are ready for questions.

Operator, Operator

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

John McNulty, Analyst

So I think the first one is just on how you're thinking about the cadence of the earnings as it progresses through the year. Obviously, 2Q came in pretty solidly, 3Q, maybe a little bit below what we and the Street were looking for, which kind of makes for a really steep ramp in the fourth quarter. I guess, can you help us to think about what drives that ramp, whether it's some of the projects or the Corporate line coming off, I guess, can you help us to think about the cadence for the year?

Seifollah Ghasemi, Chairman, President and CEO

John, that's a great question. To address it, our guidance for the quarter is slightly lower than anticipated due to necessary turnarounds at our plants in Europe and the United States, which are increasing our maintenance costs. This is why our guidance for the third quarter is not as high as we would have preferred. Looking ahead to the year, we do expect the fourth quarter to present challenges, but we plan to bring several smaller plants online. We've already added about 20 in the first half, and we anticipate new clients coming on board that will contribute. Additionally, we have implemented significant productivity measures that should improve our performance in the fourth quarter. As you know, our business tends to be seasonal, with the fourth quarter typically being our strongest. Lastly, our LNG business is performing exceptionally well, and we expect that to pick up in the fourth quarter as well. I hope this answers your question, John.

John McNulty, Analyst

Yes, that's very helpful. It certainly aids in bridging the gap adequately. For my second question, you mentioned cost reduction measures in your prepared remarks that are starting to positively impact margins. In your previous answer, you suggested there is some improvement in that area. Could you elaborate on the actions being taken and whether they pertain to a specific division or how we should approach this?

Seifollah Ghasemi, Chairman, President and CEO

We look at the company across the board. And by productivity we mean that we try to do things in a more efficient and more simplified way, which means that we don't have as many costs. That is the action that is normal for productivity. It just means that you are trying to do more with the same number of people you have or with fewer people. So those are the specific actions we have taken.

Operator, Operator

We'll go next to Jeff Zekauskas with JPMorgan.

Jeffrey Zekauskas, Analyst

In the Louisiana project, you'll bring on 3.5 million tons of ammonia. Some consultants think that the Japanese market is only 3 million tons of ammonia by 2030. Your competitors have begun to have a memorandum of understanding and procuring volume. When your plant comes on in 2027, is there 3.5 million tons of demand for blue ammonia? And where might it come from?

Seifollah Ghasemi, Chairman, President and CEO

That's a great question, Jeff. First of all, the figure of 3.5 million tons of ammonia assumes we will convert all the hydrogen produced at our plant into ammonia. That's not guaranteed. We have a large pipeline running across the Gulf Coast of the United States, and there is considerable demand for genuine blue hydrogen, not inferior alternatives. As a result, we anticipate that a significant portion of the hydrogen we produce will be distributed through our pipeline to meet customer needs. So, the exact distribution between ammonia and hydrogen is still to be determined. We're installing capacity for 2.8 million tons of ammonia, which is the maximum we could produce, but we might produce less depending on our hydrogen strategy. Your next question is about where the ammonia will be utilized. While many are announcing letters of intent, these often involve parties without an actual product or a clear use for it. Our blue ammonia is legitimate, capturing 95% of the CO2 produced, and we have a way to sequester it. Thus, our project is credible, and we are confident there will be demand for our product. We have consistently said that much of it will be used primarily for decarbonizing power plants in Japan and Korea. Additionally, we are seeing emerging significant demand for ammonia as a fuel for ships. Starting January 2025, every ship arriving at a European port will need to pay a tax on the carbon emissions produced since departing their original port. We believe this will create substantial interest in ammonia as a fuel for ships, and orders for ammonia-powered vessels have already been placed, with some expected to be operational by 2026. Lastly, I want to clarify that we have not stated that our Louisiana plant will be fully operational by 2028.

Jeffrey Zekauskas, Analyst

Okay. And then for my follow-up, the weakness in equity affiliates' income in Europe and in the Mid-East seemed surprising. And in the script, there was some talk of higher interest costs in the Mid-East. And it's difficult to know if that's a one-time event or if that's a sustainable event. Could you comment on that? And I think European volume was down 6% in the quarter and maybe in the previous quarter, it was up 9%. Could you touch on what caused that change?

Seifollah Ghasemi, Chairman, President and CEO

Okay. I will have Melissa respond to the first question, and Dr. Serhan will address the second question. Melissa?

Melissa Schaeffer, Chief Financial Officer

Yes. Thank you, Seifi. So Jeff, what you're seeing in equity affiliate income is a little bit of timing, but we did see a bit of a decline in our Jazan joint venture. This is really a one-time item from the previous year and some higher interest expense for this quarter. So again, it's primarily timing, not an underlying business issue and a prior year one-time issue.

Samir Serhan, Chief Operating Officer

And just following up on Jazan, I mean, again, Jazan is delivering $1.35 for earnings per share, and we expect really the project to continue to deliver this amount on an annual basis. I mean, there will be some seasonality depending on operating costs and maintenance. When it comes to the volume in Europe, the volume is lower because of the planned maintenance outage we had in the second quarter and a significant outage for our air separation units and SMR in the Rotterdam area. So that really drove the volume down and also what we highlighted before, the weaker merchant volumes in general, especially the liquids. The Uzbekistan project continued to ramp up, and that definitely helped in this area.

Operator, Operator

We'll go next to Vincent Andrews with Morgan Stanley.

Steve Byrne, Analyst

Just curious about the business mix that was unfavorable in Asia. Was that primarily helium? And can you provide an update on how that business is going in Asia? Are you adjusting to the Russian source product coming in, in your outlook in the next couple of quarters?

Seifollah Ghasemi, Chairman, President and CEO

Thank you for the question. We are adjusting to the helium business conditions in China. That situation has stabilized, and we expect it to remain stable for the rest of the year.

Steve Byrne, Analyst

And a question about the Alberta project. Are you still expecting that blue hydrogen project up there to start up sometime in late 2025? And just curious, how much of the volume of that plant would you say has now been committed? Can you provide any update on that?

Seifollah Ghasemi, Chairman, President and CEO

The answer to your first part of your question is yes. And the second part is that I would like to say that's just about all of it.

Operator, Operator

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

David Begleiter, Analyst

Seifi, on NEOM, have you signed any offtake agreements for any portion of the production from that project?

Seifollah Ghasemi, Chairman, President and CEO

David, no, we have not signed any contracts that we are in a position to announce for that project yet.

David Begleiter, Analyst

Understood. And the same question for Louisiana. Has any portion of that contract been contracted for?

Seifollah Ghasemi, Chairman, President and CEO

Not yet. And we have been very specific about this; that is not by accident, that is by design. We are not going to sign any contract for either one of these two projects until we get to the stage that we can get the price that we expect. We have taken the risk of being the first mover in this area of green and blue, and therefore, we deserve returns which are more than a plain vanilla, going and building an air separation unit. So we are going to wait until we can extract the right price.

Operator, Operator

We'll go next to Duffy Fischer with Goldman Sachs.

Patrick Fischer, Analyst

First question, just on Europe. Could you take out the Uzbek impact and just let us know what volumes did in Europe excluding that? And then what was the split of that number between your turnarounds and the weak merchant business?

Seifollah Ghasemi, Chairman, President and CEO

All right. Duffy, you know that that's a very detailed question and very sensitive competitively. But I'll turn it over to Dr. Serhan to see what he wants to disclose.

Samir Serhan, Chief Operating Officer

Yes. I would emphasize what you mentioned, Seifi. We would really not like to get into those details. I mean...

Seifollah Ghasemi, Chairman, President and CEO

Thank you. That's the right answer. Absolutely. Sorry, Duffy.

Samir Serhan, Chief Operating Officer

But we've highlighted before that the Uzbekistan project is expected to really produce around $0.35 per year of earnings.

Operator, Operator

We'll go next to Michael Leithead with Barclays.

Michael Leithead, Analyst

Great. First question for Seifi. This morning, the European Commission announced the first winning bids for their green hydrogen subsidy auction, and most of the winning bids were under $0.50 per kilo of hydrogen. Does that outcome surprise you at all? Would you have expected higher subsidy bids? Or is that roughly consistent with the bidding activity you would have expected?

Seifollah Ghasemi, Chairman, President and CEO

I am not familiar with the $0.50 figure you mentioned. It's not feasible to produce hydrogen at that price. To generate hydrogen, you need approximately 50 to 60 kilowatt hours of energy, and even if the cost of electricity is $0.05, that results in a price of about $3 per kilogram for hydrogen, not including capital and operating costs. So I'm unclear about that number and what you are referring to.

Michael Leithead, Analyst

Apologies. I was referring to the European Union's European Hydrogen Bank auction results this morning, referring to kind of the bid prices that were awarded to 7 different projects under $0.50 per kilogram of what they were awarded in terms of subsidy. But again...

Seifollah Ghasemi, Chairman, President and CEO

I'm sorry for the confusion. Now I understand your question. They are not purchasing hydrogen at that price; rather, they are providing subsidies for people to use hydrogen. Some countries are offering $0.50 per kilogram, while others are offering up to $8 per kilogram. The amount varies by country and specific circumstances. Regardless of the subsidy amount, it is beneficial as it promotes hydrogen usage. My apologies for initially thinking they were buying hydrogen at $0.50.

Michael Leithead, Analyst

No worries. Then again, it came out this morning. So I know it's a quick...

Seifollah Ghasemi, Chairman, President and CEO

Yes.

Michael Leithead, Analyst

And then second question related to Jazan, maybe for Melissa. Can you just remind us, again, you've talked about the EPS impact. But can you just remind us on the cash portion, are you receiving cash commensurate with your earnings per share? Or how should we think about the cash from the joint venture relative to the EPS impact?

Seifollah Ghasemi, Chairman, President and CEO

Melissa, you want to go ahead and answer that?

Melissa Schaeffer, Chief Financial Officer

Yes, I sure will, Seifi. So yes, we do get regular dividends from the joint venture in commensurate with the earnings. Sometimes in our cash flow statements, you will see a little bit of timing of when those distributions do occur. But yes, absolutely, we are getting the dividends as expected.

Operator, Operator

We'll go next to Marc Bianchi with TD Cowen.

Marc Bianchi, Analyst

On the earlier discussion around Louisiana, Seifi, you mentioned that there'll be a market for your blue hydrogen into the pipeline network. Investors have asked if that could cannibalize some of your existing gray hydrogen volumes. Can you talk about how we should think about that dynamic?

Seifollah Ghasemi, Chairman, President and CEO

It will eventually replace gray hydrogen because I believe that in about ten years, no one will be using gray hydrogen. However, we anticipate a rise in volumes. As you saw this quarter, our pipeline system is completely sold out, and if we had more hydrogen available today, we could sell it. Therefore, we expect significant growth beyond what is already in the pipeline. In the long term, we will focus solely on producing blue hydrogen. In about fifteen years, we will not operate any small modular reactors.

Marc Bianchi, Analyst

Okay. And Dr. Serhan made a comment in your prepared remarks about the electronics market outlook. It sounded like maybe looking a little bit better. I was hoping you could expand on that and maybe help us understand how much your earnings are being held back by that. So once the electronics market recovers, what sort of uplift in EPS should we expect?

Samir Serhan, Chief Operating Officer

Yes, we are noticing improvements in the electronics sector, but we are not incorporating any of that potential growth into our projections for the second half of the year. We are adopting a cautious approach in this aspect. However, particularly in Asia, we are seeing increased volumes from our major customers across nitrogen, argon, and helium, with helium showing significant growth.

Operator, Operator

We'll go next to Vincent Andrews with Morgan Stanley.

Vincent Andrews, Analyst

And I apologize. I fell off the call before. So if this has been asked, please move on. Seifi, I wanted to ask you, you did better in the second quarter. You were above the high end of your guidance. It seems to me that maybe that was a function of costs coming in on the power and maybe nat gas side, a little bit lower than maybe what you thought 3 months ago. So one, is that the case? And then two, just given those costs have indeed come down, whether it was more than you expected or not. But how are you thinking about that on a go-forward basis? Just because we've seen price be nicely sticky despite the deflationary environment. And obviously, many things can happen that could cause those costs to go back up. So if they do go back up, do you think you'll be able to reprice for it? Or should we just assume that there could be a little bit of a give back over the next, let's say, 12 months if we do see some reflation?

Seifollah Ghasemi, Chairman, President and CEO

Vincent, your observation about our second quarter exceeding expectations is due to the stronger volumes we have experienced in the U.S. and Europe, which was unexpected. This is certainly positive news. Additionally, we are implementing cost management strategies. In terms of pricing, the current inflation situation is notable, with the consumer price index increasing by 30% over the last four years. This significant inflation allows us to approach our customers for higher prices. As seen in the U.S., our merchant pricing increased by 6% this quarter compared to the same quarter last year. As I mentioned earlier, our focus remains on cost and pricing, as these factors directly impact our short-term performance, along with the execution of our projects. Over the last decade, we have demonstrated our ability to react to changing environments. As I previously stated, agility is crucial during these times, and that's the essence of Air Products. While we may not be the largest player, our adaptability is key. As the saying goes, dinosaurs became extinct because they were large but not agile; we strive to be the agile ones that will endure in the long term, regardless of what challenges we may face.

Operator, Operator

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

Kevin McCarthy, Analyst

Seifi, congratulations for the results that you outlined over the last decade, and it's nice to see the 10% earnings growth goal moving forward. Unfortunately, one thing that has changed over the last 15 months or so is Air Products' trading multiple of EBITDA. And so I'm wondering, to the extent that the company's hydrogen projects and investor anxiety around that issue may be weighing on the multiple, might Air Products be interested in establishing a market value for its hydrogen business through an IPO and/or a spin-off, for example? Is that something you would consider, if not today, then perhaps in 2025 or '26 when we move closer to sustaining cash flows from the various project startups?

Seifollah Ghasemi, Chairman, President and CEO

Kevin, Air Products is right now involved in not only trying to deliver short-term results that meet the expectations of our investors and our own goal of 10% per year increase and, at the same time, executing $20 billion of projects. I don't think this is the time to try to do any kind of financial engineering and all that because that would be significantly distracting to the management and to our people. We should continue doing what we are doing. And when the investor anxiety has disappeared once we have signed 20-year, 30-year contracts for the two big projects that we have underway. And once our hydrogen business, blue and green hydrogen business becomes reality and produces EBITDA and produces returns and all of that, that is the time that one can talk about those kinds of things. This is not the time. So right now, trying to put any value on the hydrogen business, it all depends on what is the assumption on the price of blue hydrogen and price of green hydrogen. And you talk to people. Some people say green hydrogen is worth $5, some people say it's $10, blue hydrogen the same thing. And obviously, we have other people, our competitors running around and saying, 'Well, there is no demand for these things anyway.' So how would you value a business like that? I would be very concerned about any effort in that direction because of the distraction that it will cause with especially the management and the team. So as they say, there is a time for everything. This is not the time for doing that kind of financial engineering on Air Products. And by the way, I did obviously read your thoughtful memo on this. Appreciate that.

Kevin McCarthy, Analyst

And I appreciate the feedback regarding timing, hence my reference to future years. But perhaps to follow-up on the logic, it sounds as though the game plan is to enter into multi-decade long-term contracts and with greater clarity on counterparties and terms, perhaps the pressure on the multiple will be alleviated, as I understand what you're saying. And so I guess a follow-up would be, what is the timeline that you have in your mind to lift the veil and put forth these sort of agreements to the Street? Is it 6 months or 24 months or some other period of time? How would you think about starting that disclosure process?

Seifollah Ghasemi, Chairman, President and CEO

This situation is quite dynamic and can change at any moment. Our goal is not to simply announce something to boost the stock value. Instead, we focus on maximizing the real value from these projects over the next 30 years. If someone expresses the need to secure a contract, whether that's in three months or 20 months, we are open to that. However, our clients won't begin operations until 2027 or 2028. I can assure investors that there is strong demand; it's important not to believe that there isn't. Air Products stands out because we are the only company with tangible products being produced, including a significant green hydrogen project in Saudi Arabia. In three years, when there’s a need for this product, our project will be ready. We have taken risks that have impacted our market value, and we believe we deserve better returns on these projects rather than fixating on short-term stock multiples. Our core business remains the most profitable with the highest margins compared to competitors. If other companies are valued at higher multiples, we believe we should be too. There is a genuine demand for the products we offer, supported by emerging regulations in Europe, California, Japan, and Korea. Although there is pressure, I am committed to creating long-term value for our shareholders rather than reacting to short-term fluctuations. I apologize for the lengthy response.

Operator, Operator

We'll go next to Patrick Cunningham with Citi.

Patrick Cunningham, Analyst

You cited major turnarounds in Europe and Americas potentially dragging on 3Q. Can you give us a sense of the volume and margin impact and what are those turnarounds there?

Seifollah Ghasemi, Chairman, President and CEO

Dr. Serhan, you want to take that?

Samir Serhan, Chief Operating Officer

You're talking about the third quarter? Yes. I mean, we have three major turnarounds basically in the Americas in the third quarter. And that's why really our maintenance expense for the quarter is pretty significant. And they're also finishing a major turnaround in Europe, which is also going to contribute to basically significant increases in our maintenance costs for the third quarter. And these are mainly for hydrogen plants.

Patrick Cunningham, Analyst

Got it. And then do you have an update on permitting and preliminary engineering for the North Texas project? And when do you anticipate FID there?

Seifollah Ghasemi, Chairman, President and CEO

I'd like to take that. We have done a significant amount of engineering on the North Texas project. But we are not going to make a commitment on FID on that project until the rules for the implementation of the IRA are finalized. There is a significant impact. And as you know, there is a significant amount of controversy about how those rules should be interpreted. Currently, the way the rules have been stated, they are fine with us. And if that was the final thing, we would commit to FID. But they are not finalized yet, and we expect those to be finalized by June, July. But we will wait. We are not going to make FID on that project until those rules of what is the definition of green hydrogen are final on the books and on which basis one can count on the tax credit.

Operator, Operator

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

Christopher Parkinson, Analyst

Great. Can you just quickly take us for a trip around the world in terms of the merchant operating rates and what you're seeing? I think those on the Street are hearing a few varying takes on what's happening with the global economy. So we'd love to hear yours.

Seifollah Ghasemi, Chairman, President and CEO

Thank you very much, Chris. In general terms, China has been weak for us in the first half. Currently, there is stock, and while we haven't seen any evidence yet, certain actions suggest that China's economy may improve in the second half. We're waiting to see that and have not factored any improvement into our forecast. Regarding Europe, there is no change compared to the last few quarters. In fact, the European economy is growing a bit better than we anticipated, as I mentioned before. The U.S. economy is also performing better than we expected. Conversely, Latin America is not significant to our business. I hope this addresses your inquiries, Chris.

Christopher Parkinson, Analyst

Sure. Just to follow up, given the various viewpoints out there, you've likely noticed that many of your competitors, including Exxon, Shell, Aramco, and Total, have presented mixed feedback regarding your initiatives. Considering the potential offtakers you have in mind for the next few years, do you believe their current statements will influence your ability to be a preferred partner for these projects? How should we view the industry dialogue compared to your own outlook?

Seifollah Ghasemi, Chairman, President and CEO

The products we plan to create for green hydrogen will cater to users in steelmaking, refineries, shipping, where green ammonia will be used as fuel for ships to meet strict European regulations, and hydrogen for mobility. These four areas are the prospective offtakers, and we are currently engaging with stakeholders in each sector. However, we have no announcements to make at this time, and any conversations we have are under confidentiality agreements, so we cannot share details. Regarding blue hydrogen, I view its application primarily as a fuel for decarbonizing power plants. Additionally, blue hydrogen is expected to play a significant role as fuel for ships and will also be part of our strategy to decarbonize refineries and chemical operations along the Gulf Coast. These are the sectors we are in discussions with.

Operator, Operator

We'll go next to Josh Spector with UBS.

Joshua Spector, Analyst

I have a couple of quick follow-up questions. Regarding the turnaround and maintenance aspects, can you quantify the estimated EPS impact for the third quarter, since you mentioned it as a bridging item for the second half? Would you say this year has seen more maintenance activities compared to a typical year? It seems like there are always turnarounds happening, but we might not have been discussing them as much as we are now.

Seifollah Ghasemi, Chairman, President and CEO

Serhan, do you want to take that?

Samir Serhan, Chief Operating Officer

Yes, our portfolio of hydrogen plants is expanding, and we need to perform major turnarounds on these units approximately every four years. This year, while I won't specify an exact figure, our expenses are at a record high, particularly in the U.S., with our assets in the Gulf Coast, California, and Canada. Maintaining our facilities involves significant costs. Additionally, this year marks our scheduled four-year turnaround for our major facilities in Rotterdam, Europe.

Joshua Spector, Analyst

Okay. Can you provide an update on helium in Asia? You mentioned earlier that it stabilized, but in the last call, you discussed lowering pricing to regain volume. Has that situation unfolded as expected? Is it stabilized at a lower level, or have you seen any recovery in volume? What’s the current status?

Seifollah Ghasemi, Chairman, President and CEO

We have lowered prices in order to stabilize the situation.

Operator, Operator

We'll go next to Laurence Alexander with Jefferies.

Laurence Alexander, Analyst

I have two quick questions. First, regarding merchant pricing in North America, is there any peculiarities in the end market mix that you're observing with pricing, or is the 6% consistent across all areas? Secondly, how much capital do you currently have invested in gray hydrogen?

Seifollah Ghasemi, Chairman, President and CEO

I would like to have Dr. Serhan answer the first question. And the second question, I'm not sure we want to disclose that in detail.

Samir Serhan, Chief Operating Officer

When it comes to the merchant sector, we are seeing consistent pricing discipline across the board, including nitrogen, oxygen, argon, and helium, despite the current inflationary environment. Additionally, I want to emphasize that hydrogen on-site in the Americas has been performing exceptionally well, which is positively impacting our volume for the year. We believe this trend will continue for an extended period due to ongoing refining activities.

Operator, Operator

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

Michael Sison, Analyst

It was a solid quarter. Regarding the fourth quarter, what level of volume growth do you need to reach your target range? I understand you've outlined several reasons why this quarter will be much stronger than previous ones. Do you have any insights on the volume growth required?

Seifollah Ghasemi, Chairman, President and CEO

We have not seen volume growth in the base business, but we do expect volume growth from new plants coming online.

Michael Sison, Analyst

Got it. Just a quick follow-up on your NEOM and Louisiana. I know you can't really tell us what price, but what return premium are you looking for to sign the offtake? Is there a way for us to look at it from that standpoint?

Seifollah Ghasemi, Chairman, President and CEO

We aim for the highest possible return. If we offer a unique product, we shouldn't settle for just a specific return. While I can't share exact figures, we are launching a product that will be in demand, and currently, no one else produces it. The price for that product isn't determined by the traditional calculations of cost and return. When there is a product that everyone needs, we can command a higher price. For instance, we all pay the gas prices at the pump. The cost of extracting oil in the Middle East is only $5 a barrel, which would suggest gas should cost around $0.25 a gallon. However, since the sellers have something essential, they can charge $80 today or perhaps $200 another day. Our pricing strategy isn't based on expected returns; instead, we focus on the market value due to the significant benefits we provide to investors. For example, if we can offer deep blue hydrogen to produce renewable diesel for the California market, that comes with a noteworthy premium. This is our perspective on pricing.

Samir Serhan, Chief Operating Officer

And if you allow me, Seifi, I just wanted to highlight, today, we already have three major on-site blue hydrogen contracts for 15-plus years with a premium for the blue product.

Seifollah Ghasemi, Chairman, President and CEO

Right. Obviously, we haven't disclosed some of that yet. But we know what is going on in the marketplace, and our goal is to get the maximum return for our investors, not to sit down. And if it was just a matter of saying, 'This is my investment and this is a 10% return and this is the price.' Then you don't need to pay somebody $15 million to be CEO of Air Products. Then anybody can do that.

John Ezekiel Roberts, Analyst

Seifi, did you say that in 15 years, Air Products will not have any SMRs running? Did you mean they won't be operating without carbon capture? Can you also discuss the average useful life left on the SMRs?

Seifollah Ghasemi, Chairman, President and CEO

Yes. I very much appreciate you bringing up the point. I should have mentioned that we will not have any SMRs running without carbon capture. That is correct. I'm glad you clarified that.

John Ezekiel Roberts, Analyst

On the lower natural gas feedstock cost for hydrogen, besides the pass-through impact on margin, I think you also get to key the benefit of efficiency improvements. And those efficiency improvements, I guess, are worth a lot less when gas is low. Is that a meaningful headwind? Or is that immaterial right now?

Seifollah Ghasemi, Chairman, President and CEO

Well, I wouldn't want to say it's meaningful, but it is a hit, and I really appreciate you picking up on that. That is exactly right. When the natural gas price is at $12 a thousand cubic feet, those bonuses are significant. Now the natural gas is $3, $2.5, the bonus has become a lot smaller.

Operator, Operator

At this time, there are no additional questions in queue. I'd like to turn the call back over to our speakers for any additional or closing remarks.

Seifollah Ghasemi, Chairman, President and CEO

Well, thank you very much. I would like to again thank everyone for joining our call today. We appreciate your interest in Air Products, and we look forward to discussing our results with you again next quarter. Please stay safe and healthy, and all the best. And thank you for your very good questions today, everybody. We really appreciate that.

Operator, Operator

Thank you. That will conclude today's call. We appreciate your participation.