Air Products and Chemicals, Inc. (NYSE:APD) Q1 2024 Earnings Call Transcript

Air Products and Chemicals, Inc. (NYSE:APD) Q1 2024 Earnings Call Transcript February 5, 2024

Air Products and Chemicals, Inc. misses on earnings expectations. Reported EPS is $2.73 EPS, expectations were $2.99. Air Products and Chemicals, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to the Air Products’ First Quarter Earnings Release Conference Call. Today’s call is being recorded at the request of Air Products. Please note that 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 sir.

Sidd Manjeshwar: Hi, thank you, Jenifer. Good morning, everyone. Welcome to Air Products’ first quarter 2024 earnings results teleconference. This is Sidd Manjeshwar, Vice President of Investor Relations and Corporate Treasurer. I’m 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 number two. 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 are referring 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.

Seifi Ghasemi: Thank you, Sidd, and good day to everyone. Thank you for taking time from your very busy schedule to be on our call today. As always, I would like to begin with the slide number three, our safety performance, which is our number one priority at Air Products. I’m very pleased to share that our employee recordable injury rate in first quarter was 78% than in 2014, and our employee lost time injury rate was at a record row, the best in the industry. Our ultimate goal will always be zero accidents and zero incidents. Now, please turn to slide number four, which summarizes our management philosophy. These principles remain fundamental to how we manage and grow our company. Now please turn to slide number five. I would like to take a few minutes to discuss the results for this quarter.

Our first quarter adjusted earnings per share of $2.82 was 7% higher than last year. Our business performed well and we are moving forward. There were several positive contributions to this result that included strong conversion margins, robust on-site activities in Americas and Europe, and higher quality affiliate income globally. Despite the year-to-year improvement that I just mentioned, our results diverged from the guidance range that we have given you due to several items that they’re not factored in our first quarter 2024 outlook. We have given you a forecast and we are delivering less than the forecast, but again I’d like to express that we are 7% higher than last year. These factors that affected our guidance are: number one, larger than anticipated volume headwinds from weak economic growth in China.

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Q&A Session

We were too optimistic about performance in China. Second one is lower helium demand in electronics especially across the world. But I would like to mention that our pricing in helium is very stable and very robust, but we have the volume was lower than we expected. There is a high — we had experience higher cost for a sale of equipment project and the impact of Argentinian currency devaluation. With this, let me talk about our revised full-year guidance range. Please turn to slide number six. We now expect full-year adjusted earnings per share to be in the range of $12.20 to $12.50, which reflects the first quarter events I just discussed. It also reflects evolving geopolitical developments and uncertainties and continued weakness in Asia and Helium volumes.

This new range is supported by expected positive volume contributions from several new onsite plans and improvement in our LNG sale of equipment business, as well as continuing cost productivity that we always pursue. For the second quarter of fiscal year 2024 our adjusted earnings per share guidance is $2.60 and $2.75. We continue to expect our CapEx to be between $5 billion and $5.5 billion in fiscal year 2024. Now please turn to slide number seven. We are proud of our adjusted earnings per share improvement since 2014 and we have delivered on a consecutive basis for the last 10-years more than 10% annual growth in our earnings. I would like to take the time to thank each and every one of our employees around the world for their hard work and dedication and commitment, which has made it possible for us to deliver these excellent results.

Now please turn to slide number eight. In addition to investing in high return projects, we believe creating shareholder value includes returning cash to our investors by paying a healthy dividend directly to them. In January, we again raised our quarterly 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 in 2024, while continuing to execute hard return industrial gas and clean hydrogen projects that support our customers in their sustainability journey, and drive the energy transition. This balanced approach to capital allocation, which allows us to meet our capital needs, while maintaining our A2 credit rating. Now please turn to slide number nine, which shows our EBITDA margin trends since 2014.

Our margins have returned to roughly 40% since the second-half of fiscal year 2023, going to 1,500 basis point improvement versus 2014. And our margins are leading industry margins and they reflect the continued strength of our business model. Now, it’s my pleasure to turn the call over to Melissa Schaeffer our Chief Financial Officer to give you a summary of our first quarter 2024 results. Melissa?

Melissa Schaeffer: Thank you, Seifi. Now please turn to slide 10 for a review of our first quarter results. As Seifi stated, our business fundamentals are strong. In comparison to last year, we continue to show underlying sales growth with both positive volume and price. Overall, price for the quarter was up despite lower energy costs across most regions. Volume improved 3% driven by strong on-site volume, including higher demand for hydrogen and contributions from new assets, but partially offset by weaker demand for helium, particularly in Asia. Declining natural gas prices in Europe and North America resulted in 11% lower energy cost pass-through for the company overall. This had no impact on profit, but contributed to higher margins.

EBITDA improved 8% as favorable volume, price net of power cost, and equity affiliate income, more than offset higher costs driven by higher plan maintenance, activities and inflation. EBITDA margin of 39.2% jumps more than 500 basis points with lower energy cost pass-through contributing to about three-fourths of this improvement. ROCE remains steady at about 12%. Adjusting for cash, our ROCE would have been about 13%. Sequentially, results were unfavorable primarily due to seasonality in the Americas and sale of equipment headwinds in our corporate segments. Now please turn to slide 11 for a discussion of our earnings per share. Our first quarter adjusted earnings was $2.82 per share up $0.18 or 7%, compared to last year due to favorable volume, pricing, and higher equity affiliate income partially offset by unfavorable costs.

Volume was $0.11 due to improvements in America and Europe, which more than offset shortfalls in Asia and the corporate segment. Price, net of variable costs, contributed $0.15 this quarter, driven by both pricing actions and lower power costs. Costs had an unfavorable impact of $0.21, driven by higher planned and maintenance costs, inflation, and our efforts support our growth strategy. Equity affiliate income was $0.18 higher due to the contribution of the second phase of the Jazan project and positive results from our unconsolidated joint ventures across most regions. The remaining items including lower tax rates, higher interest expense and other non-operating expense together had a modest negative $0.05 impact. Before I turn the call to Dr. Serhan, I would also like to thank the people of Air Products for their commitment to the company.

I am proud to be working alongside them as we continue to execute our strategy. Now to begin to review our business segment results, I’ll turn the call to Dr. Serhan.

Samir Serhan: Thank you, Melissa. Please turn to slide 12 for a review of our Americas segment results. Compared to last year price and volume together were up 5%. Hardware, merchants and price increase of 6%. This represents a 2% price improvement for the region overall. This shows contribution margin improvement. Volume grew 3% due to strong demand for hydrogen. EBITDA was up 9% driven by strong price as well as favorable volume and equity affiliate income, while partially offset by higher planned and maintenance costs. EBITDA margin was up by almost 800 basis points driven mostly by lower energy cost pass-through. Eventually, EBITDA decreased 7% mainly due to seasonality as demand moderated and maintenance activities picked up during the winter.

Now please turn to slide 13 for a review of our Asia segment results. The challenging economic conditions in China and the weak electronics market continued to put pressure on the region. Prior to last year, our volumes were flat for the region as higher on-site activity offset lower helium demand. Price jumped 1% as we continued to focus on price over volume. EBITDA and EBITDA margin were down primarily due to the unfavorable helium volumes and higher costs. Sequentially, results improved relative to the unfavorable business mix in the previous quarter. Please turn to slide 14 for a review of our Europe segment results. Volumes were up 9% benefitting from better on-site activities including the new project in Uzbekistan. Compared to last year merchant pricing remained stable relative to the decline in energy costs, contributing to margin improvement.

EBITDA was up 28%, driven by favorable volume, lower power costs and stronger currencies against the US dollar, which more than compensated for increased cost due to inflation and planned, maintenance activities. EBITDA margin was over 1,000 basis points higher about half of which was due to the impact of lower energy cost pass-through. Sequentially results improved driven by favorable price, volume and costs. Now, please turn to slide 15 for a review of our Middle East and India segment results, compared to last year sales decreased due to lower volume, EBITDA improved due to the completion of the second phase of the Jazan project in mid-January of last year. 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.

Despite higher sales from LNG activity, EBITDA declined due to higher costs in our non-LNG sale of equipment business as Seifi mentioned before. Our activities related to the LNG equipment and technology business are robust. We continue to have constructive conversations with customers, who are interested in our offerings. And we expect our LNG related projects to improve the corporate segment moving forward. At this moment, I also would like to thank our teams around the world for their effort and demonstrating their determination to overcome the challenges we are facing. Now I would like to turn the call back to Seifi to provide his closing remarks. Seifi?

Seifi Ghasemi: Thank you, Dr. Serhan. Now please turn to a slide number 17. As I always say a real competitive advantage is the commitment, dedication, and motivation of our people. I am proud to see that commitment and motivation in action every day in our company, and I’m very proud of our people. The fundamentals of our existing business are strong and we are moving forward. The short-term issues we have discussed do not change the compelling long-term prospects of Air Products. Air Products is pursuing a first mover growth strategy with our core industrial gases business as the first pillar and our blue and green hydrogen projects as the second pillar. Executing our strategy in these two pillars with sustainability underpinning, both of them, enables us to fulfill our higher purpose as a company, which is to help solve significant energy and environmental challenges in our world, that is our highest purpose.