Q2 2025 Earnings Call Transcript

[Abrupt Start] …operating margin, EBITDA, 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 financials can be found on our investor website in the relevant earnings release section. Now I'll turn the call over to Eduardo.

Thank you, Eric. Good morning, this is Eduardo Menezes. Thank you for joining us today. Please turn to Slide 3. Let me begin by sharing a few thoughts from my first three months as Air Products, CEO.

I talked with our employees, visited several sites and met with many of our largest customers and partners. I can say Air Products has a solid core industrial gas business with significant upside if we stay within our traditional business model. Decades ago, Air Products pioneered the on-site business model. Today, approximately 50% of the company sales are on-site with long-term take-or-pay contracts, the highest percentage in the industry.

Air Products has also built density in its merchant business, helping customers be more efficient and sustainable. We became the leading supplier of hydrogen, operating hydrogen pipeline networks around the world, including the world's largest at the U.S. Gulf Coast. We have also became a leading supplier of high period gases for the electronics industry.

These are clearly strengths to build upon. However, over the past few years Air Products moved away from its core business in search of growth. The company pivoted to investments in coal gasification, and then in clean energy. We deployed capital to complex higher risk projects with first of a kind technologies and more importantly without committed offtake agreements in place.

In doing so, Air Products moved away from its successful model, while significantly increasing its financial leverage and headcount to support these projects. The company grew by almost 7,000 employees since 2018, to execute the capital plan. This had a negative impact on both cost and execution quality, leading to significant project delays. All of this leads to the importance of refocusing our products on its core business and core capabilities.

Please turn to Slide 4, and let me talk about where the business stands today. You can think about Air Products business in three categories. First, we have the strong core industrial gas business. This includes the on-site projects with take-or-pay agreements, regional merchant business and a portfolio of high quality minority owned joint ventures.

The business has about $12 billion in sales and operating margin of 24%. I'm confident we can improve margins and unlock significant value through disciplined cost, productivity, pricing and operational excellence. This is the largest opportunity we have considering the $35 billion in capital we have invested in the base business. In summary, Air Products can grow strongly and profitably in traditional industrial gases.

And yes, we can also participate in clean energy opportunities as long as they align with the traditional industrial gases model where customers take the volume list. Second, we have the two large projects in Saudi Arabia and Louisiana. We believe these projects are set up to be the lowest cost producer of green and blue ammonia for several decades. To be clear, Air Products is an industrial gases company and does not intend to be a retail marketer of ammonia.

As a progress report, I can say that the Saudi Green project is progressing well. Our 4 gigawatt solar and wind power generation, will be concluded by mid-2026, and we will start commissioning electrolyzers and ammonia production after that. As you were informed before, we successfully limited our spend on this project through partnership and project financing. We expect product availability in 2027. Regarding the Louisiana project, we are actively working to derisk it, by focusing on the industrial gases portion of the project.

We announced ongoing discussions to divest the carbon sequestration and the ammonia production elements of this project. The earliest startup of this facility is 2028 or 2029, pending the derisking strategy. To make it clear, Air Products will only move forward with this project when we have firm offtake agreements for hydrogen and nitrogen. Third, we also have the underperforming projects with CapEx totaling about $5 billion.

These are first of a kind energy transition projects, with substantial cost overruns. In some instances, these underperforming projects were designed to produce additional volumes for non-contracted pipeline sales, and for the hydrogen mobility market, which is being delayed or reduced. I will provide additional comments on these underperforming projects in a few minutes. Please turn to Slide 5. Air Products will get back to basics.

First, we will return to excellence in execution in our core business. We can invest about $1.5 billion per year in core industrial gas projects going forward. Our focus will be on opportunities that meet our high return thresholds, with high quality customers and contracted take-or-pay offtake. And we will work to expand our margins through operational excellence, productivity and by rightsizing the organization, as we return to a normal level of CapEx spending.

Focused on the second column of this slide, we remain cautiously optimistic about both the green hydrogen project in Saudi Arabia and the Blue Hydrogen facility in Louisiana. In Saudi Arabia in the near term, we will focus on completing construction and selling clean ammonia FOB Saudi Arabia, until hydrogen regulations fully develop, and we will delay investment in downstream facilities in Europe, until specific regulatory frameworks are clear for each country, and we have firm customer commitments. As you all know, the previously announced agreement for green hydrogen supply in Europe, is scheduled to start in 2030. We expect clarity regarding the development of this project, no later than 2027. For Louisiana, we plan to concentrate on the hydrogen and nitrogen production, and continue discussions to derisk the carbon sequestration ammonia production activities.

There will be no new spending commitments on this project, while we pursue the derisking strategy. Lastly, we're moving forward with the underperforming projects, given our commercial obligations and project status. Though they are not expected to materially contribute to operating cost. We anticipate these projects will provide positive cash flow, which will allow us to recover on an undiscounted basis our cash investment over the life of the projects.

We have roughly $2 billion remaining to be spent on these projects from 2026 to 2028. Our goal will be to maximize profitability for commercial negotiations, operational improvements and productivity. Turn to Slide 6. We have begun the process of getting back to basics. We canceled three significant U.S. projects in February, and we are taking a more prudent approach to the Louisiana project. Additionally, we are also working to address the underperforming projects, which do not currently meet our expectations.

For the previously announced Net Zero hydrogen project in Edmonton, total cost is now expected to be $3.3 billion with on stream between late 2027 and early 2028. On the next two slides, I will detail how we will bring down both our capital expenditure and headcount in the coming years. On Slide 7, you can see that once we complete the projects in Saudi Arabia and Louisiana, as well as the underperforming projects, our capital expenditure will level at roughly $2.5 billion per year, which can sustain both our future growth and ongoing maintenance. Now please turn to Slide 8. Part of our productivity improvement will come from rightsizing our headcount to the levels we had before, we started the large wave of projects discussed in this presentation.

Air Products total headcount increased from approximately 16,000 to 23,000 employees since 2018. 1,300 reductions have already been identified and are in process. This is in addition to the approximately 500 related to the LNG divestiture. We intend to identify another 2,500 to 3,000 positions, which will be eliminated between 2026 and 2028, as we finalize the large projects with the objective of reaching an unemployment level similar to 2018 adjusted for employee growth to support new assets. Let's turn to Slide 9, and talk about our roadmap for improvement in the coming years.

For 2025, we expect our base business to deliver around $12 per share of EPS, double-digit ROCE and over 20% adjusted operating margin. We strongly believe we can do better, so we will look to maximize profitability from the base business, to drive results in the coming years. We will manage our cash flow to allow dividend increases, new projects and in time reduce our debt and buyback shares. As we improve our operating margin through productivity, and address challenges in certain projects, we expect these key operating metrics to improve despite the burden of the underperforming projects.

We anticipate that during the 2026 to 2029 period, we can achieve high single-digit adjusted EPS growth, adjusted operating margin in the high 20s, and adjusted ROCE in the low to mid-teens. We also expect our aggregated net cash flow, to improve to neutral during this period. As you can see in the far right column, once the Saudi Arabia and Louisiana projects begin contributing, we expect to unlock significant potential, achieving roughly 30% adjusted operating margin, mid to high-teens, adjusted ROCE and double-digit adjusted EPS growth by 2030, and beyond. Our objective is that at full contribution, these projects will allow us to achieve greater than 10% compounded EPS growth, versus 2025 by 2031 or 2032. The Air Products team recognizes the importance of transparent communications, with our investors.

Going forward, we will A, focus 100% on our core industrial gas business, B, be disciplined with capital and C, build a culture that prioritizes productivity and continues improvement. Finally, I would like to express my gratitude to Air Products employees, for the way they received me during the last three months, and for their support to refocus the company in our traditional business model, despite difficult changes we'll need to go through. Now I'll turn it over to Melissa, to go through our financial results. Melissa?

Thank you, Eduardo, and good morning everyone. As a reminder on this call, we will be speaking about our adjusted non-GAAP financial measures. Before we do, I want to take a moment to acknowledge the $2.3 billion after tax charge taken in the second quarter. This charge included the project cancellation we previously announced, cost reduction measures and executive separation costs.

We will now turn to Slide number 11, to review our financial results. Our second quarter adjusted earnings per share of $2.69, or below our previous guidance of $2.75 to $2.85 primarily due to changes in cost estimate on a sale of equipment project in the U.S. and lower than forecasted helium contribution. Compared to last year, sales volume was down 3%, with 2% driven by the LNG business divestment, while weaker merchant primarily helium was largely offset by favorable on-site volumes across the region. Total company price was up 1%, which equates to a 3% improvement for the merchant business, driven by continued non-helium pricing strength in the Americas and Europe.

Adjusted operating income decreased 9%, mainly due to the LNG divestiture and unfavorable helium impact. Additionally, we saw higher costs from driven by Americas maintenance and fixed cost inflation, which was partially offset by strong productivity actions across the company. Operating margin was down 210 basis points, with approximately 100 basis points driven by higher energy pass through. Now please turn to the Slide number 12, for the details of the second quarter earnings per share.

Second quarter adjusted earnings per share of $2.69, decreased $0.16 from prior year. The divestment of the LNG business accounted for $0.12 of headwind and currency was unbearable $0.04. Our base, which includes volume, price and cost was down $0.07. Other than LNG, volume was relatively flat, as a lower helium was largely offset by favorable on-site volumes. Price was positive $0.04 driven by improvements in the Americas and Europe. Costs were $0.11 unfavorable, primarily due to fixed cost inflation and higher maintenance in Americas, partially offset by favorable cost productivity across the company.

Equity affiliate income was better in Europe, but partially offset by lower contribution in America. Now please turn to Slide number 13, I would like to provide an update on our FY '25 full year guidance. Since our last earnings call, we have canceled several large projects and observed volatility in the macroeconomic conditions. As we look at the guidance year-on-year, the divestiture of LNG will continue to drive a 4% decrease relative to the prior year.

The large project cancellation will be a 3% headwind, resulting from lower operating income and reduced capitalized interest. We anticipate base business growth of 2% to 5% for the year, despite the 5% headwind in helium, resulting in a fiscal 2025 full year adjusted earnings per share, to be in the range of $11.85 to $12.15. Please note the potential economic impact of global tariffs, is not in our guidance. While the industrial gas business is primarily a local business and very resilient, it is difficult to determine at this time, if there will be broader macroeconomic impacts from tariffs, or events that may impact our customers.

We expect our third quarter adjusted earnings per share be in the range of $2.90 to $3, and our full year capital expenditure to be approximately $5 million. We've included additional details on the segment results in the Appendix section. Now we'll open up the call for questions. Operator?

Thank you. [Operator Instructions] Our first question is going to come from John McNulty from BMO Capital Markets.

Yes, good morning and thanks for taking my question and welcome to Air Products. So I had a question for you on the underperforming projects where you highlighted that there's no operating income contribution. I guess maybe a couple of things on that. First, how should we think about the EBITDA contribution just because, obviously, early on, there's going to be a lot of D&A just given the size and scale of these projects.

And then I guess, also tied to that, the Alberta project looks like it's ballooned up almost three times what I think the original plan was. I guess, can you help us to understand what's going on there, and what looks to be a reasonable delay in that project as well? Thanks very much.

Thank you John, for the question. Yes, let's start with the contribution from the projects in terms of EBITDA. As we're saying here, we expect to basically recover our capital on an undiscounted basis, which means that we expect to be able to get on average our depreciation for this project. So of course, this is not what we expect to have, but that's what the situation is.

Considering the tremendous increase that we have in capital, which is part of your second question. So regarding Alberta, I would say that of course, we had some self-inflicted issues. And when you have that in a construction environment that is, so unforgivable as Alberta, you pay a steep price. So when you have a project that gets out of sequence, and you start losing windows in terms of weather, and how to execute the project.

And then you have very low productivity from contractors that, are very expensive to start with. So you get on this spiral and then the project gets delayed, we have capitalized interest, in which case, in the case of Air Products is included in the cost of these projects. So what happened here, basically, this didn't happen in the last 90 days, as you can imagine. At the end of last year, the company basically understood that we had a problem.

We hired a third-party to look at the project to give us some opinions about, how we're doing on that. And as a result of that and some of the reviews that I was able to do here, we basically took some actions on replacing project management teams, replace contractors. And then we resequenced the job and that resulted on this estimate for cost, and schedule that we are presenting today. Again, of course, this is not exactly what we would like to have, but we have a commitment to be transparent with the shareholders, and this is where we are today.

Got it. Okay. Thanks for the color on that. And then maybe just a follow-up.

In your introductory remarks, you spoke about some of the past strategic decisions, including the pivot to gasification. You've got - it seems like $0.40 to $0.50 worth of big gasification projects out there in terms of EPS contribution. I guess can you speak to your comfort with those projects? Are they delivering kind of as you would expect if you were starting from scratch.

And I guess can you speak to the resiliency that you would expect from those if we have some sort of a downturn, especially given some of the issues going on between the U.S. and China?

Yes. Yes, it's another tough subject. We have three gasification projects in China where we operate the coal gasifiers and the reality is, if you look at our numbers from '23 and '24, the EPS contribution, the combined EPS contribution of these three projects was close to zero. So it's not exactly the $0.40 you you're mentioning here, before you ask, I know there were a lot of discussions about the Lu'an project when that started.

The Lu'an project is probably the best of the 3 projects we have there. The main issues we have on the other two projects. So we have our team working on that, trying to understand how we can optimize these assets, but if you look historically on the performance of the Asian segment for Air Products, you see some deterioration coming from the last few years. And I would say that most of this deterioration came from these gasification projects.

And in terms of the tensions between China and the U.S. At this point, we don't see a lot in the ground. Our business is really a local business. I think it's understood locally, by the government and the customers as a local business.

And again, these other two projects that we have, that we have more problems there. They are not government entities. They are private-owned companies that make methanol, or ammonia from syngas from coal gasification?

Got it. Okay. Thanks for the color on that.

Our next question comes from Steve Byrne from Bank of America.

Yes. Thank you. In your remarks, Eduardo about descoping in Louisiana, I was just wondering if 1 potential scenario would be to just focus on hydrogen. You mentioned you have the largest pipeline network in the Gulf Coast. Why pursue ammonia at all, drop the ammonia reactor, drop the deepwater port and just focus on hydrogen and reduce the CapEx. Is that a scenario that you would consider?

That's exactly the scenario we are trying to explain. We're talking about not only having someone else executing the ammonia loop, and only in the ammonia loop, but also another company or the same company taking care of the CO2 sequestration, which is not a core business for us. So the objective, Steve, from the total cost of this project, let's say, it's $8 billion with the full scope. Our objective is to bring the total CapEx down to a range of $5 billion to $6 billion with a firm offtake agreement, for the hydrogen in nitrogen.

That's the objective we have given ourselves until the end of the year, to work on these options. And I'm relatively optimistic on that. I think we have a good location. We have probably the best CO2 part of the space in the region.

So I think, we have the right components and our total CapEx, is in line or even a little better than other products that were announced in the region, when you adjust for the size of the project.

Okay. Thank you for that. With a question about NEOM is $600 a ton, a reasonable estimate for the green ammonia that you will be taking possession, from the joint venture? And curious to hear your view on the value proposition, to potential customers at $600 a ton?

Yes. As you can imagine, we cannot talk about specific numbers on our agreements. I can tell you that from the outside, I was very concerned with this project, because we have this long-term take-or-pay commitment to buy the entire production of ammonia. I have seen several reports from sell-side analysts with estimates of the price.

I can tell you that I was positively surprised with the numbers that I found and they are in the lower part of the range, of the estimates that I've seen before. I would say that in addition to that, the one positive point for our NEOM project is that since we own the power generation, in both solar and wind, and there is no other variable cost, our price that we're going to have from the joint venture, is going to be basically fixed for the life of the - we have a small adjustment for O&M, but that would be it. So I think in the long-term, it's a very favorable outlook for us in the market. In the short-term, '27 to basically 2030 until the regulations in Europe, are more well developed.

We're going to have a little less contribution, but I'm relatively optimistic that the project will contribute to us starting in - when we start up the plant in 2027.

Very good. Thank you.

Thank you.

Our next question is going to come from David Begleiter from Deutsche Bank. Please go ahead.

Thank you. Good morning. Eduardo, first on the headcount reduction, what's the initial savings from the first tranche of roughly 1,800 people being let go? And what's the cadence of those savings?

We started this process before. So even in '23, '24. So I'll let Melissa explain the numbers, but we are very advanced on the '23, '24, and I think we are already close to 50% or more than that on the new reductions of 800 people. Melissa, do you have additional comments on that.

Sure. Yes. Thank you, Eduardo. So since FY '23, we've taken actions on around 2,400 individuals.

That's about 10% of the organization. This will largely be complete the FY '23 and '24 actions by the end of this fiscal year, and we'll see the FY '25 actions continue through FY '26. We should see about $25 million in savings for this fiscal year associated to the '25 actions, and the remaining will be seen in '26. We're looking for a run rate of around $100 million for the FY '25 actions.

Thank you. Just on Alberta, again, in six months' time, the project has basically doubled in cost and been pushed out by two years. So when - I'm not clear when the company became aware of this? And what's been reaction of your customer to this delay?

Yes. I hope you understand that. I'm here for 90 days, and I cannot give you that information precisely. It's something that we're probably going to need to take a look, and I can make some comments in private to you, but it's definitely not something that I can comment here.

Understood, thank you.

Our next question comes from Jeff Zekauskas from JPMorgan.

Thanks very much. Can you talk about what the point of the remaining Louisiana project is for Air Products? That is how much hydrogen you need, and why you need it, and why you want to go forward with that part of the project?

Yes, Jeff, if I understand your question, the total project, if you go back and look at the numbers, if I'm not wrong, it's something like 750 million cubic feet a day of hydrogen and as you know, we announced two ammonia trains. And so the ammonia production is taking about 75% to 80% of the - or maybe more than 80% to 85% of the total hydrogen production. So the balance that we have is really the equivalent of one SMR, right, on what size SMR so that's where we have today in the scope. And as you know, the size of our - I'm sorry, as you know, the size of our system, this is relatively a small part of our total production in the Gulf Coast, and we believe we can absorb that in our normal business.

Thank you for that. And for Melissa, if the cost savings from the employee reductions are something like $100 million going forward. Does that mean that these employees or the cost of these employees were mainly capitalized? And so the income statement effects of getting to a more normal employee level are smaller?

Yes. Great question, Jeff. So the amount that I'm giving you the $100 million associated to the FY '25 program, that's a P&L impact. So there are, in fact, engineers that are capitalized on top of that $100 million of savings. Around $40 million from an engineering resources impact that you don't see slow down to the bottom line. But obviously, we'll have a reduction in the capital cost.

Okay, great. Thank you so much.

Our next question comes from Patrick Cunningham from Citi.

Hi, good morning and welcome. Eduardo. For NEOM, you're now delaying the downstream investment until you get regulatory clarity - what does that mean for the agreement with Total? And who are the logical customers for that green ammonia and just your general view on the relative premium you would get paid there?

Yes. Our agreement for green hydrogen in Europe, the agreement that we announced a few months ago, and they were making reference to is really for 2030, right? And the agreement, as you know, the customer has several refineries across Europe. And as part of the agreement, what we are basically doing today is engineering work and permitting work and trying to wait to see how each country will transpose the EU regulations.

So together, we can decide which refinery would make more sense for us to supply the green hydrogen. So this is the work we're going to be doing between now and 2027, I would say. And by 2027, we hope to have a definition, we'll be able to understand exactly, the regulations and what makes sense for both Air Products and the customer in terms of installing this hydrogen, this ammonia associates for hydrogen production. In terms of what we do starting 2027, it's part of what I have been working on.

We hope to be able to announce firm plans on how we're going to commercialize this ammonia. Again, FOB, Saudi Arabia, we don't intend to be long-term marketers of ammonia to be in the ammonia business. So we're looking - working with potential partners, and I hope to be able to have something firm that I can share with you all, by the end of 2026. I'm sorry, by the end of 2025.

Understood. Very helpful. And I'm curious as you go and meet with leaders in the different countries. What's your sense for the opportunity on productivity and price optimization for the core business? How meaningful will those levers be? And where do you see the biggest opportunities on price?

Yes. I would say that coming from the outside, going back in time, I tell people that I used to come - town 20, 25 years ago to work in projects and talking to business development people to engineering people. And hopefully, they were not very different from what I was used with. So I wasn't expecting very different cultures, when I came here.

I don't know exactly what to expect on the operating side of the day-to-day. But I'm pleasantly surprised. I think the local business performs well. I think they have a lot of attention to the detail.

They have been working very hard on price, and productivity for the last few years. It doesn't mean it's perfect. There is always an opportunity. You see that we talk about our base business today, running at 24% operating profit margin.

And by the way, you won't see any reference to EBITDA in any of our presentations going forward. So we're going to look at really the operating profit from our regions, keep the equity affiliates outside of that, although we have a fantastic business on some of these joint ventures, but we're going to focus on our business. And I don't think there is any reason for us, to not have the same level of performance of the best-in-class players here. So we're going to work on that.

I believe there is an opportunity for us to raise our operating margins to the level of 30%, as we have in the roadmap slide. And it's basically blocking and tackling and reviewing every business, paying attention on every detail, and I think the business already had that DNA, and I'm just trying to expedite that and make sure that everyone behaves, like a business owner and they own their own P&Ls, and we can accomplish this increase in operating profit margin. Any other questions?

And our next question is coming from Mike Leithead from Barclays.

Great. Thanks. Good morning. First question, I was hoping you could provide a bit more color on how the team works through deciding which projects should be canceled versus which projects were deemed underperforming yet you go forward, such as why the green hydrogen project in Arizona moves forward versus, say, the green hydrogen project in New York does not?

Yes. It's just a cash flow decision. So you have two factors, right? One, any commercial commitments that you have with customers.

We take that very seriously. So we need to finish any contractual commitment that we have and then if you have the freedom of making a decision like that, then you just look at your cash flow, look at what you need to spend to finish the project from where you are. And what the cash flow will be after the discount cash flow will be, after you start the plant. So in the case of Arizona, we are basically 90% done or 95% of the CapEx was already spent, or committed.

So it was not - the best thing for the shareholders was to finish the project and get whatever cash flow will get out of this project, right? In the case of Masina in New York, we were in the beginning of the project, we still had to spend another $400 million to finish. And based on the perspectives that you have for the mobility market, it didn't make sense for us to continue on a cash basis.

Great. That's super helpful. And then second, I just was hoping you could talk more about the cash flow progression you expect over the next 1 to 2 years. I guess when you talk about net cash flow, is that after funding the dividend? And how do you think about when is appropriate to begin share repurchases as you've alluded to in the slides?

Yes. I think we are talking about being neutral, including everything, but I'll let Melissa give you more details. Go ahead, Melissa.

Sure. Thanks, Eduardo. So when we look at cash flow positive, we believe we can be cash flow positive as early as next year. This obviously is, of course, dependent on our WIP curves for the execution of our projects, and several other factors.

But as of right now, we are projecting to be cash flow positive next year. Additionally, we are forecasting to be net cash flow positive through 2028 and then acceleratingly significant positive thereafter. When I think about share repurchase obviously, I take into consideration a number of things. We need to think about and assess our balance sheet.

We need to delever as we decrease our capital spend. But of course, part of that plan as our balance sheet does get into a position to do so and economically, we can, we will then put in our share buyback program at that point in time.

Great, thank you.

And our next question comes from Duffy Fischer from Goldman Sachs.

Yes. Good morning. Helium for you guys has been a pretty volatile earnings contributor over the last five years, kind of ran up post the war and then rolled off hard. And it as kind of like a commodity on supply/demand to some degree.

So can you help size the earnings contribution from helium today? And basically, how you see that contribution progressing kind of out through your '26 to '29 period?

Yes, Duffy, it's - helium is a different product. As you know, we have suppliers and customers and it's a more cyclical business, and it became even more cyclical with the - when the BLM basically ended the program, and they were basically the balance of the volume and that went away. Air Products, we took measures to protect ourselves. So we have this big cabin that we commissioned in Texas, and we use that to basically absorb the cyclicality volumes, right?

We don't have hidden as a segment in our numbers. So I have a very difficult time to give you more specific numbers on that. But I can tell you that compared to the year's pre-COVID, when we had the market shortage and the prices went up. I think the team at Air Products did a good - very good job pushing taking advantage of that.

They really increased the operating profit very significantly. And now that the market is long, because of all the Russian project - product that you see coming in Asia, we have been managing that, using our cabin. And although the numbers year-over-year, they are negative for us, as Melissa said, was a very significant impact. And as you know, Air Products is a very large - much larger percentage of their sales given than their larger competitors.

But today, our operating income from helium, is still significantly higher than it was in the years pre-COVID. So it went up very significantly. It's coming down, but it's still better than, let's say, the period between '15 and '18. We expect that for '26 and '27 that we'll continue to see some headwinds in price. We have more volume because of our cabin.

So we expect to manage that and reduce these headwinds as much as we can. But other than this information that Melissa was able to provide for this year, I'm afraid that we cannot disclose more than that.

Fair enough. And then I just wanted to go back, if I could to NEOM just to understand - so in the early years before you have the offtake agreement, let's say, in 2030 and hopefully some other committed by then, when you're selling just the ammonia. Your assumption is that your offtake price for the product will be meaningfully lower than what you'll be able to sell it at. So you'll be able to generate significant free positive cash flow and EBITDA from the asset or from the offtake agreement?

Yes. I don't know your definition of meaningfully, but it will be -- our forecast is that we'll be able, starting 2027 to be positive and to increase that number as the years go by. We were trying to be cautious here on what we can do. We are still negotiating a lot of these offtake agreements.

And - but our expectation is that we're going to be, let's say, we're going to be starting to be slightly positive in 2017 and increase from there. Again, we need to do that because as you can imagine, if we have a very favorable price for the ammonia as I explained, it means that the joint venture doesn't have a very high return. So we need to get some margin to basically remunerate our shareholders, for the investment that we made at the joint venture.

Terrific. Thank you guys.

Thank you.

And our next question is going to come from Josh Spector at UBS. Please go ahead.

Yes, hi good morning. First, a quick follow-up for Melissa. Just in answer to Mike's comments around free cash flow. Can you just confirm your '26 comments? Is that positive free cash flow after the dividend or before the dividend?

So that's positive free cash flow after the dividend.

Perfect. Thanks. And then for Eduardo, I wanted to ask around your general approach to guidance here. So obviously, Air Products versus peers has had a bit of a different approach in terms of what macro assumptions are baked in.

So as you look at what's here for 2025, the next couple of quarters, what's your assumptions baked in on a macro perspective and then more medium term, when you say high single-digit EPS growth, how much of that, again, Air Products and your control cost savings, et cetera, projects versus macro assumptions? Thanks.

Well, I would say that we expect not a lot of help going forward from the economy for the next two quarters. The currency, we expect to be about where we are today. The tariff issue, as Melissa said, is a little bit complicated now. We don't have a lot of trade in our day-to-day business.

The main issue here is on the capital side. And as you can imagine, for our projects, when we don't buy things off the shelf. We basically have to order equipment and modules and that kind of stuff. And they normally take six months to 18 months, to be manufactured by our suppliers.

And I have to say that it's a very difficult environment to predict right now, considering that you only pay the tariffs once you -- the equipment is imported. So we are having - as everyone else, a little difficult trying to forecast what you do in our projects, and going back to our customers that we are in active negotiations, and presenting alternatives and trying to share the risk somehow. But this is affecting much more our projects, our business development and our day-to-day business.

Okay. Thank you.

[Operator Instructions] Our next question is going to come from Mike Harrison from Seaport Research Partners. Please go ahead.

Hi, good morning. Eduardo, you talked about growth CapEx of $1.5 billion a year on the core industrial gas business. I'm just curious, is that kind of just a placeholder, and the actual spend is going to depend on the number of available projects that, you guys find to meet return metrics. Maybe if you could talk just a little bit more about your approach to determining, what projects you're going to pursue and what you'll pass on?

Yes, of course. It's just an estimate based on what we have been doing, for the last few years. And the $1.5 billion, is more like what we envision for 2029, 2030. So if you look at this slide, you're going to see that for the next few years, we're going to have a little less than that. That's our expectation.

But again, two things we need to have first. We need to be able to fit that in our capital allocation principle, which is being net cash neutral, including dividends, as Melissa said, from '26 to '28. And secondly, they need to satisfy our return expectations, right? I worked in this business for a long time, and I can tell you that the most difficult thing when you talk about new projects to say no, right? It's very easy to say yes, but you have to basically raise the - to be very firm about your hurdle rates, about the returns and expectations.

And if you - the project can deliver that, that's great. If the project cannot deliver that after you stress all the assumptions then you need to pass. And that will be the philosophy.

All right. Thank you for that. And then just related to the uncertainty around tariffs, a lot of companies that we talk to are saying that they're seeing some slowing in manufacturing activity and pauses in decision-making. I'm just curious, your merchant [indiscernible] business probably gives you some pretty real-timeline of sight into what's going on with your manufacturing customers.

Can you talk a little bit about what you've been seeing in the March and April time frame across your three key regions, from a merchant demand perspective? Thank you.

Thank you, Mike. Yes, I'm asking the same question. It's been a little difficult to get a good answer on that. In fact, I think we had like a slight uptick in manufacturing before the tariffs came online because people are trying to create inventory or something else.

And now I expect that to be a little negative. Really, the countries that we are more concerned that are being more affected are U.S. and China. And at this point, it's very hard for me to give you a good estimate of what's going on there.

And our next question is going to come from Chris Parkinson from Wolfe Research. Please go ahead.

Thank you so much. Just want to turn back to your commentary about Alberta and Rotterdam, understanding some of the commentary on the underperformance and the cost overruns. But - is this - given you still have some decent customers associated with those projects, is this commentary about those specific projects and how they were managed? Or is it more of a larger indictment on your view of blue hydrogen and how that fits into your intermediate to long-term strategy?

Thank you.

No, I would say that our contracts and our customers, they have been as expected. As I said quickly during the remarks, some of these projects, they even have -- they had some additional volume that we need to place with other customers. We still believe we can do that. That's been positive.

We have some other projects like in Alberta that we have a liquid hydrogen plant associated with the project that, was supposed to produce liquid hydrogen for the local market, for the mobility local market. That part of the project on the, liquefy is basically done. And so we're going to go ahead with that because it's going to be there, but we expect a very slow development on that. So the overall, let's say, underperformance of the projects related to our expected financials, are basically related to the overrun in CapEx, and to some additional volumes for the mobility market.

Everything else, I think it's - we expect to perform as expected in the project.

Got it. And just a quick - to dive into a little bit more details on your comment about 2026 free cash flow post the dividend you both just mentioned this, but just really hit the nail me on this, what further assumptions would we need to make in terms of like cash flow conversion of what's specifically in your control to reach those levels and I apologize I kind of just got like 10 questions on it. So I just want to be absolutely certain that we have this correct?

Yes. At the end of the day, you look at our projects, our CapEx and our cash generation. it's all about how much money we're going to spend in Louisiana, right? So it's all about what -- how we're going to be able to derisk that project and manage that cash flow for that project in '26, '27 and maybe a little bit of '28 to make sure that we are cash neutral on this period. So that's the main point.

So we're going to solve the equation to be cash neutral. We're not going to increase our debt. That's our spirit here and the level that we have is really the spending in the Louisiana project.

Thank you very much.

Our next question is going to come from Kevin McCarthy, Vertical Research Partners. Please go ahead.

Thank you and good morning. Eduardo, coming back to your blue hydrogen project in Louisiana, just wondering if you can provide an update on your business discussions for that project. For example, irrespective of the scope changes that you talked about, I think Air Products is pursuing partnerships for sequestration and also, as I understood, financial partners with an eye toward project financing. So how are those discussions going?

And with regard to the new timeline of late '28 or possibly 2029, what is the rate-limiting step? Is it no longer receipt of the Class VI permit and it's shifted to the business side, sorting out some of the scope and financial issues that you outlined?

No, there is no issues with the permits. I think we are basically complete on the permit for the Class VI well. The issue really is how we progress in our discussions, both for the CO2 sequestration and the ammonia group. And how long it will take.

Again, we're giving ourselves until the end of this year to get this concluded. And the final schedule will depend on how fast we can close these deals. In terms of project financing for the remaining scope of the project, which is the hydrogen and nitrogen plant is something that we may consider, but it's not even practical to start talking about that, before we can have the project completely delineated and we have partners, for the ammonia and in the CO2. So to make it clear, I'm not a big fan of project financing. I think it's expensive.

I think it's something that we should do only in cases where we have joint ventures or other cases. But it has - for very large products like this one, like NEOM, it has some merit. And in the case of NEOM, frankly, it even helped us to keep the project very well contained in the box. So we do not have the same issues that we have in other places in terms of overruns and so forth.

And I think part of that is a discipline that came with the project finance. So we're going to look for that. We may look for that depending on our cash flow and depending on the offers that we have. But that's not the priority right now, the priority are the CO2 and the ammonia loop.

I appreciate that. And then secondly, thank you for the updated comments on your infrastructure build-out in Europe. Just wanted to clarify what the status of that build-out is in the U.K., Netherlands and Germany. At one point, Air Products was talking about $2 billion for various import terminals in those countries.

Can you comment on how much capital has been sunk and how much you're avoiding and what you would need to see to resume?

I would say that we're basically pausing all activity there. We're just doing the permitting and a little bit of engineering on all these places until we understand exactly what the regulations will be for each country. So we have some costs that - was some money that we spend that I think it's part of the overall charge that Melissa took, but it's not very significant compared to this $2 billion. And again, we are not going to spend anywhere close to this money going forward.

I can tell you right now, when and/or where we're going to spend this money until we get clarity from the regulations from each country there.

Understood, thank you so much.

And our next question is going to come from Laurence Alexander from Jefferies.

Good morning. Just to come back to the merchant and so the non-on-site businesses. Can you just characterize what return hurdles you're using and how they compare to what has been used by Air Products over the last, I don't know, 10, 15 years. Have you significantly changed in any way the return hurdle metric?

And secondly, within the footprint, how much of the region-by-region, and I mean, within like the local operations, how much of the footprint is actually in highly concentrated markets? And how much is in markets where you wish there was a - you need a significant increase in density, either by yourself or competitors to improve return on capital on a regional basis?

Let me try to answer. I don't know if I understood the question completely, but the merchant business for us, most of our merchant business comes from big back from large on-site plants. So basically, they are included on the calculations that we have for return on our projects. We - the hurdle rate is something that we don't talk publicly.

I think it's fair to say it's double-digits and on top of that. And that the - any additional risk that we have, country risk, customer risk, regulatory risk, we need to add on top of our standard hurdle rate that we use for, let's say, the U.S. So that's all I can say on that. In terms of density, our business, I think it's -- we have good presence in most of the geographies where we participate.

We don't participate in a lot of geographies. So if you go, for example, in Asia. You're going to see that 90% of our business is in three countries, in China, Korea and Taiwan. And the business in U.S. and in Europe, we have two very large competitors that are based there, so it's a little more complicated.

But where we operate, we have good density. And I don't think we have any -- we're always going to have a place here and there that would like to have more, but it's not a main issue for us today.

Thank you.

Our next call comes from Laurent Favre from BNP.

Yes. Good morning. You mentioned when you talked about the margin improvement, headcount reduction. I was wondering if you could talk a little bit more about what you're going to do with the organization, incentivization as well as management structure, et cetera. So for instance, are you keeping the 12% Board - management Board that was announced last summer? Thank you.

Thank you. Yes, I know in Europe, the term management Board has a very different meaning than it has in America. I was surprised with that as well. It doesn't have a legal meaning that it has in Europe, I need to think a little bit about that, how we call that in the organization and to avoid complications in people - especially people in Europe looking at this and thinking it's like a management board in Europe, which is not.

So overall, I have to say that the message that we have here is not an easy message for our employees. I think our people are smart people. They understand that if today, we are spending $4 billion in capital above the maintenance capital in the projects, and we're going to go down to 1% to 1.5%. Of course, we're going to need to reduce and -- but I think that, in general, the employees that I talked to in Air Products that have 20, 30 years in the company, they understand that we are in a rough patch here.

And they, in general, support the measures and they understand that we need to do some of these movements, in order to have the company to bring back the strength of the company, and avoid even further cuts in the future. So overall, I think I expect that to be well understood by the employees. And in terms of the management of the company, I'm still working with the regional group that we have here. Of course, we're going to have changes here, and there like you have in any business, but there is no drastic changes or no big restructures to announce.

Thank you. And on the capital allocation side, apart from the descoping, which I assume you hope to get some proceeds for -- are you considering any disposal or certain business lines or certain countries?

You're talking about divesting of countries and operations?

Yes.

Yes, no, the short answer would be no. I would say that we are industrial gas company, we are an industrial gas business. And whenever there is a business we're going to try to be there. That doesn't mean that if you have a very small position in some geographies that, doesn't make a lot of sense for you to be there that, you're not going to consider that.

But nothing major, nothing that like I've seen some considerations before in for our products in the press like South Korean things like that. We're definitely not going to - any of these positions in Air Products.

All right, thank you.

Thank you.

Our next question comes from Mike Sison from Wells Fargo.

Hi, good morning Eduardo, one quick question. On the $5 billion underperforming assets. Air Products used to talk about generating roughly 15% on every dollar spent for EBITDA and about 10% on every dollar for EBIT, implying that depreciation is around 5%. Is that what your - you think the $5 billion, would generate around a 5% or mid-single-digit return.

And then, if that formula is may be different than what you think. What do you think the return should be on every capital that Air Product spends on future projects? Thank you.

Okay. Yes. I understand the math. I think it's a very simplified version, 5% means that you are depreciating 20 years.

In some cases, we do. In some cases, we do shorter than that. We think we have an accounting obligation to depreciate according to the life of the agreement. So it will be what it will be in each case.

And again, it's one of these when we compete for these projects. It's really a tough fight, and it's about the CapEx that you have, the efficiency that you have in your plants, the O&M cost, and it's about your expected IRR. So obviously, we try to avoid make comments about that publicly. We were not going to be in the range of ROC that we want to be if every project comes at, let's say, 10% IRR.

So we need projects to come higher than that. But that's all I can say at this point. We will not talk about publicly, what our hurdle rates are, because that's a sensitive information from a competitive point of view.

Thank you.

We will now take our last question from John Roberts from Mizuho. Please go ahead.

Thank you and welcome as well. Do you expect any material recovery on what's already been spent in Louisiana, for CCS and ammonia? And would that recovery likely be rolled into a favorable contract for CCS or a hydrogen offtake agreement?

Again, we are negotiating that. We cannot make a lot of comments on that. I think, of course, in the ammonia side that makes all the sense in the world. In the CO2 side, there are some other options that we may look at.

But certainly, the sites that we have and the work we've done in the CO2 side, it has value, and it can be monetized within this project, or as a standalone operation. So I think that's our goal in both cases.

Thank you.

And this will conclude our question-and-answer session. I'll turn it back over to Eduardo, for any closing or additional remarks.

Thank you for attending the call, and have a safe day, and I look forward to see you in the next quarter. Bye.

And this concludes today's call. Thank you for your participation. You may now disconnect.