Air Products & Chemicals Inc (APD) — Q1 2026 Earnings Call Transcript

Hello, and welcome to the First Quarter Fiscal 2026 Earnings Conference Call for Air Products. Our prepared remarks today will be led by Eduardo Menezes, Chief Executive Officer; and Melissa Schaeffer, Chief Financial Officer. We have prepared presentation slides to supplement our remarks during the call, which are posted on the Investor Relations section of the Air Products website. During this call, we will make forward-looking statements, which are our expectations about the future. These statements are based on current expectations and assumptions that are subject to various risks and uncertainties. Our actual results could materially differ from these statements due to these risks and uncertainties, including, but not limited to, those discussed on this call and in the forward-looking statements and Risk Factors sections of our reports filed with or furnished to the SEC. We do not undertake any duty to update any forward-looking statements. Please note in today's presentation, we'll refer to various financial measures, including earnings per share, capital expenditures, operating income, operating margin, the effective tax rate, ROC and net debt to EBITDA either on a total company or segment basis. Unless we specifically state otherwise, statements regarding these measures refer to our adjusted non-GAAP financial measures. Reconciliations of these measures to our most directly comparable GAAP financial measures can be found on our investor website in the relevant earnings release section. It's now my pleasure to turn the call over to Eduardo.

Thank you, Megan. Hello, and thank you for joining our call today. Please turn to Slide 3. Earlier today, we reported results for the first quarter of fiscal 2026. We delivered a 12% improvement in adjusted operating income that was broad-based across our reporting segments. Earnings per share were $3.16, up 10% relative to the prior year on stronger productivity despite weak economic conditions. Our operating margin of 24.4% was also up, while return on capital of 11% was slightly lower than last year but remained stable sequentially. I'm pleased with the progress that our global team is making to improve our bottom-line results, and the first quarter represents a solid start to our fiscal year. I have now been at Air Products for a full year. In that time, we have taken significant actions to refocus on the core industrial gas business, including project cancellations, headcount optimization, and asset rationalization that are showing up in our results. Moving to Slide 4. We are focused on three key priorities for 2026 consistent with the longer-term strategy that we shared last year: one, unlock earnings growth; two, optimize large projects; and three, maintain capital discipline. On unlocking earnings growth, we are affirming our full-year earnings guidance, which implies an improvement of 7% to 9% at the midpoint for the full fiscal year. EPS growth is expected to be achieved primarily through continued focus on pricing actions, productivity, and new asset contributions. We are on track to deliver in line with these expectations despite continued headwinds in a sluggish macroeconomic environment that will limit volume growth for the fiscal year. Despite these headwinds, we see pockets of resilience from key sectors, including refining, electronics, and aerospace. For example, earlier this week, we announced our latest supply contracts with NASA to provide liquid hydrogen to multiple U.S. facilities. On our second priority, we continue to make strides to optimize our large project portfolio. Coming into our products that prioritize descoping and derisking our clean energy project portfolio. Along this path, in December, we announced that we are in advanced negotiations with Yara International on the low-emission ammonia projects in Saudi Arabia and the U.S. I will share more detail about our next steps in a minute. Finally, on our third priority, we continue to take actions to drive discipline in our capital allocation to improve our balance sheet position while at the same time investing in strong base business growth and returning cash to shareholders. As we have previously indicated, we expect to reduce our capital expenditures by approximately $1 billion in fiscal 2026 and remain on track on that objective. Fiscal 2026 in the first part of 2027 is our heavy CapEx period for the clean energy projects in Canada and the Netherlands, and we expect CapEx to decline significantly after these projects go on stream. On return of cash to shareholders, we announced earlier this week that our Board has authorized an increase in our dividend, marking our 44th consecutive year of dividend increases. We remain committed to disciplined capital allocation that ensures that we are well positioned to continue our strong track record of returning cash to our shareholders. Please turn to Slide 5. In December, Air Products issued a joint press release with Fara International announcing that we are in advanced negotiations for the low-emission ammonia projects in the U.S. and Saudi Arabia. We believe that the potential collaboration provides a strong strategic base on complementary capabilities. The collaboration would connect the global industrial gas expertise of Air Products with the global supply network and world-leading crop nutrition and ammonia expertise of Yara. In Saudi Arabia, we are in advanced negotiations on a marketing and distribution agreement where Yara would distribute and commercialize all the renewable ammonia that is not used by our products to produce green hydrogen in Europe. We expect to have that agreement finalized in the first half of 2026. For the U.S. project in Louisiana, our goal is to have a traditional industrial gas project scope and return for our products. To that end, we are in negotiations for Yara to acquire the ammonia production and distribution assets from our Louisiana project and execute a 25-year hydrogen and nitrogen supply agreement for an industrial gas facility that we would build, own, and operate. Moving to Slide 6. I want to be very clear that we have set a high bar for moving forward with the Louisiana project, which aligns with our disciplined capital allocation strategy. Already, we have taken action to find a world-class partner for the ammonia production. In this way, we would have traditional industrial gas company scope with a long-term offtake agreement to supply hydrogen and nitrogen to Yara. We also require a partner for the carbon capture and sequestration scope prior to taking a final investment decision. We have already launched an RFP process for the CO2 transport and storage scope and are in active discussions with several key sequestration service providers. More importantly, we must have a highly reliable capital cost estimate based on agreements with reputable EPCs that meet our return requirements. A key requirement for Air Products is having a project return on the go-forward capital significantly higher than our traditional hurdle rates. We expect to have full clarity on the project costs in the next few months. Overall, the project has many positive economic aspects, including location and the ability to receive tax credits, which drives significantly higher returns per share for the project during the first 12 years of operation. We are monitoring recent reports related to fertilizer CBAM tariffs in Europe. CBAM came into effect on January 1, 2026, and proposals to modify the current scheme would need to be discussed and approved by the EU. Any change in the CBAM rules would have an indirect effect on our potential Louisiana project as only gray ammonia imports are subject to significant CBAM tariffs. Overall, Yara bears the regulatory risk related to CBAM changes if the project goes forward. We are following this subject closely with Yara and continue to work on the cost aspect. Please be assured that the Air Products management team and Board will take the time needed and drive a very high level of diligence on the capital cost before we reach our own final investment decision. Now I will turn the call over to Melissa to discuss our financial results in great depth and review our 2026 outlook.

Thank you, Eduardo. Hello, and welcome to those joining our call today. Please move to Slide 7 for a high-level summary of our first quarter financial results. With respect to sales, volume was flat as favorable on-site volume was offset by lower helium, which included a sizable nonrecurring helium sale in the Americas in the prior year, making for tough comparisons in the first quarter. Price improved on non-helium merchant products, particularly in the Americas and Europe. Operating income was up 12%, and margin was up 140 basis points on business mix and non-helium price, offset by a tough year-on-year comparison. Margin also improved despite a 50 basis point headwind from higher energy cost pass-through driven by the Americas. Lower costs also improved results, primarily driven by productivity net of fixed cost inflation and lower maintenance. Earnings per share of $3.16, which grew 10% from the prior year, exceeded the top end of our guidance range. Return on capital of 11% was lower versus the prior year but stable sequentially as we continue to execute on our project backlog. Moving now to Slide 8. Our first quarter earnings per share of $3.16 increased $0.30 or 10% from the prior year. Despite continued helium headwinds, which included the prior year nonrecurring helium sale in the Americas of approximately $0.10, the base business continued to demonstrate strong resilience in an uncertain macroeconomic environment. Favorable on-site volume, non-helium pricing actions, and ongoing productivity improvements drove results this quarter. Moving now to Slide 9. I will provide an overview of our results by segment. You can find additional details of the quarterly segment results in the appendix. For the quarter, Americas sales were up 4%. This was driven by higher energy pass-through, operating income improved on price, on-site volume, and lower maintenance, partially offset by prior year nonrecurring items and fixed cost inflation. Sales in our Asia segment were up 2%, while operating income was up 7%. This improvement was driven by productivity and reduced depreciation from certain gasification assets held for sale, partially offset by lower sales. We saw a modest contribution from our new assets as they continue to ramp up, contributing further in the second half of the fiscal year. European sales and operating income both increased due to volume and price as well as favorable currency. Higher volumes were driven by on-site including a prior year turnaround and non-helium merchants. Operating income was also impacted by higher costs associated with depreciation and fixed cost inflation despite productivity improvements. In our Middle East and India segment, operating income improved on lower costs, while equity affiliate income remained flat. Lastly, the Corporate and Other segment results improved from lower costs, including productivity actions. Moving now to Slide 10. We continue to generate strong cash flows from our base business. Our investments in both energy transition and traditional industrial gas projects remain on track with our expected capital spend for the fiscal year. Additionally, we returned nearly $400 million in cash to our shareholders and increased the quarterly dividend, marking the 44th consecutive year of dividend increases. As it relates to our leverage, our net debt-to-EBITDA ratio is 2.2x. As a reminder, we are currently consolidating the joint venture investment in the neo green hydrogen project on our balance sheet during the construction phase. And as previously communicated, we plan to deconsolidate once the project is on stream and being operated by the joint venture. Therefore, we have adjusted our leverage ratio to better represent Air Products' investments. Please turn to Slide 11, where we will review our outlook. We are maintaining our fiscal full-year guidance of $12.85 to $13.15 given uncertainty around the macroeconomic environment. We remain focused on delivering these results through pricing actions and productivity while bringing new assets on stream from which we expect increased contributions in the second half. For the second quarter of 2026, we expect to deliver earnings per share in the range of $2.95 to $3.10, representing a 10% to 15% improvement from the prior year. Our outlook assumes growth from pricing actions and productivity, partially offset by lower helium. As a reminder, we expect our second quarter earnings per share to be lower sequentially due to normal seasonality, particularly related to the Lunar New Year and higher planned maintenance. We are also maintaining our guidance for capital expenditures at approximately $4 billion in fiscal 2026 as we work to de-risk our Louisiana project and optimize our portfolio. Now we'll open up the call for questions.

This is Emily Fusco on for Dave Begleiter. You're aiming for a double-digit return on future capital expenditures. How should we view the returns on the $2 billion already invested in the project? Also, is the 45Q credit factored into the double-digit return on future capital expenditures?

I imagine this question is related to the project in Darrow, right? So yes, the 45Q credit is going to be taken by Air Products, and it's included in the return. And it's an overall return for the project on a go-forward basis, and that's all we're going to disclose at this point.

First question is just on helium. Obviously, this quarter, you had to eat the one-time sale a year ago in your year-over-year comps. But could you just talk about how much the continuing business is still down? And how much of a headwind do you think that will be kind of in Q2 and throughout the rest of the year?

Duff. Yes, I would say that in general, we had a better-than-expected quarter. I think the volume from the aerospace segment in the Americas was very strong for helium for us in the last quarter. Other than that, we continue to see the same trends we've seen before. As we said, we've continued to try to increase our volumes for new accounts. And we're working very hard to increase our sales with new customers and new deals, especially on the electronics side. But I would say, overall, the information that we gave you in the beginning of the year that we would be down for the year around 4% EPS effect is still our best forecast at this point.

And then on the gasification plants in China, what was the benefit from moving them to for-sale? And then what's the expectation for kind of timing? And should we expect any meaningful proceeds coming from those?

It was about 1%, David, from the overall results for the quarter. I would say that we're still working on the process to sell the assets. We received some offers; we proceed with the negotiations. It's always difficult to forecast these things, but we still expect to get this done in this fiscal year. Hopefully, sooner than later.

Is Air Products receiving income from or full income from Gulf Coast ammonia? And how much did you invest in that project? And what are the assets that you actually own?

Thank you for the question, Jeff. Yes, we are in the process of starting the plant. So the plant is making product; it was running at up to 80%, 90% capacity for the last few months. In fact, this week, we are taking a turnaround that we were expecting to do that to finalize the last components, and we hope to be up and running at 100% and finalize all the commitments from that side in the next few weeks. So that's the overall picture of the project. I think when Air Products announced this project five, six years ago, we made clear what the investments were; on the numbers, I can go offline and get to the numbers that we published at that time. Air Products, in this case, we own the SMR, so the hydrogen production. We own the assertion plan, and the customer owns the ammonia production. So this is basically the setup that we have there. The plant is connected to our hydrogen pipeline system, and, in fact, it imports some hydrogen. So we have a reformer data that I think is around 175 million cubic feet a day, which is probably 70% of the total volume required by the ammonia plant when running at 100%, and the balance of the hydrogen is imported through the pipeline.

In your corporate line, it looks like there was some kind of sale of equipment cost overrun. How much was that? And how much was that versus last year?

Melissa here. We experienced an increase in our equipment sales this quarter. The impact on our results was approximately $30 million, similar to what we observed in the same quarter last year. As we start to bring this on stream, we expect to eliminate that headwind in our results. This quarter, the amount was around $32 million. As you know, we use percent of completion accounting, which serves as our best estimate of future costs, and we acknowledge the full future cost.

Maybe on the first one, can we unpack a little bit the margin improvement seen in the Americas? Certainly, it looks like price may have helped, but the volume drop of, I think it was 4%, is pretty meaty. So I guess, can you help us to unpack where that 150 basis points of improvement came from?

Yes, I'll let Melissa answer the question, but that one-time helium impact that we have is reflected in the volumes in the Americas. Melissa?

Yes, absolutely. Thanks for the question, John. So we did see strong on-site volumes in the Americas. This is specific to our HEICO and non-helium merchants. So positive in the volumes. Price was also strong in the Americas this quarter across products outside of helium. And then costs, unfortunately, were slightly negative, driven versus prior year. But obviously, we're continuing to look for cost productivity. So the margins were better this quarter, but we're continuing to see improvement there as we continue to focus on productivity.

Okay. Fair enough. I appreciate the color. And then can you give us an update on Alberta at this point in terms of the potential for project offtakes, how that's progressing as well as any updates on the construction timing and costs?

Yes. The construction time and cost is still the same, John. We did the same estimate that we provided probably a year ago, so around $3.3 billion and start-up in the first part of 2018. So we continue to work in that direction. I think we have a much higher level of certainty in this project than we had before in terms of scope and costs. The negotiations with other potential offtakers continue. It's not something that we will be able to talk about until we have something more definitive to share with you.

Eduardo, I wanted to ask you about the $2 billion spent on Darrow. How much of that could be recovered? I recall you mentioned that about half could be recouped through equipment sales. However, I'd like clarification on whether that was your complete answer. If you decide not to proceed with Darrow, would the recovery simply involve selling the equipment to get back $1 billion to $2 billion, or are there additional costs for Air Products, whether small or large, associated with not moving forward with the project? I have a follow-up question as well.

Yes. I think it's important to note that no one can definitively answer that question. The estimate of 50% is just a guess; it could be higher or lower. It's impossible to determine the value of recovery without going through negotiations because ultimately, it's about the equipment's value to a potential buyer. We are assessing this in parallel. Some of the assets we've developed for this project are very specific, although the ammonia loop is fairly standard and similar to other projects, giving it a better chance to achieve high market value. However, this plant is a high-pressure facility designed and built under U.S. regulations, which limits its market. In the end, it's uncertain how much can be recovered if we decide not to move forward. Our exposure mainly consists of the capital we've spent before halting new purchases on the project, which occurred a month after I joined the company. Currently, the only expenditures related to this project are for equipment that was ordered prior to that decision.

Okay. As a follow-up, I understand you're planning to make a go/no-go decision on this by mid-year, but is that still a set date? Considering the uncertainty around CBAM, which is crucial for Yara's economics, could the timing for the final investment decision be pushed later into the year while the EU sorts out their plans?

No, there is no absolute certainty in negotiation. However, our goal is around the middle of the year. The main issue for us remains ensuring we have a capital cost that we feel confident about executing. That's what we're currently focusing on. Regarding the CBAM, as we explained in our slides, it has a very indirect impact. If any changes occur, they would indirectly affect Yara based on how this agreement is structured. We will produce hydrogen and nitrogen, sell it to them, and they will then create ammonia, making it their responsibility. They can sell ammonia in the U.S., Asia, or Europe. If it goes to Europe, it will still be subject to a very low CBAM tariff. The impact is really indirect if there are regulatory changes. This is ultimately a decision for Yara to make. Verbally, we've gathered that they perceive it as low probability, but it is something they must consider in their decision-making. We'll await their conclusion. Ultimately, I would say that 99% of the decision revolves around the construction cost more than any other factor.

Thanks for the question. First question is about the space opportunity. Clearly, you've just signed some contracts with NASA this week. Can you talk a little bit about the opportunity there, your opportunity with commercial space providers, how that business is performing, and where you see growth in the outlook? And then I've got a follow-up to that.

Yes, it's a very hot segment. It's a segment that Air Products has participated in since the 60s since we started supplying liquid hydrogen for NASA and continues to date. I would say that probably over 2% of our total sales is in this segment in aerospace, when you add all the products: hydrogen, helium, oxygen, and nitrogen. So it continues to be a very important segment for us. Of course, the market is changing. There are more commercial launches; some of them use hydrogen, some of them do not use hydrogen. So we are working on these opportunities, and we are trying to grow our market share, but it's a very important market for us. But I think Melissa, you will have more insight.

Yes. Yes. Thanks, Eduardo. So having many conversations because this has gotten a lot of attention lately. So based on the customers we serve, it's our estimate that Air Products is about 40% to 50% of the total space market share in the U.S. And from a growth trajectory, I think our expectations are that for projected sales, we see about a 6% to 7% growth per year. So obviously, a market where we have been focused on for many decades and something that we're going to continue to focus on.

And then just on your volumes. It was interesting that European volumes are up 5% year-on-year. Is Europe back? Are we looking at some recovery here? Or are we remaining cautious about European volumes?

We remain cautious. A lot of things go into this calculation. We had some turnarounds last year, so we are lapping these turnarounds this year. So that created a good tailwind for us on the volume side. But things in Europe, as reported, are complicated at this point. But I would remind you that our business in Europe is different from our business in other areas of the globe because it's really fully integrated into packaged gases and other areas. And unlike the other industrial gas companies, we see much more pressure in the large customers than we see in retail in packaged gas and so forth. So it's still an important business for us, very profitable. We have a very experienced management team that is doing the blocking and tackling and being able to extract good results despite the economic environment we have there.

Now that you're a year in, and you've had a time to evaluate prior pricing strategies as well as the cost fund. How do you see these things progressing throughout the year? I imagine you have a good handle on cost now. But also it seems like there's this divergence between kind of cost pricing improvements versus obviously some helium headwinds. And I'm just kind of curious on what the cadence of that narrowing is as we progress through the fiscal year. So any color on those two topics would be greatly appreciated.

Thank you, Chris. I think you're addressing the pricing opportunity. As indicated by our first-quarter results, much of our improvement is attributed to productivity. This reflects the usual operations of the business. Managing in 40 countries with over 20,000 employees means we focus on efficiency. Air Products has strong management practices and talented leaders to drive progress in both pricing and productivity. We anticipate that for the remainder of the fiscal year, the outcomes in these areas will mirror those of the first quarter. The helium situation is a unique challenge that we are actively addressing. However, beyond helium, we are equipped with the right resources and continue to strive for similar results as we achieved in the first quarter.

Got it. And just as a quick follow-up, there's a lot happening in the tech world right now. Given your scale in Asia and the insights from your customers abroad, could you share some thoughts on how the investment community should consider content when evaluating aspects like N2, HBM, etc.? Specifically, how should we view the growth of your customers in relation to their constraints, and when should we expect to see these results reflected in your performance throughout this year and into the future?

Electronics is currently the leading segment in the market. With the influence of AI, this is evident in the performance of chip manufacturers and companies like ASML. We are experiencing a significant number of RFPs and inquiries. Traditionally, products in this market have been increasing in size, and we've typically seen new products every two to three years. However, over the past two years and likely continuing in the next two, we observe a rapid acceleration in investment decisions by major chip manufacturers. We have a strong presence in Asia and are actively pursuing new business there. We are working on projects that could push CapEx close to $1 billion, and we anticipate new projects within the same CapEx range to be decided in the coming year.

Yes. And one additional comment to your question, Chris. You did mention that new assets. We absolutely are having new assets come on stream as we talked about when we set our guidance. Additionally, as we talked about, this is a ramp, as you know, with the electronics business. So we will see the majority of those contributions towards the back half of this year.

I wanted to unpack, if I could, the upcoming deconsolidation of Neom. Can you comment on the expected timing of that event and the specific trigger? And then with regard to the financial impact, I appreciate the color that you provided on Slide 10 with regard to your net debt balance and leverage ratio; I wanted to ask whether there would be any appreciable impact on your income statement as well moving through that event?

Yes. Thanks, Kevin. So we've been talking about the deconsolidation for quite a while now, but I think we need to unpack it a little bit more for our investor community. So because we are the EPC or the engineering procurement and construction group, Air Products to the joint venture, we do consolidate that because we make the key decisions during that period. So at this point in time, with that control aspect, we do consolidate. Once the joint venture is operational, however, the decisions are even amongst the three shareholders. So during operations, which, as we've talked about, is in the mid '27, we will then deconsolidate that joint venture. As you rightly mentioned, that means that the debt would come off of the full balance sheet and would be within the equity affiliate line, so you will see the reduction in our debt profile at that point in time. As we lead up to the deconsolidation in '27, obviously, the operating company will be adding resources. So we will see additional costs being run through the O&M as we lead up to the on-stream. Once that is deconsolidated, obviously, you'll see that come off, and we will only see the impact of one-third of that operating cost. So there will be a slight increase in operating cost as we ramp up, getting closer to the on-stream in '27, and that would then be deconsolidated, and you'd only see the 33% through the equity affiliate line.

Understood. Very helpful. And then secondly, if I may, can you comment on the sequential price change for helium and whether or not your Asia price of negative one would have been flat or possibly positive if we were to carve out helium?

Yes. Thanks for the question. So yes, we continue to see helium as a headwind, both to volume and price. For this quarter, on a global perspective, price was a 1% decrease from helium specifically. In Asia, Asia is an interesting market right now because of the macroeconomic headwinds. We would have seen price up slightly. However, because of the helium impact, we did see that negative in Asia. However, in Americas and Europe, the price would have been up quite significantly, but the helium headwind did bring that down a bit. But Asia, without a doubt, is the largest impacted region.

I wanted to ask about Europe operating margin. It looks like you saw about 150 basis points of sequential decline from Q4 into Q1. And I think the energy pass-through maybe should have been a little bit favorable sequentially. The top line was pretty similar. Depreciation was lower; is this maintenance costs that we're seeing there? Or maybe help us understand what was causing that sequential margin headwind? And how should we think about margin trajectory in Europe in the rest of the year?

Yes. Thanks for the question, Mike. So the specific margin for Europe actually is being affected by cost. And so we have some significant productivity in that region. However, we did have sizable depreciation. So the depreciation year-over-year is, in fact, I believe, up a bit. That is largely due to some in-sourcing and some purchases of our supply chain assets that we are seeing a hit of depreciation and some fixed cost inflation. They are largely wage inflation that we're seeing in Europe that is shrinking the margin.

And there is also some seasonality in the quarter, which is normal for this last quarter of the calendar year.

All right. And then my other question is if you can comment on what portion of your customers are running below take-or-pay minimums in terms of their volume consumption right now. And I'm just curious, is that most pronounced in Europe? Or maybe if you could comment on what you're seeing region by region in terms of take-or-pay minimums.

Yes. We don't normally disclose that, Mike. We have some cases in Europe, but I would say that it's not a very large percentage of our business, but Melissa.

So one of the things that we do track is really utilization. So if I think about utilization across the Americas, Europe, and Asia, it's pretty similar in the mid to high 70s. So that's pretty similar to what we saw in fiscal '25 as well. So we're not seeing a significant change in utilization.

It's a case-by-case situation. The steel and chemical industries in Europe are experiencing some effects, but this impact isn't uniform across all customers or locations. It largely depends on where your assets are and your customer base. To frame it differently, this isn't a matter of chance; it's a result of strategic customer selection made 20 to 30 years ago. Currently, we are not seeing a significant impact in Europe, though it’s important to note that our on-site business there is smaller compared to Asia and the U.S.

Back to CBAM, for ammonia. Is Section 27 a key issue to watch here? And do you know what the next step is on Section 27? I don't think it's approved yet.

Yes. I'm not an expert on EU regulations, and I'm not sure anyone really is. However, from what I understand, this proposal needs approval and involves several legislative levels in Europe, with one of the directives acting as suggestions for countries to implement. The CBAM functions more like a tariff, requiring approval from the entire EU, and any changes also need to be sanctioned. Moreover, the CBAM is linked to the CO2 ETS scheme, which is designed to compensate European producers for the CO2 tax they need to pay. This CO2 ETS scheme has been established for roughly 15 years. To implement any changes, you would need to alter the entire CO2 ETS scheme, which is why I believe the likelihood of change is very low. Nevertheless, our responsibility is to operate the business and make our choices, with regulatory issues serving only as signals to guide those decisions.

Okay. And then in the U.S., is contracting for new electric power an issue at all in bidding for new ASU business with all the data center competition, and so forth?

Yes, no question. We are seeing increases in power costs for new contracts. We have a very sophisticated power procurement process within Air Products, as you can imagine, as it is the main input that we have in our Separation business. So it's an ongoing relationship with suppliers. I would say that if you have something new today, you would need to negotiate the tariffs. But at the end of the day, when we have an on-site contract, as you know, this is a pass-through in the formulas that we have. So for the customer side and for the merchant product, any energy that we use in the energy to make liquid oxygen, liquid nitrogen, and so forth. We work very hard to pass those costs to our customers. So it's not that we are completely immune to power, but we work hard to make sure that we pass this cost to the market and try to be ready for any cost increase. But there is no question that data centers are creating demand and they are creating distortions in the power market today.

Just a few follow-ups related to prior questions on Neon. Is there any dependency on the relationship with Yara at Darrow? And are these go/no-go decisions being viewed separately? And do you foresee the same risks related to Yara's appetite for the ammonia offtake?

No, there are no dependencies between the two projects or the two potential contracts. Again, the product from Neon will be green, so there will be absolutely no CBAM effect on that product. The impact on other products coming to Europe would be an indirect effect on the overall market, and we need to assess if that happens and what the effect will be. However, referring back to my earlier answer, it's very uncertain whether there will be any impact on the CBAM scheme today. If there is an impact, it will be an indirect impact on this project.

What do you anticipate the run rate contribution of the Neon JV will be from an equity affiliates perspective? And should we expect that to be at a loss when the asset first ramps up given the debt profile and initial fixed cost burden?

No, it's not going to be at a loss, but we cannot disclose results from our joint ventures that we own 33% of or expected results in this case. But it's not going to be a loss.

I guess I'll follow up on Darrow and CBAM, and see if maybe you'll answer it a little bit differently at all or not. But when you think about the decision here that Yara would need to make, I understand CBAM doesn't impact Air Products directly, but it does impact the economics for Yara, assuming they're intending to bring that into Europe. And if they say that we don't know what the regulation is going to be, and we need another year to think about it. We want to see if anything is going to change, is that time value something that you're willing to accept? Or does that then trigger we need to look at a plan B or some of these other options because we're not going to sit around for a year? How do you game theory that yourself?

Yes, it's a theoretical question right now, and we haven't really considered that. I need to see how things unfold. When I joined, Air Products was developing a comprehensive ammonia project and handling CO2 sequestration itself, intending to be an ammonia producer. We halted the project as it stood. So currently, the base case is that we've stopped the project. However, we recognize that the project has positive aspects and potential, so we are exploring ways to generate value from it. The most challenging part thus far has been securing a credible, world-class partner willing to take the commercial risk associated with the ammonia, which they intend to purchase, along with the hydrogen and nitrogen necessary to produce it. We are assuming the commercial and operational risk of the ammonia. This is the most complex aspect of the entire situation. We need to ensure that the capital cost works for both parties. The project’s capital cost must align with our expectations. At this point, it's essentially a matter of determining which plan will be prioritized, plan A or plan B, depending on perspective. As it stands today, if nothing changes, we will revert to our position from 11 months ago, which means we won't proceed with the project as originally proposed. That's the current status. From my perspective, we're faced with two outcomes: either we won't proceed, or we will move forward with a viable project. Those are the only two scenarios we are considering. Naturally, there is substantial effort required to ensure that if we do proceed, we have certainty regarding the capital costs and that the project is sound, but those are the real possibilities. I hope our shareholders view this as a free option for a promising project in addition to the current situation, which is not moving forward.

I have two. But so Uniper from Germany announced an agreement to offtake 500 kt of green ammonia from the new Amgen green hydrogen project in India, which looks to be commissioning in 2028. Can I ask if you bid on this project? And if you did, why you don't think you won, or if you didn't bid on it, why you didn't, considering the profile?

I have two questions. First, regarding green ammonia, it's quite a complex topic. To produce ammonia from hydrogen, you generally need about 10 megawatts of power for each metric ton of ammonia. So when I hear claims about developing projects in areas like India with ammonia prices around $600 or $700, it's important to realize that it involves exporting power at a much lower cost, around $60 or $70 per megawatt, which is less than local rates. This raises concerns about the economics of green hydrogen and ammonia in such regions. In contrast, our project in Saudi Arabia, which is publicly accessible information, operates within a strong renewable power market where agreements are made for pricing under $0.02 or $20 per megawatt. Our internal power costs for the project are also below this rate. We are actively constructing the project, and the power economics are favorable. While many announcements and MOUs are happening in Europe and India, the only significant project currently under construction is ours. In India, the situation differs because they're utilizing an existing facility, and while I believe they will build something, there remains a regulatory risk involved, and the feasibility of exporting power at such low rates from India is questionable. As for the EPC side, we won’t disclose details about our activities but can say that our project has several well-defined components. We are assessing every option to ensure we make the best decisions for our shareholders and customers, particularly Yara, who will be part of the process. However, we are not ready to share specific execution plans at this time.

A question around AI-related productivity. If it comes in better than expected or compared to expectations a few years ago, do the benefits accrue to your on-site business? Or do your contracts mean that you pass some or all of that benefit through to the customers? And then similarly, I guess, for merchants, it would be more just sort of competitive dynamics in the local market. Is that fair?

Yes, AI can be used everywhere, right? So when you talk about how you're using it and where the benefit will accrue it depends on the specific use case, right? So you say I'm using AI to lower my power costs in negotiations with my power suppliers. If I have an agreement with the customer that is really pass-through on the cost, that will be somehow shared. If we use AI to reduce our power consumption, normally, we will capture that to our products because at the end of the day, what we do, we give the customer a guarantee of maximum power consumption. So it's case by case. But that's a very specific application of AI. We're using a lot of AI to look at our, let's say, administration, our SG&A activities, our engineering activities, and those are internal costs, and those are not contractually passed to customers, although, like any other company, we try to be more efficient in order to be more competitive in the marketplace. So you can make the conclusion as well that in the long run, somehow these benefits will go to our customers. But it's very difficult to determine what share that will represent at the end. I hope that was clear. I'm not sure if that's exactly what you're asking. Thank you. 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. Have a good and safe day. Thank you. Bye.