Air Products and Chemicals Inc (APD) 2022 Q2 法說會逐字稿

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

Beginning today's call is Mr. Simon Moore. Please go ahead, sir.

Thank you, Diaz. Good morning, everyone. Welcome to Air Products' Second Quarter 2022 Earnings Results Teleconference. This is Simon Moore, Vice President of Investor Relations, Corporate Relations and Sustainability. I am pleased to be joined today by Seifi Ghasemi, our Chairman, President and CEO; Dr. Samir Serhan, our Chief Operating Officer; Melissa Schaeffer, our Senior Vice President and Chief Financial Officer; and Sean Major, our Executive Vice President, General Counsel and Secretary.

After our comments, we will be pleased to take your questions. Our earnings release and the slides for this call are available on our website at airproducts.com. This discussion contains forward-looking statements. Please refer to the forward-looking statement disclosure that can be found in our earnings release and on Slide #2.

In addition, throughout today's discussion, we will refer to various financial measures. Unless we specifically state otherwise, when we refer to earnings per share, EBITDA, EBITDA margin, the effective tax rate and ROCE, both on a company-wide and segment basis, we are referring to our adjusted non-GAAP financial measures. Adjusted earnings per share, adjusted EBITDA, adjusted EBITDA margin, adjusted effective tax rate and adjusted return on capital employed. Reconciliations of these measures to our most directly comparable GAAP financial measures can be found on our website in the relevant earnings release section.

Now I'm pleased to turn the call over to Seifi.

Thank you, Simon, and good day to everyone. Thank you for taking time from your very busy schedule to be on our call today.

I want to begin by saying a few words regarding Air Products' response to the current situation in Eastern Europe. We are deeply concerned by the human tragedy in Ukraine and the impact that this conflict has on the world. We condemn this aggression and encourage all efforts for peace. Our hearts go out to those affected and we are continuing to support our employees in this region.

As a company, we are providing humanitarian support including assistance to the International Committee of the Red Cross from the Air Products Fund Foundation. Our employees have also responded with care and generosity, reaching out to their affected colleagues and making contributions to various organizations supporting relief efforts.

Our presence in Ukraine is minimum with about $5 million in sales last fiscal year, and we have suspended the development of a small separation unit in the country. Our businesses in Russia is also very small with less than $25 million in sales last fiscal year. We are in the process of exiting Russia and will stop doing business in that country.

Now before we get into the details, I want to thank each and everyone about 20,000 employees around the world for their hard work, commitment and dedication to operational excellence and to serving our customers.

Last quarter, despite the very difficult conditions caused by war, significant inflation in energy costs, supply chain disruptions and lingering effects of the COVID-19 virus, our people delivered strong results with an earnings per share of $2.38, which is 14% higher than the previous year. As always, our people's commitment and dedication is our competitive advantage as we move forward.

Now please look at Slide #3, focusing on safety which is our highest priority. Our second quarter safety performance was similar to last quarter, but still behind last year. Although we are proud of the fact that we have made significant progress in this area over the past few years, this result is not acceptable. Our goal remains zero accidents and zero incidents, and we are committed to achieving that goal across the organization.

Slides #4 to #7 include our goal, our management velocity and our 5 plans for moving forward. And we have also included our higher purpose slide to explain what we are trying to do every day when we come to work. We have shared these slides with investors many times before, but we always have them as part of our package to emphasize the point that these are the principles that we will follow every day, and they will continue to guide us as we move forward.

As we have explained to our investors in the past, our strategy for moving forward is based on 2 pillars. The first is absolute excellence in running our existing industrial gases business. That is to operate with the greatest efficiency and productivity, invest and maintain our market share and improve pricing to compensate for inflation. Our results that we have just announced confirm that we are successfully implementing this strategy, since we are delivering strong results under very difficult and challenging circumstances.

The second pillar of our strategy for the future is to take advantage of our unique technologies and expertise to be a meaningful player in the significant worldwide effort to transition to clean energy. Specifically in this area, we are focused on developing and executing mega projects to produce blue and green hydrogen and other sustainable fuels for the world.

In summary, this explains the content of the almost $20 billion of projects that we have in our backlog, and there are more of these projects to come.

In the second quarter of fiscal year '22, we announced projects that confirm in a significant way our commitment to these 2 strategic pillars. First, in our base business, as you can see on Slide #8, we announced $1.3 billion of investment in 2 major projects for the electronic industry. These are real mega projects with long-term take-or-pay contracts with some of the largest semiconductor manufacturers in the world. We are proud to be executing these projects that confirm our significant position in the semiconductor industry.

As related to the second pillar of our strategy, as you can see on the Slide #9, we announced that we are building a $2 billion facility in Southern California to convert a conventional refinery to one that produces sustainable aviation fuel called SAF. This facility will use as its raw material renewed organic material such as base cooking oil, animal fats, et cetera, and use substantial amount of hydrogen to convert these raw materials to fuel for airplanes.

The total capacity of this plant will be approximately 340 million gallons per year. Although this sounds like a big number, in 2019, world jet fuel consumption was more than 100 billion gallons. The Board airlines are looking to decarbonize. Major corporations in the Board are focused on reducing the carbon emissions generated by their airline business travel. And there are already significant incentives in place to encourage the move towards sustainable aviation fuel. This is the fundamental reason aligned with our strategy to pursue this opportunity.

We started developing this project 3 years ago in partnership with World Energy, a private company that is currently the leading producer of sustainable airlines fuel. Our agreement is that Air Products will engineer, build and own the facility and World Energy will provide the raw material. World Energy will also sell the project -- the product and has a contractual commitment to pay Air Products a fixed fee that ensures an acceptable return on Air Products investment.

We are very excited about these projects since it also uses a significant amount of hydrogen that we can supply from our established and extensive hydrogen pipeline in Southern California.

Our partner in this project, World Energy, is a private company. So I know and fully appreciate that there is little information available about them in the public domain. We have permission from the principles of the company to disclose the following information, which can be found on Slide #10. This information is self-explanatory and we are delighted to work with World Energy on this great project.

I'd just like to point out that on the bottom of Slide #10, we have included sales and profitability numbers, $400 million sales and $54 million of profit. That is just for the products that World Energy sells out of the Paramount refinery that we are converting today.

In addition to that, World Energy has the capacity in their other plants in America and Canada to produce 150 million gallons a year of biodiesel. The sales number and profitability of those numbers are not disclosed.

I also want to report to you at this time that we continue to make good progress in building and bringing on stream key mega projects that we have already announced. Slide #11 highlights the major projects that we expect to bring on stream in 2023.

Now I would like to take a moment to reflect on our performance over the past 8 years. In July 2014, during my first conference call with investors as Chairman, President and CEO of Air Products, I promised the shareholders that our goal was to deliver over the long term a 10% per year average cumulative growth in Air Products earnings per share.

On Slide 12, you can see that for the past 8 years, we have delivered more than what we promised 8 years ago. And our goal for the future is to continue to deliver similar results as we move forward.

On Slide 13, you can see that we have shared the positive growth with our investors and increase our dividend on average 10% per year over the last 8 years.

And finally, please turn to Slide #14, still my favorite slide. It shows our EBITDA margin since 2014. Despite all of the turmoil in the Board, significant energy, cost inflation and supply chain disruptions, our EBITDA margin last quarter was almost a 1,000 basis points higher than in 2014.

Now it's my pleasure to turn the call over to Melissa to discuss our results in more details. Melissa?

Thank you, Seifi. As Seifi mentioned earlier, we are executing our growth strategy and supporting our base business at the same time. We expect the large projects to drive our long-term growth, while our base business continues delivering near-term results. Both large projects and base businesses contribute to our fiscal second quarter results.

The Jazan joint venture that started up during Q1 provided a full quarter of benefit, consistent with our commitment of $0.80 to $0.85 per share on a full year basis.

Our pricing actions also contributed with gains exceeding variable cost increases this quarter. The outperformance was particularly noteworthy in Europe, where we experienced the most significant energy cost pressure. I want to express my thanks to the team for their speed of execution and a job well done.

Now please turn to Slide 15 for our second quarter results. Energy costs remained elevated this quarter. Our teams continue to implement significant price actions in response to the unprecedented challenges. The 6% total company price increase translating 13% increases in price for the merchant business. This is our second consecutive quarter of double-digit price gain across our merchant business.

Volume was also strong, increasing 8% overall, up in all segments, driven by the new assets, hydrogen recovery, strong merchant demand and increased sales of equipment activity.

Pricing volume combined were up 14%, accounting for most of the 18% sales increase compared to last year. EBITDA increased 9%, our third consecutive quarter exceeding the $1 billion mark as favorable volume, prices and equity affiliate income more than offset higher costs. EBITDA margin declined 270 basis points from the prior year as the negative impact of higher costs in energy pass-through more than offset higher equity affiliate income. Higher energy pass-through lowered adjusted EBITDA margin are about 200 basis points.

Sequentially, volumes were down 3%, primarily due to lower higher volumes on specific customer operational actions and the leaner (inaudible).

Operating income was up 7%, driven by favorable rates and costs. However, EBITDA was up 2% and net income was down 5%, primarily due to the (inaudible) related to the finalization of our (inaudible) Jazan ASU joint venture, which is the benefited last quarter.

ROCE was 10.6%. We currently have significant cash on our balance sheet, which will support the major projects we have announced. Adjusting for this cash, our ROCE would have been 13.7%. We expect ROCE to improve as we deploy the cash and bring projects onstream.

Now please turn to Slide 16. Our second quarter adjusted EPS was $2.38, which is $0.30 or 14% above last year, the fourth consecutive quarter, a double-digital year-over-year revenue growth and a testament to the stability, resilience and growth of our business model.

The volume was favorable at $0.18 and price net of variable costs at $0.14, as our price actions more than offset the unprecedented energy cost increases. For the quarter, our price actions alone before netting against variable costs contributed around $0.50. Our other costs are higher due to the combination of investments for future growth, planned maintenance and external factors.

One example that we have invested in is our helium storage cavern to help provide reliable helium supply to our customers globally. This investment increased our cost now, but we expect to generate significant value from this investment in the future. We also see higher costs as we increased resources prior to bringing projects onstream. For example, we have hired approximately (inaudible) people, who will be responsible for operating the Jazan gasifier complex once it comes onstream next year. These purposeful strategic actions begin to ensure the long-term success of our company responsible for roughly half the total increased cost this quarter.

The remaining half was primarily external factors attributable to inflation and supply chain challenges across the region. We remain focused on driving productivity across our business. The Jazan joint venture contributed it's first full quarter of results and continues to deliver as expected. Our share of the results from the projects are reflected entirely in equity affiliate income this quarter and will be going forward. I realized this is an updated accounting interpretation and it's slightly different than we discussed last quarter, but we believe this approach will be clear for our investors moving forward.

There is no difference to the bottom line EPS. The project continues to deliver as we expected. Overall, for the quarter, equity affiliate income was $0.18 higher, driven by our share of the joint ventures profit.

Our second quarter effective tax rate of 18.6% was 160 basis points lower than last year, including the favorable impact to Jazan. We expect our tax rate to be between 19% and 20% for the remainder of this fiscal year. Non-operating income is $0.03 lower, driven by higher [Jazan] expense.

Now please turn to Slide 17. The stability of our business continues to allow us to generate strong cash flow despite the challenging geopolitical and energy environment. Over the last 12 months, we generated around $2.8 billion of distributable cash flow or nearly $12.70 per share. From our EBITDA of over $4 million, [interest], taxes and maintenance capital expenditures. Note that our maintenance capital is a little higher than usual, driven in part by spending on our new global headquarters which is nearly [continuous].

From this distributable cash flow, we paid over 45% or over $1.3 billion and dividends to our shareholders and still have about $1.5 billion available for high-return projects. This strong cash flow, even in uncertain times, enables us to continue to create shareholder value through increasing dividends and capital deployment.

Slide 18 provides an update on our capital deployment. We continue to make great progress in developing, announcing and executing on our major growth projects. In fact, we see potential opportunities significantly greater than the investment capacity we show here. As you can see, our capital deployment potential is over $34 billion fiscal 2027. $34 billion includes about $8 billion of cash and additional debt capacity available today. Over $16 billion we expect to be available by 2027 and almost $10 billion already spent. We still believe this capacity is conservative given the potential for additional EBITDA growth, which would generate additional cash flow and additional borrowing capacity. We will continue to focus on managing our debt balance to maintain our current targeted A/A2 rating.

So you can see we've already spent 29% in our already committed 74% of the updated capacity we show here. We've made great progress and still have substantial investment capacity remaining to invest in high-return projects. We continually evaluate our (inaudible) determine the best way to use available cash entrusted to us by our shareholders. We believe that investing in these high-return projects is the best way to create shareholder value.

To begin the review of our business segment results, I'll turn the call back over to Seifi. Seifi?

Thank you, Melissa. Now please turn to Slide #19 for our Asia results. Sales were up 8% compared to last year, primarily on 6% higher volume as a variety of new traditional industrial gas plants came onstream across this region.

Price was again positive. The 1% overall price improvement for the region equals to about a 3% increase for the merchant business. China's dual control policy has eased, but COVID restrictions in parts of China have modestly impacted customer demand. They also impacted our plant efficiency and increased our supply chain costs.

Costs that are unfavorable, primarily due to inflation and resources needed to support new project start-ups, as Melissa mentioned. EBITDA up 2% as better volume and price more than offset higher costs.

Compared to last quarter, volumes declined 2% primarily due to the Lunar New Year holiday. Price was 2% lower sequentially. As mentioned during our last earnings call, China's government has relaxed its power tariff program to allow local power costs to fluctuate. This market-oriented approach has resulted in higher power costs compared to last quarter. However, our overall costs were lower due to better operating and supply chain efficiencies.

Our EBITDA was down 9% sequentially, and EBITDA margin decreased 60 basis points as the unfavorable volume and price more than offset lower costs. For the second half of the fiscal year, we are very concerned about the potential impact of the COVID-related restrictions in China, and we do expect higher planned maintenance activities.

Now I would like to turn the call over to Simon to talk about the European results. Simon?

Thank you, Seifi. Now please turn to Slide 20. Energy costs in Europe began the quarter moderating but then moved up significantly and were the highest yet in March. Natural gas costs peaked in January more than 7x higher than a year ago while power costs stayed almost 4x higher. As Melissa mentioned, our on-site business has contractual pass-through of the higher costs, so we are not directly impacted by higher natural gas prices.

Higher power costs are also passed through in our ASU on-site business.

In our merchant business, our team implemented significant price actions, which more than covered the higher power costs this quarter. In fact, we recovered this quarter's higher power costs and about half of the unrecovered costs from Q1. Again, a great job by the team. However, we remain vigilant and are working to drive further improvement.

Now please turn to Slide 21 for a review of our Europe results. Compared to the prior year, sales were up 32%. Energy cost pass-through, which increases sales, but not profits accounted for more than 2/3 of the sales increase. Price increased 14% for the region, which translates to 22% for the merchant business. Prices were higher across all major product lines and subregions.

Volume was up 2% on higher merchant volumes. EBITDA was down 3% as favorable price net of variable costs and better equity affiliate income were more than offset by negative currency, unfavorable volume mix and higher other costs. For the quarter, the supply chain disruptions caused by the significant energy cost increases persistent, negatively impacting both plants operating and distribution efficiencies. We also saw higher costs due to inflation while we continue to prepare for new projects coming onstream.

EBITDA margin was 950 basis points lower, most of the decline about 700 basis points was due to the significant energy pass-through increase. The remainder was mostly driven by higher costs and negative volume mix, partially offset by strong merchant pricing and higher equity affiliate income. Compared to the prior quarter, price was up 5%, further improved from the already strong performance last quarter, which allowed us to more than offset the higher energy costs. This equates to an 8% increase on the merchant business.

Volume was 7% lower due to reduced hydrogen demand on customer-specific operating actions. EBITDA jumped 17% sequentially, and EBITDA margin improved 380 basis points as strong price, higher equity affiliate income and lower nonenergy-related costs more than compensated for the lower volume.

Now I would like to turn the call over to Dr. Serhan for a brief discussion of our other segments.

Thank you, Simon. Now please turn to Slide 22 for a review of our Americas results. Sales increased 12% versus last year. Volume and price together were up 11%. Our team in the Americas also did an excellent job raising prices to cover the higher energy costs this quarter. Prices improved in all key product lines over the last year and were also up sequentially. The 5% price gain for the region compared to last year is equivalent to a 12% increase in our merchant business.

Price, net of variable costs was also positive for the region. Volume grew 6%, primarily due to hydrogen recovery and better merchant demands. In general, we see hydrogen demand back [here] pre-COVID levels. Although [hydro] volumes this quarter were impacted by the planned outages. We expect the third quarter to continue at a high level of planned outages then expect volume to fully recover as we move into 2023.

Meanwhile, our merchant volume was weaker in South America due to lower demand for medical oxygen as COVID cases declined. The decreased demand for medical gases also reduced Americas equity affiliate income. As we expected, the planned maintenance increased costs this quarter. Costs were also unfavorable primarily due to inflation and supply chain-related challenges, including driver shortages that are broadly impacting the industry.

Operating income improved as positive price and volume more than covered unfavorable mix and higher costs. EBITDA was flat as it was impacted by lower equity affiliate income. EBITDA margin was 460 basis points lower than the previous year due to higher costs, negative volume mix and reduced equity affiliate income, which were partially offset by better price.

Sequentially, volume this quarter was lower due to planned maintenance outages. Operating income was up primarily due to strong price, but was partially offset by higher maintenance costs. EBITDA was down additionally impacted by lower equity affiliate income.

Now please turn to Slide 23, our Middle East and India segment, which includes our businesses in the Middle East, including the Jazan joint venture and India. Sales and operating income in this segment are modest since our Middle East and India wholly owned operations are smaller in size. However, the segment's EBITDA significantly includes the equity affiliate income related to the Jazan joint venture and our India joint venture, INOXAP.

The $55 million increase in equity affiliate income included our share of the Jazan joint venture net profit for the full quarter that Melissa previously discussed. I'm pleased to report that the team successfully started up a number of gasifier and steam carbon units, and the rest of the Phase 1 start-up is continuing as planned.

Sequentially, equity affiliate income was lower due to the positive nonrecurring items in quarter 1 related to the finalization of our previous Jazan ASU joint ventures.

Now please turn to Slide 24, which addresses our corporate segment. This segment includes our sale of equipment businesses as well as our centrally managed functions and corporate costs.

Over the past few years, our non-LNG sale of equipment businesses have grown considerably and are now reasonably -- responsible for most of the sales and the profit increases this quarter.

Our LNG project activities remained robust and also contributed to these increases. As expected, inquiries for potential LNG projects have increased significantly. But since our customers' major projects take time to develop, it will be some time until this interest translates into new projects.

At this point, I would like to return the call back over to Seifi to provide his closing comments. Seifi?

Thank you, Dr. Serhan. Although the consequences of the conflict in Ukraine are far from clear, the evolving situation has once again brought the critical issue of energy independence and national security to the forefront, emphasizing the critical nature of the energy transition, their air products has highly valued technologies, skills and experience that will benefit our customers and countries around the world.

Gasification allows countries to utilize their own resources in an environmentally friendly way, reducing their imports of fuel and chemicals. Meanwhile, renewable energy, including green hydrogen and fuse drive from sustainable organic resources, including renewable diesel and sustainable aviation fuel, will allow countries to reduce their reliance on faster fuels.

Furthermore, the desire for diversified energy supply will also encourage additional LNG projects in the future, a positive development for Air Products as we are the leading technology and equipment provider for these large LNG projects.

Air Products' strategy and competencies are allowing us to be a leader in the energy transition. Our industry-leading gasification technologies are suitable for various types of feedstocks, which can create net-zero hydrogen.

The NEOM Green Hydrogen project is the largest project of its kind in the world. Our LNG heat exchanges, which convert natural gas to liquid are an integral part to all LNG projects. The sustainable aviation fuel to be produced in our new facility in California is a direct drop in replacement for conventional jet fuel. It can significantly reduce carbon footprint of the aviation industry without any equipment modification.

The focus on energy security and energy transition is creating significant new project opportunities now and in the future. Therefore, we firmly believe that investing in high-return projects rather than share buyback is the right way forward to support the energy transition and continued profitable growth for Air Products and an appropriate return for our investors.

Now please turn to Slide #25. I remain highly confident of Air Products' resilient business model, our strategy and our execution. However, I do have some concerns about the economic backdrop, driven by continued COVID challenges, the impact of supply chain constraints, inflation and energy costs.

Even with these challenges, for quarter 3 fiscal year 2022, our earning per share guidance is $2.55 to $2.65, up 10% to 15% over last year and almost $0.20 higher than last quarter. For fiscal year 2022, our earnings per share guidance remains unchanged at $10.20 to $10.40, which is 13% to 15% better than last year.

We continue to see our CapEx in '22 to be around $4.5 billion to $5 billion, including the approximately $1.5 billion previously invested for phase 1 of the Jazan project.

At this point, I'd like you to turn to Slide #26. The drive for energy security and transition to a more sustainable future are not mutually exclusive. The world needs cleaner, lower carbon forms of energy and more divest sources of energy. We believe our strategy directly addresses these needs. As we drive toward the clean energy world, the talent and dedication of our people are the key to making this vision a reality.

We need and fortunately, have talented and dedicated people to help us accelerate the progress. As I always say, our long-term competitive advantage is the commitment and motivation of our people. Their hard work and contribution will ensure our success.

So at this point, I would like to end my comments, and we will be very delighted to answer questions. Operator, we are ready for questions.

(Operator Instructions) Our first question will come from Vincent Andrews with Morgan Stanley.

Okay. I'm wondering if you could just talk a little bit more to start off with about the volume decline in Europe and how much of that was related to sort of customer financial conditions versus maintenance or anything else and sort of how you're seeing the European operating environment in general, just given obviously the inflation for the consumer and for corporates and some of the other macro challenges?

Sure. Our volume decline in Europe in our HyCO business, but specifically related to one specific customer who decided to kind of change the feedstock for their gasifiers because of the high natural gas prices. But overall, we do see a small decline. I think we said that our volumes in Europe sequentially are down about 2%. That is obviously the effect of the very high energy prices. And there were those high energy prices is affecting demand. But it is not dramatic and it is not a significant cause of concern, but it is a cause of -- but it is a reality that we have to deal.

Okay. And as a follow-up, the other costs that you called out from the investments, obviously, easy to understand what you're doing there. But could you help us understand whether those costs have now sort of plateaued on a sort of year-over-year basis, such that we'll begin to lap them and they won't be come in incremental issue? Or do you think there's going to be more investment coming in future quarters?

Well, obviously [we watch] our costs every penny. But the cost increases, for example, in Europe are related to the fact that we are building the infrastructure that we need to build in order to bring our green ammonia into Europe, crack it and supply green energy to Europe. So it is early days but we have started that process. And that requires people and the expenditure and buying properties and renting equipment and trying to do engineering and all of that, because that is -- they need to get ready because by 2026, '27, they need to bring in the green ammonia and sell it to our customers, and the customers expect us to start building the infrastructure. And then around the world, we are starting up new plants and all of that. So those costs are very focused and necessary for us to maintain the growth. We've been (inaudible), as you see right now, our costs are a little higher than they should be. But in the overall scheme of things, they would be more than justified as we move forward. But I don't expect to see a significant uptick on those costs, if that is where you are going Vincent.

That's exactly what I wanted to know.

Our next question comes from Kevin McCarthy of Vertical Research Partners.

This is Cory on for Kevin. In the context of Asia, why has the pricing in Asia lagged? And can you help us understand maybe the pricing in the region? And then for the volume, it declined modestly on a sequential basis. How much of that was related to Lunar New Year versus COVID? And have you seen any impact thus far in the current quarter as it relates to COVID impact on volume?

With respect to pricing, the reason that the prices haven't gone up so much in Asia is because there is no significant energy inflation in Asia that justifies us going to the customers and increasing prices. So that is the fundamental dynamics. The decrease in volumes are mainly due to Lunar New Year. But starting in March, the restrictions that the Chinese government has put in (inaudible) clients on are beginning to have some effect. And as we are in this current quarter, we do see more impact because of the COVID restrictions. It is almost impossible to predict what would be the effect because it depends on how much they relaxed restrictions or actually increased it depending on the progress of COVID. So we are watching that situation very carefully because it can swing back and forth in a significant way.

Understood.

Okay, Cory?

Yes, that's great. And a quick follow-up. In the context of rising interest rates, I'm curious how you think about capital deployment going forward and the need for potentially higher ROIC on future projects.

Rising interest rates, if we need to raise new capital, obviously, we have to pay more interest on that. But right now, currently, we have a lot of cash, and we are not in the market to do that. Was that your point? Or did I miss that?

I guess I meant more broadly, sort of structurally as you think about the 10% returns that you generally target, would you raise that target? And how would you think about the project you take on? Yes?

No, then I understand your question completely. Of course, we do. I mean if we are going to bid on a new project or consider a new project, we will consider it in the -- with the view of what is the cost of capital. Obviously, the cost of capital has gone up as interest goes up sure.

Our next question comes from David Begleiter at Deutsche Bank.

This is Anthony [Marcondedi] on for Dave Begleiter. Would you expect earnings in Europe to be up year-over-year in the second half? And then in regards to Asia, do you think merchant pricing is slowing there? It was up just, I believe, 3% year-over-year?

Well, I think, first of all, if I may ask your second question first. Merchant pricing in the second half in Asia depends very much on what the energy costs are and all of that. If we see energy costs going up, that our costs are going up, we certainly will increase the prices to recover that, and I hope that our performance in the last 2 quarters demonstrates that we do have the ability to increase prices if energy costs go up.

As Melissa mentioned, we have increased prices in Europe, 22% versus last year, significant pricing power when it is justified. So we will do that. As far as whether our earnings in the second half of the year, for Europe will be higher than before, I don't want to make a forward predictions like that. But from the guidance that we have given you for the quarter and for the year, you can conclude that we are not expecting any decline. We expect that we will do fine versus last year. That's why -- that's the only way we can meet our forecast.

And yes, just maybe as one more follow-up here. Is the entire increase in the Middle East and India equity income of -- I think it was $55 million. Is it all from Jazan?

Most of it is from Jazan, our joint venture operations in India is doing very well, too. But most of that is from Jazan. Dr. Serhan, do you want to make any comment on that?

Yes. Definitely, Jazan is the main driver for the results in the second quarter. But again, when it comes to our joint venture, 50-50 INOXAP in India, that's also doing very well. We're currently basically executing around 20 new plants for India. They are basically the #1 industrial gas company in India, and they are on a significant growth. So we anticipate in the future that we're going to get more contribution from that.

Our next question comes from Mike Leithead of Barclays.

Great. First I wanted to ask on your Slide 11 on the 2023 project, I appreciate we're still a bit early in '22, but I think you've got over $2 billion of projects starting up there. So could you maybe just help level set roughly how we should think about the EPS contribution in '23? I know Jazan should be immediately accretive upon close, other projects might need to ramp, just roughly how we should nest that all together here?

Well, I think we have laid it out for you because we say that every dollar that we spend should get us $0.10 in operating income. And then you know our tax rate and all that. So the projects that we have, we have given you the capital, not -- all of them are not going to come onstream at the beginning of '23, but you can make a good guess about how much contribution those projects will make to our bottom line, and it is not small.

Okay. Great. And then maybe just secondly, on the SAF project. I think there's obviously been tremendous customer interest for sustainable aviation fuel, as you rightly talk about. But my understanding is there is still some questions in the industry about constraints on feedstock and what that ultimately means for SAF pricing and the economics behind it. So obviously, you're investing and backing a company growing very tremendously from, say, $4 million SAF to $250 million. So I guess just how do you get comfortable with the questions of feedstock supply and the economics behind that?

Well, because we have confidence in both energy people who have been, they are responsible for coming up with feedstock. They have been in the business of buying and providing the feedstock for their facilities for the past 20 years. That company has been around since 1999. We are very confident people and we have done our due diligence, and they feel very confident that they can get the feedstock. Everybody in the world is trying to do this thing, as you know, that's why a company like Chevron then bought REG and all that. Everybody is trying to convert their refineries to sustainable airline fuel because that is the fuel of the future. The great thing about sustainable aviation fuel is the fact that it's a direct dropping, you don't need to change the engine of the plane or anything like that.

Obviously, we believe that 50 years from now, most of these planes, especially the short-haul ones will be fueled by hydrogen. But I think that in the meantime, right now, sustainable airline fuel is -- SAF is the solution and everybody wants it, not only the airlines, but also companies, some of the biggest companies in the world that they want to take credit for decarbonizing their business travel. So the demand is very high on that. We are very excited about that project.

We'll go next to Mike Harrison at Seaport Research Partners.

You noted the increases that you've seen in LNG inquiries, obviously, given the natural gas situation in Europe, can you give us a sense of how many of these inquiries could turn into equipment sales? And I guess, maybe how should we think about the contribution of LNG heat exchangers as we think about the next couple of years?

Well, I'm going to turn this question to Dr. Serhan to answer because he runs the business on a day-to-day basis. But obviously, we are not going to disclose the contribution of these projects. But Dr. Serhan mentioned that they are seeing significant additional inquiries, but I'll let him make a comment. Dr. Serhan, would you like to...

Yes. Thanks, Seifi. Yes, we're currently executing 7 large [world] of scale of projects. Right now, they are under execution. Everything is going well. And actually, and we're getting lots of pressure from our customers to supply this exchange earlier because of the demand for LNG. And I can tell you, our pipeline right now for projects is more than 15 projects that basically we're developing with our customers, and we see this is going to be coming in the future. So we do expect very steady flow and income out of our LNG business. It's really in a very good position.

Okay. All right, and that's great. And then I wanted to ask a question about the helium business. Talk a little bit about what you're seeing in that market and how much contribution that's having to both earnings and pricing? And maybe talk a little bit about what we should expect from the helium business in the second half compared to what you're seeing now?

Mike, our helium business, it's a business that we don't usually talk about the details of that, but -- in terms of how much contribution and all of that. It's a great business. We are the world leader on that. The fact of the matter is that the world expected that a very large projects that will produce helium, called the Amur project in Russia, would be onstream in 2021. And that would put a lot of helium in the market. And therefore, it would have a negative price -- negative effect on pricing. That was the expectation. In starting up those plants in Russia, they had 1 explosion in 1 train, and then 6 months later, they had an explosion in the second train. So nothing came -- no helium came out of Russia in 2021, and nothing has come out of it in 2022 yet.

But now on top of the fact that they have to repair those units because of the damage that was done, now you have the issue of the sanctions on Russia. So I am not sure that even when they are ready to bring that material to the market, how much of it can they bring on the market considering the sanctions. So as a result of all of that, you would expect that the market for helium would be a little bit tight, and that is what we see. Okay?

Excellent.

We'll move next to Josh Spector with UBS.

Just first on the guidance. I guess, looking at your guide for next quarter and the full year, you're implying about a 10%-ish step-up sequentially each of the next 2 quarters. Wondering if you could break down the drivers there between price cost recovery, volume or anything else, particularly in light of perhaps more challenging volume outlook than you guys expected previously?

Well, I'm very happy that you laid it out like that because it does show that it is a pretty robust forecast. So a 10% each quarter going up. The reason that we feel confident about that is that number one, historically, if you look at our results, we delivered about 47%, 48% of our EPS in the first half and 52%, 53% of our result in the second half. Seasonally, the second half is stronger. So that is one reason.

The second reason is that we are very confident about the fact that we can deal with inflation and energy cost increases by increasing prices. So as a result, and I hope the investors get some comfort about that looking at our results, that we have that capability. And I think that is one of the most important things that I hope people notice about our results, that we have the capacity and the ability to do that. And the only reason we can do that is because our products that our customers need and our products are not a significant part of our customers' cost. So with the increased prices, we are not increasing the final price of the product that the customer sells to the market that much.

So we have the ability to recover that. So therefore -- and then with the volumes, we are optimistic that at least -- I don't know what's going to happen in Asia, but we are optimistic that at least in the U.S. and in Europe, we will see some pent-up demand because of -- now that the COVID is easing out, and therefore, we will see better volumes.

Okay. That's very helpful. And I guess just a second question, just on hydrogen logistics. I guess, with the NEOM project, you guys announced there's $2 billion of infrastructure to be spent along with that. With SAF, you talked about some infrastructure there. The Arizona plant, I think you had some language that it could be a hydrogen hub to an extent. And you announced the Rotterdam commercial truck hydrogen hub as well. Is that part of that $2 billion being spent in some of those projects? Or is that contemplated for some different applications?

The $2 billion is just related to NEOM. The other things that you're talking about are additional costs to that $2 billion.

We'll go next to Laurence Alexander with Jefferies.

This is Dan Rizzo on for Laurence. Just want to think over time, what do you think is a good mix in terms of profit contribution from the vertically integrated JVs relative to on-site, merchant and packaged, how should we think about it over the long term?

May I just focus on your question to make sure that I understood it correctly.

I just want to know how we should think about mix over the long term from JVs from on-site, from merchant and packages, how it should break out?

Well, our JVs right now, if you add up the sales of our JVs, I think we disclosed that publicly. Simon, we do disclose it publicly, so I can mention that, right?

Correct.

Yes. Our sales from JVs is getting close to more than $2.5 billion. So we see a very good growth in our JVs. Our major JVs are an excellent company that we had in Italy called Sapio. We have an outstanding company in India. And as Dr. Serhan mentioned, they are going very fast with 20 new plants under construction. And then we had a great JV in Thailand, and significant joint venture in Mexico. Those 4 -- and obviously, we have a JV in Taiwan that we fully consolidated. But these JVs, they're all very good companies, longly established companies, and they are doing very well because some of those economies are doing well. So we expect those to continue to grow.

And then our merchant business, right now, I think our on-site business is about 20 -- about 52%, 53%, 55% of our portfolio, and we expect that with all of the big projects that we are doing, that we would end up our on-site business, if you look at it 10 years from now, it might grow to be about 60 -- I mean, 70% of our business, but that doesn't mean that our merchant business is shrinking. Our merchant business should continued to grow. The percentage will come down because the whole company will become a much bigger company.

That's very helpful. I really appreciate that. And then just one follow-up. With the equity income, does it have the same seasonality as the rest of the company? I think you mentioned 52%, 48% for EPS. I was just wondering if the income from affiliates is relatively the same?

I wouldn't characterize it that way because those are different countries, different dynamics and all of that. But usually, the second half of the year is stronger for most people usual.

Next, John McNulty with BMO Capital Markets.

So I guess, look, we understand the lockdowns in China are a little bit difficult to predict going forward. But I guess, is there a way to think about how much April was down relative to, say, the first -- or excuse me, your fiscal 2Q levels, just so we can kind of set a baseline and then think about how it kind of changes throughout the quarter?

John, if I start disclosing that since I know the results for the month of April, it's kind of talking about the quarter while we are in the middle of it. But let me just, in general, say that April was a little bit worse than the month of March. Yes, let me put it that way. The situation compared to March hasn't improved. I hope it does improve. But it's totally unpredictable, John. I don't think even the Chinese authorities know that in terms of -- it just depends on the spread and number of cases of COVID, right?

Got it. Okay. And then just a housekeeping kind of question. So in the Slide 16, where there was kind of a breakdown of the earnings contributions. You had about $0.18 from equity affiliate income. And I'm assuming the bulk of that is Jazan. But when I annualize that, it doesn't quite get to that kind of $0.80 to $0.85 contribution that Jazan is supposed to be giving. So am I missing something on this? Or does Jazan have kind of another kind of step up when we think about moving from fiscal 2Q to fiscal 3Q that we should be thinking about or whether there's a start-up issue or what have you, like, I guess, how would you characterize that?

I'll give Melissa to think about this thing before I turn it over to her to answer the specific question. But with respect to Jazan, there is no step-up. I mean, what you saw in the second quarter is a pretty good -- is a representation of what that will do every quarter until the phase 2 comes onstream. So now if you are taking the contribution that we have had and annualizing, they can say that where is the $0.88, I think we should get to that. I think Melissa mentioned that it will get to that. But Melissa, would you like to make any comments on this?

Yes. So thank you, Seifi. Just to be clear, that $0.18 that you're saying there is versus prior year, right? So yes, you have to take the -- that is a portion of the prior year. But to be clear, if you're analyzing the IGCC, it's around $0.22 for this quarter, but we did have some headwinds in other joint ventures, specifically our Mexican joint venture has some headwind because of reduced sales from COVID lockdown medical oxygen.

We'll go next to Chris Parkinson with Mizuho.

This is Kieran on for Chris. I was just wondering if you can speak a little bit about your current, let's say, traditional on-site project backlog. You seem to be getting some benefits in Asia throughout this quarter. But how should we think about contributions from that business in the balance of the year and maybe into '23? And maybe more of a long-term picture, are you seeing an uptick in opportunities, I guess, particularly in terms of energy or chemical or electronics end markets?

Sure. We are doing very well in that regard. We are getting projects which are more than our so-called traditional share of the market. We are very successful in the electronic industry. As you saw on the projects that we have announced and there are some projects that we haven't announced. And in the other things like oxygen plants and nitrogen generators and so on, we certainly are winning our share of the market. So if you look at the industrial gases business worldwide and look at our market share, which is about, I think, 14%, 15%, 17% depending -- you look at it, we certainly are winning more than that in terms of the so-called traditional hydrogen generator, oxygen generators and electronic high-purity nitrogen generators. We are doing fine there, and we are very pleased with that.

Great. And then maybe just a really quick follow-up in terms of the Americas logistics challenges. I think you mentioned trucking being a bit of a drag in terms of the quarter. Any thoughts in terms of that improving, whether it's just preliminary thoughts into what you've seen throughout April and May? Or just your thoughts into the back half of the year would be helpful.

Sure. I mean, our challenge in the United States is that you know that we are obviously a very big trucking company because we have all of these trucks developing -- delivering product to our customers. I don't mind telling you that we right now have had in the last quarter about 150 positions open for truck drivers that we cannot get. So despite that, we are delivering product to our customers and so on. But you know what that means? That means that our costs increased. Number one, we have to offer a lot more to hire drivers. And number two, people have to work significant amounts of overtime in order to compensate for the shortage of the drivers that they have. So that is creating an issue for us, but that has been with us in the last 2 quarters. and the effect of that on our bottom line is included in the second quarter. So in the next few quarters, I don't think the situation will get worse. But I think we owe it to describe what the challenges are.

We will go next to Steve Byrne with Bank of America.

This is Rob Hoffman for Steve Byrne. My first question is regarding the first SAF project, does World Energy have any long-term contracts for SAF? And if so, oil pricing needs to be competitive with conventional aviation fuel. And then will the hydrogen plant be a POX or ACR technology rather than an SMR so as to enable CO2 capture if required in the future?

Okay. Number one, I'll answer your second part of the question. The hydrogen plants that we have supply this thing now when it comes on the screen, will be the regular SMRs. But in the future, we can put CO2 capture on those, but capturing CO2 in Southern California, you have a challenge of what do you do with it. Our plan in the long term, in the long term, is to try to supply that facility with green hydrogen, which we can bring to Los Angeles from our different plants making green hydrogen and use our pipeline to deliver that. So that is how we would super decarbonize.

In terms of the price competitive pricing, as you know, the new cell sustainable airline fuel to an airline, you charge them a certain amount, but then there is the incentives, the low LCFS, low carbon fuel subsidies that people get. So theoretically, you can sell me a gallon of sustainable aviation fuel for $5 or $6, which is the price that you pay for the conventional thing. But then one can get about $3 to $4 or sometimes more than that, depending on the carbon intensity as a subsidy, which is -- it's a tradable commodity right now. So as a result, the end result will be as if you're selling it for $9 or $10 a gallon these days. So that is how that is. Therefore, it is very competitive.

Got it. A quick follow-up. Just what was the source of hydrogen recovery in the Americas? And is there more opportunity for this?

The source of hydrogen recovery is basically the fact that the refineries are running harder because the demand for gasoline has gone up.

And with no other questions holding, I'll turn the conference back for any additional or closing comments.

Well, thank you very much. I would like to take a moment and thank everybody for their participation in our call. We appreciate your good questions, and we look forward to talking to you in about 3 months about our third quarter results. In the meantime, stay safe and have a wonderful day. Thank you very much.

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