Air Products Faces Challenges with Strategic Refocus

Air Products and Chemicals, Inc. ((APD)) has held its Q2 earnings call. Read on for the main highlights of the call.

Air Products and Chemicals, Inc. Navigates Challenges with Strategic Refocus

The recent earnings call for Air Products and Chemicals, Inc. painted a picture of a company grappling with significant challenges while maintaining a strong core business. The sentiment expressed during the call was a mix of cautious optimism and acknowledgment of hurdles, as the company highlighted its robust industrial gas segment but also addressed issues with underperforming projects and cost overruns. Efforts to enhance productivity and reduce costs are in motion, although the financial strain from project setbacks remains a concern.

Strong Core Industrial Gas Business

Air Products’ core industrial gas business remains a pillar of strength, boasting approximately $12 billion in sales and a commendable operating margin of 24%. The company is optimistic about further margin improvements and unlocking significant value through disciplined cost management, productivity enhancements, pricing strategies, and operational excellence.

Progress on Saudi Arabia Green Project

The Saudi Green project is making headway, with plans for 4 GW of solar and wind power generation to be completed by mid-2026. This will be followed by the commissioning of electrolyzers and ammonia production, with product availability anticipated in 2027, marking a significant milestone in Air Products’ green energy initiatives.

Refocusing on Core Business

In a strategic move, Air Products plans to concentrate on its core industrial gas business model, earmarking around $1.5 billion annually for high-return opportunities within this sector. This refocus aims to bolster the company’s profitability and align investments with its core strengths.

Cost Reduction and Productivity Improvement Plan

To streamline operations, Air Products is implementing a cost reduction plan that includes reducing its headcount by 1,300 positions, with further reductions planned between 2026 and 2028. This initiative aims to return the workforce to 2018 levels, adjusted for growth, and enhance productivity.

Underperforming Projects with Significant Overruns

The company faces challenges with $5 billion in underperforming energy transition projects plagued by substantial cost overruns. These projects, initially designed for non-contracted pipeline sales and the hydrogen mobility market, have encountered delays and reductions, impacting financial performance.

Negative Impact from Project Cancellations and Cost Reductions

Air Products reported a $2.3 billion after-tax charge in Q2, stemming from project cancellations and cost reduction measures. This charge has significantly affected the company’s financial results, underscoring the impact of strategic adjustments.

Alberta Project Cost and Schedule Overrun

The Edmonton Net Zero hydrogen project has experienced a cost surge to $3.3 billion, with completion now expected between late 2027 and early 2028. Execution challenges and severe weather conditions have contributed to this delay, highlighting the complexities of large-scale projects.

Challenges with Gasification Projects in China

Air Products is facing difficulties with three gasification projects in China, which have yielded minimal EPS contributions. Issues in project execution and financial performance have been identified as key challenges in this region.

Earnings Miss and Lower Guidance

Air Products reported Q2 adjusted EPS of $2.69, falling short of the previous guidance of $2.75 to $2.85. This miss is attributed to revised cost estimates and a lower helium contribution, prompting a reduction in full-year guidance to $11.85 to $12.15 EPS.

Forward-Looking Guidance

Looking ahead, Air Products’ leadership has outlined a strategic refocus on its core industrial gas business to enhance profitability and efficiency. The company aims for an adjusted operating margin of over 20% by fiscal year 2025, with double-digit adjusted ROCE and EPS around $12. Significant capital discipline is planned, with annual investments in core projects projected at $1.5 billion. The company remains cautiously optimistic about large projects in Saudi Arabia and Louisiana, contingent on securing firm offtake agreements. By 2030, Air Products targets a 30% adjusted operating margin, mid to high-teens adjusted ROCE, and over 10% compounded EPS growth. Efforts to rightsize the organization include planned headcount reductions to improve productivity by $100 million annually.

In summary, Air Products and Chemicals, Inc. is navigating a complex landscape with a strategic refocus on its core strengths in the industrial gas sector. While challenges persist, particularly with underperforming projects and cost overruns, the company is committed to enhancing productivity and aligning future investments with high-return opportunities. The earnings call reflects a blend of cautious optimism and strategic recalibration, as Air Products aims to bolster its financial performance and sustain growth.