Executive Summary / Key Takeaways

• Air Products is undergoing a significant strategic reset under new leadership, shifting focus back to its core industrial gas business after a period of investing in complex, higher-risk energy transition projects.
• The company recorded a substantial pre-tax charge of approximately $2.9 billion in Q2 FY25 ($2.3 billion after tax attributable to Air Products) related to exiting certain clean energy projects and implementing cost reduction measures, reflecting a move to streamline the project backlog and enhance capital discipline.
• Near-term financial performance has been impacted by the LNG business divestiture, lower global helium demand, and the project exit charges, resulting in a net loss in Q2 and 6M FY25 despite underlying strength in the core Americas and Europe segments.
• Management is targeting significant operating margin expansion in the core business (to high 20s, then ~30% long-term) through operational excellence, productivity, and rightsizing the organization, alongside disciplined capital allocation ($1.5 billion annual CapEx target for core).
• The outlook anticipates becoming cash flow positive (after dividends) as early as FY26 and accelerating thereafter, contingent on successful derisking and execution of key large projects like NEOM Green Hydrogen and the Louisiana Blue Hydrogen facility under a more prudent investment approach.

Setting the Scene: A Global Leader's Strategic Evolution

Air Products and Chemicals, Inc. stands as a global leader in the industrial gas sector, a position forged over 80 years of operation. The company's foundational strength lies in its pioneering on-site business model, where it builds, owns, and operates gas production facilities directly at customer sites under long-term, take-or-pay contracts. This model, particularly refined over 30 years in hydrogen supply for industries like refining, provides a stable, recurring revenue base and allows for contractual pass-through of energy and other costs, contributing significantly to business resilience. Air Products has cultivated an extensive hydrogen pipeline network, notably the world's largest on the U.S. Gulf Coast, and is a key supplier of high-purity gases to the electronics industry.

Within the competitive landscape, Air Products operates alongside major global players like Linde plc (LIN), PPG Industries (PPG), Ecolab (ECL), and LyondellBasell Industries (LYB). While precise, directly comparable market share figures for all niche competitors are not publicly detailed, Air Products holds an estimated 15-20% aggregate share in the global industrial gases market. Historically, the company has distinguished itself with industry-leading profitability metrics, including a 44% adjusted EBITDA margin in Q4 FY24, significantly outpacing some competitors whose EBITDA margins might range from 10% to 30% depending on their specific market focus. This margin leadership is partly attributable to operational efficiencies and the stable, high-margin on-site business model.

The company's technological edge is a critical component of its competitive moat. Air Products possesses proprietary cryogenic and non-cryogenic gas production technologies that offer enhanced efficiency and purity in gas separation. While specific quantitative comparisons with all competitor technologies are not publicly detailed, management commentary and historical performance suggest these technologies contribute to operational advantages, potentially leading to better margins and higher customer loyalty, particularly in demanding applications like electronics and hydrogen supply. The company also leverages its extensive experience in hydrogen production and handling, a core competency built over 65 years, which is foundational to its strategic pivot towards clean energy.

Over the past decade, Air Products pursued a growth strategy that saw it venture into more complex, higher-risk projects, including coal gasification and large-scale clean energy initiatives. This strategic pivot, while aiming for accelerated growth, involved deploying significant capital into projects that sometimes utilized first-of-a-kind technologies or lacked committed offtake agreements upfront. This period led to a notable increase in the company's financial leverage and headcount, intended to support the ambitious capital plan. However, management has acknowledged that this expansion negatively impacted cost control and project execution quality, contributing to delays and cost overruns on several large projects, including some gasification assets in China that have yielded minimal earnings contribution.

The Strategic Reset and Recent Performance

In early 2025, a significant shift occurred with changes to the Board of Directors and the appointment of Eduardo Menezes as the new CEO. This leadership transition marked the beginning of a strategic refocusing, explicitly aimed at "getting back to basics." The core of this reset involves a renewed emphasis on the traditional, lower-risk industrial gas business model and a more disciplined approach to capital allocation, particularly concerning large-scale energy transition projects.

A tangible outcome of this strategic review was the decision announced in February 2025 to exit three specific U.S.-based projects related to clean energy generation and distribution. This action, intended to streamline the project backlog and focus resources on opportunities deemed more value-enhancing for shareholders, resulted in a substantial pre-tax charge of approximately $2.9 billion ($2.3 billion after tax attributable to Air Products) recorded in the second quarter of fiscal year 2025. This charge primarily covered the write-down of project assets to their estimated net realizable value and costs associated with terminating contractual commitments. One notable project exit involved the termination of a Master Project Agreement related to a sustainable aviation fuel expansion project with World Energy.

The impact of these strategic actions, combined with other factors, is evident in the company's recent financial performance. For the three months ended March 31, 2025 (Q2 FY25), Air Products reported sales of $2.92 billion, a slight decrease from $2.93 billion in the prior year period. On a percentage basis, sales were flat, as a 3% volume decline (partly due to the LNG business divestiture and lower helium demand) and a 2% unfavorable currency impact were offset by a 4% increase from energy cost pass-through and 1% higher pricing. The quarter saw a significant operating loss of $2.33 billion and a net loss of $1.73 billion, primarily driven by the material charges for business and asset actions ($2.93 billion pre-tax). Excluding these charges and other adjustments, adjusted EBITDA was $1.17 billion, a decrease of 3% from the prior year, reflecting lower volumes, higher costs, and unfavorable currency, partially offset by productivity gains and pricing.

For the first six months of fiscal year 2025, sales were $5.85 billion, down 1% from $5.93 billion in the prior year. This decline was driven by a 3% volume decrease (including a 2% headwind from the LNG divestiture and lower helium demand) and 1% unfavorable currency, partially offset by 2% higher energy cost pass-through and 1% higher pricing. The six-month period also saw a significant operating loss of $1.68 billion and a net loss of $1.09 billion, again primarily due to the business and asset action charges. Adjusted EBITDA for the first six months was $2.36 billion, down 1% from the prior year, impacted by higher costs, lower volumes, and unfavorable currency, partially mitigated by productivity and pricing.

Segment performance in Q2 FY25 showed varied trends. The Americas segment saw sales decrease by 3% but operating income decrease by only 2%, with operating margin declining by 150 basis points, primarily due to higher costs (maintenance, depreciation, inflation) and unfavorable currency, partially offset by favorable business mix and pricing. Asia sales decreased by 1% and operating income by 6%, with margin down 140 basis points, impacted by unfavorable currency and lower helium pricing. Europe sales increased by 9% but operating income decreased by 3%, with margin down 320 basis points, driven by higher energy cost pass-through, higher costs, and unfavorable currency, partially offset by pricing and on-site volume growth. The Middle East and India segment saw sales decline by 8% and reported an operating loss, primarily due to lower merchant performance and higher costs, although equity affiliates income increased due to contributions from JIGPC. The Corporate and other segment's sales and operating results were significantly impacted by the LNG business divestiture and changes in sale of equipment project estimates.

Liquidity remains supported by cash, operations, and financing access. As of March 31, 2025, total debt increased to $15.9 billion from $14.2 billion at September 30, 2024, primarily due to Eurobond and commercial paper issuances and borrowings for the NEOM project, partially offset by debt derecognized upon deconsolidation of a subsidiary.

Cash provided by operating activities was $1.14 billion for the first six months of FY25, a decrease from $1.43 billion in the prior year period, partly due to higher income tax payments related to the LNG business sale gain. Capital expenditures totaled $2.94 billion in the first six months of FY25, up from $2.67 billion in the prior year, reflecting continued investment in clean energy and core industrial gas projects.

Charting the Future: Outlook and Strategic Execution

The strategic reset under the new CEO lays out a clear path forward, centered on maximizing the potential of the core industrial gas business and executing the remaining large projects with greater discipline. Management expects the core business, currently generating around $12 billion in sales with a 24% operating margin, to be the primary driver of future value. The goal is to expand adjusted operating margins in the core business to the high 20s in the 2026-2029 period and eventually reach approximately 30% by 2030 and beyond. This margin expansion is expected to be achieved through operational excellence, productivity improvements, and rightsizing the organization, with plans to eliminate an additional 2,500 to 3,000 positions between 2026 and 2028 to align headcount with a normalized capital spending level.

Capital allocation will prioritize the core business, with an envisioned annual CapEx of approximately $1.5 billion for traditional industrial gas projects going forward, focusing on opportunities with high return thresholds and contracted take-or-pay offtake. This is a shift from the higher CapEx levels seen during the peak of large project investments.

Regarding the large clean energy projects, the approach is now one of cautious optimism and derisking. The NEOM Green Hydrogen Project in Saudi Arabia is progressing well, with construction about 60% complete and on track for mechanical completion by the end of 2026 and product availability in early 2027. Approximately 35% of the production is contracted on a take-or-pay basis, and negotiations for additional offtake are underway. Initially, the focus will be on selling clean ammonia FOB Saudi Arabia, with downstream investments in Europe delayed until regulatory clarity and firm customer commitments are secured (expected by 2027 for the TotalEnergies (TTE) agreement starting in 2030). Management anticipates a slightly positive contribution from NEOM starting in 2027.

The Louisiana Blue Hydrogen Project is being actively derisked, with a focus on the hydrogen and nitrogen production elements. Discussions are ongoing to potentially divest the carbon sequestration and ammonia production components. No new spending commitments will be made on this project while the derisking strategy is pursued. The earliest startup is now anticipated between late 2028 and 2029, contingent on securing firm offtake agreements for hydrogen and nitrogen. The Canada Net-Zero Hydrogen Energy Project in Edmonton, now expected to cost $3.3 billion and come online between late 2027 and early 2028, is listed among underperforming projects, having experienced substantial cost overruns and delays due to execution issues.

The company has stated it will not take final investment decisions on new clean hydrogen projects until existing facilities are loaded to 75% or more and anchor customers are secured, a more stringent approach than in the recent past.

Financially, the strategic reset aims to improve cash flow generation. Management projects becoming cash flow positive (after dividends) as early as fiscal year 2026 and net cash flow positive through 2028, with accelerating significant positive cash flow thereafter as the large projects contribute. This trajectory is expected to support continued dividend increases (marking the 43rd consecutive year of increases with the Q2 FY25 dividend) and eventually enable share buybacks as the balance sheet delevers. The full-year FY25 adjusted EPS guidance is maintained in the range of $11.85 to $12.15, with Q3 FY25 adjusted EPS expected between $2.90 and $3.00. Full-year FY25 capital expenditures are expected to be approximately $5 billion.

Risks and Challenges

Despite the strategic reset and clear objectives, Air Products faces several risks and challenges that could impact its ability to execute its plan and achieve its financial targets. Macroeconomic conditions, including inflation, interest rate fluctuations, and potential recessions in key regions like China, could dampen demand for industrial gases and impact project economics. Geopolitical risks, such as ongoing conflicts and trade tensions (including potential global tariffs), could disrupt supply chains, increase costs, and affect international operations and project timelines.

Execution risk remains pertinent for the large clean energy projects, particularly those that have experienced past delays and cost overruns (e.g., Edmonton, potentially Louisiana if derisking is unsuccessful). The success of these projects hinges on timely completion, securing sufficient offtake agreements, and navigating complex regulatory environments (e.g., IRA clarity for green hydrogen subsidies, permitting for CO2 sequestration). While Air Products has technological expertise, competitors like Linde also possess advanced capabilities, and the race to scale clean hydrogen production efficiently and cost-effectively is intense.

The significant charge taken in Q2 FY25 highlights the financial impact of past strategic decisions and the inherent risks in large, complex projects. While management has provided estimates for future cash expenditures related to these exits, actual costs and timing could differ. The global helium market's cyclicality and current long position also present a headwind to profitability, particularly in the merchant business.

Conclusion

Air Products is at a pivotal juncture, marked by a decisive strategic shift under new leadership. The company is returning its focus to the proven, resilient model of its core industrial gas business, aiming to unlock significant value through operational excellence, productivity, and disciplined capital allocation. The recent, substantial charge related to project exits underscores the commitment to streamlining the portfolio and addressing the challenges faced during a period of aggressive expansion into higher-risk ventures.

While the near-term financial picture reflects the impact of these strategic actions and prevailing market conditions, the long-term outlook is centered on margin expansion in the core business and the eventual contribution from key clean energy projects executed under a more prudent framework. The ability to achieve projected cash flow generation and deliver on EPS growth targets will depend on successful execution of the strategic reset, effective management of the remaining large projects, navigating competitive dynamics, and adapting to evolving market and regulatory landscapes. For investors, the story is one of a global leader recalibrating its strategy, leveraging its core strengths and technological expertise to pursue growth opportunities more selectively, with the aim of restoring profitability and enhancing shareholder value over the coming years.