DEFA14A: Air Products Defends Strategy Against Mantle Ridge, Highlights Strong Performance and Clean Hydrogen Push

Air Products has filed its definitive proxy statement, urging shareholders to vote for its director nominees amidst a challenge from activist investor Mantle Ridge, while highlighting its financial performance and strategic position in the clean hydrogen market.

Summary

• Air Products has filed its definitive proxy statement for its 2025 Annual Meeting of Shareholders, scheduled for January 23, 2025.
• The company is urging shareholders to vote for its nominees on the WHITE proxy card, opposing Mantle Ridge's attempt to gain control of the board.
• Air Products emphasizes its two-pillar growth strategy, focusing on its core industrial gas business and capitalizing on the clean hydrogen market.
• The company claims to be the most profitable industrial gas business globally, with industry-leading adjusted EBITDA margins and EPS growth.
• Air Products highlights its first-mover advantage in clean hydrogen, citing a potential market revenue of over $600 billion by 2030 and $1 trillion by 2050.
• A 15-year contract to supply TotalEnergies with 70,000 tons of green hydrogen annually starting in 2030 has been secured.
• The company has increased its dividend per share by a 9% CAGR under the leadership of its CEO, Mr. Ghasemi.
• Air Products is conducting a search for a President to serve as a qualified CEO successor, with an announcement expected no later than March 31, 2025.
• The board is being refreshed, with six of nine directors appointed in the last five years, including two new nominees.
• Mantle Ridge, with a 1.8% stake, is attempting to replace all directors and the CEO, which Air Products argues would be destabilizing and value-destructive.
• Air Products' adjusted EPS increased 13% and adjusted EBITDA was up 12% from the fiscal fourth quarter of 2023.
• The company expects adjusted earnings per share of $12.70 to $13.00 for its ongoing business, excluding the recently sold LNG business, representing a 6% to 9% improvement.
• The NEOM green hydrogen project is approximately 70% complete and is expected to be operational by the end of 2026.
• Air Products is investing less than 10% of the total cost of the NEOM project, demonstrating successful project financing.
• The company is committed to returning capital to shareholders, with over 40 years of dividends and approximately $1.6 billion of dividend payments in fiscal year 2024.

Sentiment

Score: 7

Explanation: The document is generally positive, highlighting strong financial performance and strategic positioning in the clean hydrogen market. However, the ongoing proxy fight with Mantle Ridge introduces some uncertainty and risk, preventing a higher score.

Positives

• Air Products is the most profitable industrial gas company globally.
• The company has achieved industry-leading adjusted EBITDA margins.
• Air Products has a strong position in the growing clean hydrogen market.
• The company has secured a significant long-term green hydrogen supply contract with TotalEnergies.
• Air Products has a track record of increasing dividends, with a 9% CAGR over the last decade.
• The company is actively managing succession planning with a search for a new President.
• The board is being refreshed with new independent directors.
• Air Products is demonstrating strong financial performance with increased EPS and EBITDA.
• The NEOM green hydrogen project is progressing well and is on track for completion.
• The company is committed to returning capital to shareholders through dividends and potential share repurchases.

Negatives

• Mantle Ridge is attempting to gain control of the board and replace the CEO, which could be destabilizing.
• Mantle Ridge's demands are seen as lacking a well-thought-out plan and are focused on short-term gains.
• The company has had to put the World Energy SAF Facility on hold due to permitting issues.
• The Texas Green Hydrogen JV was no longer pursued as it did not meet the company's guidelines.
• Mantle Ridge's previous activist campaigns have not always resulted in long-term value creation.

Risks

• The ongoing proxy fight with Mantle Ridge could create instability and distract from the company's strategic goals.
• The company's clean hydrogen projects are capital intensive and require successful execution to achieve expected returns.
• The company is reliant on securing off-take agreements for its clean hydrogen projects to de-risk investments.
• The company faces competition in the industrial gas and clean hydrogen markets.
• The company's future performance is subject to various market and economic conditions.

Future Outlook

Air Products expects continued strong performance in its core business and anticipates significant growth in the clean hydrogen market. The company plans to increase its return of capital to shareholders as capital expenditure moderates. They also expect meaningful declines in net debt-to-adjusted EBITDA ratio and positive net cash starting in full year 2027 or before.

Management Comments

• Air Products is executing on a two-pillar growth strategy to grow our core industrial gas business while capitalizing on our first-mover advantage in the clean hydrogen market.
• We believe this strategy will maximize value for shareholders as the global economy continues to adopt lower carbon sources of energy.
• Our long-term disciplined approach to capital allocation and investing in new projects is already proving successful.
• We are proud of our performance and, as evidenced by our fiscal year 2025 outlook, we expect continued strong performance.
• We are committed to efficiently running and growing our core industrial gas business while pursuing strategic, high-growth, and high-return opportunities in clean hydrogen.
• We are pursuing this strategy prudently, only approving new projects after securing anchor customers and loading at least 75% of the output of our existing clean hydrogen projects.
• Another top priority for us is to consistently return cash to our shareholders.

Industry Context

This announcement comes as the industrial gas sector is increasingly focused on sustainability and the transition to clean energy. Air Products is positioning itself as a leader in the clean hydrogen market, which is expected to grow significantly due to global decarbonization efforts. The proxy fight with Mantle Ridge highlights the increasing pressure on companies to adapt to changing market dynamics and shareholder expectations.

Comparison to Industry Standards

• Air Products claims to be the most profitable industrial gas company globally, which would place it ahead of competitors like Linde and Air Liquide in terms of EBITDA margins.
• The company's 9% CAGR in dividend per share is a strong performance compared to industry averages.
• The 15-year green hydrogen contract with TotalEnergies is a significant win, demonstrating Air Products' ability to secure long-term off-take agreements, which is crucial for de-risking large-scale hydrogen projects.
• The NEOM project is a large-scale green hydrogen project, comparable to other major projects in the industry, but Air Products is highlighting its lower capital investment as a key differentiator.
• The company's focus on a disciplined capital allocation strategy and securing anchor customers before committing to new projects is a prudent approach, aligning with best practices in the industry.

Management Changes

Corporate Governance

Stakeholder Impact

• Shareholders are urged to vote for the company's nominees to protect their investment.
• Employees are assured of the company's commitment to growth and stability.
• Customers are assured of continued service and innovation.
• Suppliers are assured of continued business relationships.
• Creditors are assured of the company's financial strength and commitment to debt reduction.

Next Steps

• Shareholders are urged to vote for Air Products' director nominees on the WHITE proxy card.
• The company will continue to execute its two-pillar growth strategy.
• The search for a President to serve as a qualified CEO successor will continue, with an announcement expected by March 31, 2025.
• The company will continue to pursue off-take agreements for its clean hydrogen projects.
• The NEOM green hydrogen project is expected to come online by the end of 2026.

Key Dates

Keywords

Air Products, clean hydrogen, proxy fight, Mantle Ridge, industrial gases, EBITDA, shareholder value, board of directors, CEO succession, capital allocation, green hydrogen, NEOM, dividends