Air Products (APD) Q4 and Fiscal 2026 Earnings Call: EPS Growth, Backlog and 2027 Guidance

Air Products (NYSE: APD) reported higher fiscal 2026 sales, earnings and profitability as stronger on-site volumes, new asset start-ups, pricing and productivity supported results. Management also emphasized lower capital spending and a shift toward core industrial gas investments.

Key Takeaways

• Fiscal 2026 sales increased 8%, adjusted operating income rose 11% and adjusted EPS advanced 12% to $13.45.
• Adjusted operating margin expanded 70 basis points to 24.4%, while return on capital improved 100 basis points to 11.9%.
• Air Products reduced capital expenditure by $1.8 billion from fiscal 2025, spent approximately $3.3 billion and achieved net cash flow neutrality.
• The traditional industrial gas project backlog reached approximately $3.3 billion. More than $2 billion of project wins secured during the past 12 months support electronics customers.
• Management expects fiscal 2027 adjusted EPS of $14.15 to $14.50, representing growth of 5% to 8%, and capital expenditure of $3.0 billion to $3.5 billion.
• The company expects positive net cash flow in fiscal 2027, supported by improved operating cash flow and anticipated asset proceeds, while no share repurchases are included in guidance.

Core Financial Data

Air Products completed approximately 93% of its previously announced workforce reduction and reduced headcount 15% from the fiscal 2024 peak. Higher inflation and incentive compensation partly offset the resulting savings.

Business and Operating Performance

Americas operating income increased 8%, primarily due to stronger on-site volumes, higher production from U.S. refinery assets and contributions from new assets. Management said U.S. HyCO operations were effectively sold out during fiscal 2026, with volumes rising by a mid-single-digit percentage. Demand remains strong, making further growth dependent largely on production optimization.

Asia operating income grew 15%. The improvement reflected benefits from gasification assets held for sale, new electronics assets, productivity savings and a 3% currency benefit. Weaker pricing, particularly in China, was a partial offset.

Europe operating income increased 7%, including a 4% benefit from currency. On-site volumes and pricing actions supported the remaining growth, while higher costs were a headwind.

Middle East and India operating income improved due to lower costs. Equity affiliate income in the segment rose 6%, mainly because of lower costs at a Saudi Arabian affiliate.

Corporate SG&A declined 10% on productivity improvements. Fiscal 2026 results also included equipment-sale project cost increases, including approximately $70 million associated with the GCA project, which management does not expect to recur in fiscal 2027.

The traditional industrial gas backlog rose to approximately $3.3 billion. More than $1 billion of fiscal 2027 capital expenditure is currently allocated to traditional industrial gas growth projects. Management said electronics and space opportunities could see major award decisions over the next 12 months.

Management Guidance

Management expects pricing and productivity to more than offset inflation. The existing cost-reduction plan is expected to provide an additional benefit of approximately $50 million in fiscal 2027.

The outlook assumes modest market volume growth consistent with current industrial production rates. Management indicated that base volumes embedded in its forecast are approximately 2%, with another 3% contribution from new assets coming on stream.

Nonoperating items are expected to reduce EPS growth by approximately 2%. The headwinds include higher interest expense following project cancellations and a higher tax rate due to fewer U.S. tax credits and lower foreign investment incentives.

Management expects helium to be neutral for the full fiscal year, despite a first-quarter pricing headwind and a modest noncash impact from changing helium inventory accounting to the average-cost method.

Risks and Points to Watch

Approximately $2 billion of capital expenditure remains to complete the company’s legacy energy-transition projects in Canada, the Netherlands and NEOM. Management expects roughly $1.5 billion to be spent in fiscal 2027, with the balance in fiscal 2028 and no related spending in fiscal 2029.

Some legacy projects are not expected to contribute materially to future operating income. Air Products is pursuing commercial negotiations, operational improvements and productivity measures to improve their performance.

Management cited difficult economic conditions in Europe, the U.S. and China. Other operating risks discussed included inflation, labor constraints, higher maintenance costs, weaker Chinese pricing and uncertainty surrounding energy-transition regulation.

The fiscal 2027 outlook also assumes no meaningful resolution affecting the helium market for at least six months. Management noted that the Middle East conflict has affected energy prices, refinery demand, Chinese gasification activity and global helium supply.

Analyst Q&A Highlights

• Pricing and inflation: Management said on-site contracts generally pass through energy costs, while merchant pricing can adjust with a lag. Air Products expects to recover the remaining cost pressure during the first few months of fiscal 2027.
• Helium contracts: The company is increasingly combining helium supply with long-term oxygen and nitrogen agreements. Some helium contracts extend for 15 years, supported by Air Products’ storage and supply capabilities.
• China gasification assets: Jiutai was sold for slightly more than $250 million. Debang was written down while arbitration continues, and management still expects to complete its sale. Lu’An is operating above nameplate capacity.
• NEOM: Management does not anticipate a material fiscal 2027 financial impact. The plant is expected to be fully operational in the second half of 2027, with initial product available earlier for market testing.
• Alberta project: Air Products is working toward completion by the end of 2027. Management reiterated that the project, under its original assumptions, was not expected to contribute to operating income, although commercial improvements are being pursued.
• Portfolio optimization: Air Products is considering an IPO of its India subsidiary. The prospectus contemplates selling 10% to 15% initially, with a potential regulatory obligation to reach 25% within three to five years. A decision on the initial tranche is expected in the first calendar quarter of 2027.
• Capital allocation: Management said stronger cash generation after legacy project spending declines could create capacity for share repurchases, subject to future board approval. No buybacks are assumed in current guidance.

Full Earnings Call Transcript

Complete Earnings Call Transcript

Management Remarks

Operator

Good morning, and welcome to Air Products' Fourth 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 Megan Britt. Please go ahead.

Megan Britt

Hello, and welcome to the Fourth Quarter and Full Year 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 will refer to various financial measures including earnings per share, capital expenditures, operating income, operating margin, the effective tax rate, ROC, net cash flow and net debt to EBITDA on a total company 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.

Eduardo Menezes

Thank you, Megan. Hello, and thank you for joining our call today. Please turn to Slide 3.

Earlier today, we reported our fourth quarter and full year fiscal 2026 results. These results demonstrate the progress we made to drive earnings growth while adjusting our portfolio of legacy energy transition projects and increasing the investment in our core industrial gas business. Our adjusted financial results were strong. We delivered 8% year-on-year sales growth and adjusted earnings per share of $13.45, which represents a 12% increase compared to the prior year. EPS growth was comprised of operating income growth of 11% and equity affiliate income growth of 14%. Our operating income margin was 24.4%, a 70 basis point improvement relative to prior year, and return on capital was 11.9%, a 100 basis point improvement relative to prior year.

Our total capital expenditure was reduced by $1.8 billion compared to fiscal year 2025, and we achieved net cash flow neutrality. All that, while significantly expanding our investment and backlog of industrial gases projects, primarily in the electronics and space sectors, and maintaining our historical track record of dividend increases with $1.6 billion paid to shareholders in fiscal 2026.

Overall, our results for fiscal year 2026 demonstrate the benefit of focusing on our core industrial gas business, setting meaningful targets and executing with resilience to ensure that we deliver on the targets we set. I want to express my appreciation to the entire Air Products team for their dedication to safety, reliably serving our customers and supporting our projects.

Moving to Slide 4, we show our progress relative to our midterm targets. In early 2025, we provided a road map on this slide, and we have made meaningful progress in 2026 on several of these targets. We delivered double-digit adjusted earnings per share in fiscal year 2026, above our original guidance for the year.

And as you see in this slide, we also made progress relative to each of our midterm targets. For example, we demonstrated progress on our commitment to return to excellence in execution through a rightsized organization. We achieved $95 million in savings from cost reductions in the year and have completed approximately 93% of our previously announced workforce reduction. These actions are critical to offset inflation and adapt the organization to a lower level of CapEx spend. We'll continue to pursue further productivity gains using tools like AI and taking meaningful productivity actions that keep us on track to deliver our multiyear commitments.

Moving to Slide 5. We have our key priorities for 2027 to continue our performance momentum and our progress to reach our medium-term targets. We have an objective to improve our operating income margin and achieve best-in-class margins among our primary peer group. We expect to deliver a step-up in margin improvement this year using a combination of pricing, productivity actions and portfolio optimization. Also, we expect to continue to win high-quality industrial gases projects particularly in the electronics end market.

Last quarter, we highlighted that our industrial gas backlog was approximately $3 billion. With another group of project wins in the fourth quarter, which we plan to announce during the next few months, our IG backlog now stands at $3.3 billion and we are still evaluating a healthy pipeline of opportunities. I will share more detail on the backlog in a moment.

Finally, we expect to strengthen our balance sheet in fiscal 2027 as improved operating cash flow relative to capital expenditure is expected to generate positive net cash flow. We also anticipate the opportunity for proceeds related to several asset transactions to improve our overall balance sheet and support improved return on capital.

Please turn to Slide 6 for a summary of our current project backlog and our update to our capital expenditure forecast. We currently have a traditional industrial gas backlog of approximately $3.3 billion in projects. A significant portion of the capital projected for the backlog will support electronic customers, including over $2 billion in project wins for Air Products during the last 12 months. Translating our backlog into a view of capital expenditures on the right-hand side of this slide, we are targeting to invest approximately $3 billion to $3.5 billion in CapEx in fiscal 2027 with over $1 billion currently forecasted to go towards traditional industrial gas growth projects.

As a reminder, there are new projects being added and completed projects being removed from the list every quarter. As we have previously disclosed, we are also moving forward with several underperforming projects, giving our commercial obligations and project status. Although these projects are not expected to contribute materially to our future operating income, we continue to work to improve their results through commercial negotiations, operational improvements and productivity.

Overall, I would say 2026 was the year we demonstrated, we can turn the ship and return Air Products to its long-term mission of being a high-performance pure-play industrial gases company. I look forward to maintaining our momentum in 2027 and continue our progress on delivering our commitments.

Now I will turn the call over to Melissa to discuss our results in greater depth and review our 2027 outlook. Melissa?

Melissa Schaeffer

Thank you, Eduardo. Please move to Slide 7 for a high-level summary of our fiscal year financial results. Sales were up 8%, while operating income improved 11% and earnings per share improved 12% on strong underlying business performance. Even with headwinds from higher energy pass-through, operating margin expanded 70 basis points compared to the prior year. Return on capital of nearly 12% also improved from last year on strong base business performance and large project optimization.

Please turn to Slide 8. Our fiscal year earnings per share of $13.45 increased 12% on improved base business performance led by strong on-site volume from our existing assets and new start-ups. We also saw benefits from portfolio optimization, pricing action and our equity affiliates. Despite overall higher costs from inflation and incentive compensation, we recognized approximately $95 million in savings in fiscal 2026 from our head count reduction plan and have reduced head count 15% and since the FY '24 peak. These results also reflect a 3% headwind from helium. Against a challenging supply chain environment, we're able to navigate the disruption while narrowing the pricing headwinds through positive volume momentum from reliably supplying our customers.

Moving now to Slide 9. I will provide an overview of our results by segment for the fiscal year. You can find additional details on the fourth quarter results by segment in the appendix. Americas operating income increased 8% and primarily driven by on-site volume, including higher production from U.S. refinery assets as well as new assets, which began contributing in the second half. The volume and pricing improvement was partially offset by higher costs. Americas equity affiliate income was elevated during the fiscal year due to higher volumes from a short-term contract in our Mexico joint venture.

Asia's operating income grew 15% due to benefits from the gasification assets held for sale, new electronic assets starting up and lower costs driven by productivity, partially offset by weaker pricing, particularly in China. Asia also saw improvement from helium volumes driven by reliably supplying from our electronics customers. Currency improved results 3%. Europe's operating income improved 7%, including 4% from favorable currency. The remaining growth was primarily driven by on-site volume and pricing actions, which were partially offset by higher costs. Europe's equity affiliate income was up due to the performance in our Italy joint venture.

In our Middle East and India segment, operating income improved on lower cost, while equity affiliate income increased 6%, primarily due to lower cost in an affiliate in Saudi Arabia. Lastly, the Corporate and other segment experienced lower sale of equipment activity, which was partially offset by productivity improvements that drove a 10% reduction in Corporate SG&A. We also recognized lower changes to cost estimates associated to our sale of equipment project.

Please turn to Slide 10. For the fourth quarter, earnings per share increased 6% which was primarily driven by higher volumes from new assets and a strategic asset sale associated with an early contract termination in the Americas. Additionally, we're able to implement timely pricing actions to recover higher power costs. This improvement was partially offset by higher costs which included higher incentive compensation and fixed cost inflation, partially offset by productivity. While we continue to experience a helium price headwind in the quarter, we were able to partially offset the impact through positive momentum in electronics volume.

Moving now to Slide 11. We will review our outlook for fiscal 2027. For the full year, we expect earnings per share to be within the range of $14.15 to $14.50, which is an improvement of 5% to 8% from the prior year. In terms of key drivers, we expect to more than offset inflation with pricing actions and productivity. This includes realizing an approximate $50 million of benefit associated with our existing cost reduction plan. For new assets, we expect a continuation of the benefit recognized in the prior year from the ramp-up of new startups in the Americas and Asia.

As a reminder, we do not anticipate a material financial impact from NEOM in fiscal 2027. In our outlook, we have assumed modest market volume growth in line with current industrial production growth rates. We also do not expect the prior year sale of equipment cost adjustments in our Corporate segment to repeat. As a reminder, last fiscal year, we benefited from collections related to the China gasification assets that were held for sale that will not repeat as we are now exiting both assets.

We expect a 2% headwind from nonoperating items, including higher interest expense due to the canceled projects and higher tax rate of 19%, primarily due to lower tax credits. We anticipate contributions from our equity affiliates to be flat, primarily due to the contractually lower interest income in our Jazan joint venture, largely offset by modest improvement in our other affiliates.

Lastly, we have not anticipated share buybacks within this outlook. For the first quarter, we expect earnings per share to be within the range of $3.35 to $3.45, up 6% to 9% from the prior year. Although we expect helium to stabilize for the full fiscal year, we anticipate a headwind in the first quarter due to lower pricing from a contract renewal with the strategic customers. For capital expenditures, as Eduardo noted earlier, we expect to spend within the range of $3 billion to $3.5 billion.

From a cash perspective, we expect to be net cash flow positive as improvements in our operating cash flow and anticipated asset proceeds are expected to offset anticipated capital expenditures and dividends paid to our shareholders.

We will now open the call up for questions. Operator?

Operator

[Operator Instructions] We will take our first question from David Begleiter with Deutsche Bank.

Question-and-Answer Session

Emily Fusco

This is Emily Fusco on for Dave. Could you maybe quantify or give some color on where U.S. HyCO volumes ended for '26? And if you're expecting maybe similar levels for '27? And if so, whatever the outlook is there, what gives you confidence in the sustainability of refinery rates. Just any color there would be helpful.

Eduardo Menezes

Yes. I believe it's fair to say that we basically sold out in '26, our volume increase, probably in the mid-single-digit percentage. We are trying to squeeze more molecules and try to find a way to continue to grow the volume, but the demand is very strong. And it's going to be more a function of us optimizing our production than the market, which is very, very strong, as you can imagine, with all the demand from the refineries.

Operator

We will take our next question from Vincent Andrews with Morgan Stanley.

Steven Haynes

This is Steven Haynes on for Vincent. Just wanted to ask a couple of questions on NEOM. I guess you kind of indicated that there's not much of a financial impact in '27, but just wanted to confirm that, that also applies on the cash side of things?

And then secondly, on the NEOM project financing, who exactly is paying the interest expense? And when does the principal start getting repaid?

Eduardo Menezes

Yes, we can confirm again that we not -- we do not expect any impact on 2027. We do not disclose exactly on the cash flow of this project, but I can tell you that on this category of projects that we talked about at our energy transition projects, so including the project in Canada, the projects -- the multiple projects in the Netherlands and our portion of the NEOM project.

We have a little over $2 billion in CapEx to go to finish all these projects together. We expect that the majority of this money will be spent in 2027. I think we indicated in the prepared remarks that something around $1.5 billion. So the majority -- the vast majority will be in '27, the balance in '28 and 0 in '29. And with that, we will close the expenditures on this energy transition projects. So that's the forecast, we have a project finance for this project, but we do not disclose the terms and conditions that we have with the banks and with our partners.

Operator

We will take our next question from Jeff Zekauskas with JPMorgan.

Jeffrey Zekauskas

I think Linde's average prices were up 3% and maybe yours were less than that. And what they argued was that there are all kinds of inflationary costs that need to be captured. Do you feel you're capturing them? And do you feel that you're pricing up with your competitors?

Eduardo Menezes

Jeff, yes, I believe so. I think we are very close. At the end, as you know, there is a difference in portfolio in the packaged gas side that do not have a price in U.S. in hard goods and so forth. So the numbers always are going to be a little different from one company to the other. But I believe on the products and the markets we serve, I think our numbers are similar to our competitors. And I think in 2026 it was a little bit of a battle to pass these costs.

At the end of the year, as you know, there was a extreme inflation, especially in Europe that natural gas prices, they jumped close to $30 per million BTU, power prices, we've seen power prices over EUR 200 a megawatt. So we pass those prices as always to our on-site customers basically as part of the normal price increases we have in our agreements.

On the merchant side, there is a little bit of a lag always and that's a normal activity. So you may end with a little less recovered than you would like at the closing of the year when the price increase is at the end that we have, but we that expect we're going to be able to recover that in the next few -- first few months of our fiscal year. 2027.

Operator

We will take our next question from Chris Parkinson with Wolfe Research.

Christopher Parkinson

In your guidance, it indicates that helium are neutral for the year following a slight headwind for the first fiscal quarter, and I guess that kind of aligns with what we saw in the fourth fiscal quarter. So could you just give us a little insight on how you're underpinning your assumptions in terms of cadence for the balance of the year how you apply current, let's say, spot trends, albeit so small to, let's say, contracts that are rolling over. And whether or not you've seen any propensity from customers to adapt, let's say, longer-term contracts with floors ceilings -- is there any difference in how everything is evolving in due course?

Eduardo Menezes

Thank you, Chris. Yes, helium, as you know, we had a lot of changes in the market in the last year. Most of the changes they started with the war, so after the first quarter. So we have a little bit of [ lag ] effect between the first quarter of last year to this year and some of price renegotiations that will affect this year.

And in addition to that, we are working on the direction of changing a little bit how we value our inventory and that will have also a negative effect for the year that is part of our estimate. So when we say that our guidance is to be neutral, we have to overcome this change in inventory cost. And also, we have to overcome several renegotiations that we had started in last -- in '25 and the beginning of '26 of that will have a negative effect for us in '27.

Put that aside, I would say that our volumes, they continue to grow. We continue to use our storage, our cabin. We have many, many quarters that we can continue to supply about 40%, 50% of our needs with product that comes from the cabin, and that is giving our customers the confidence to sign long-term agreements and work with us in a different way to contract helium in the future.

So some of agreements that we have signed, especially with our new on-site plants in oxygen and nitrogen space. They combine -- they are combined with agreement for helium that sometimes can go for the entire life of the separation plant. So a 15-year contracts for helium, which was not something that we've seen before.

I know the next question will be about price and helium. Of course, we understand the dynamics. Our customers understand the dynamics. This contract is a long-term contract. They have instruments that can make both parties feel comfortable that they can work during these 15 years but it is a change. And I think the resilience that we show in our system is really paying off and is really positioning us to start recovering our helium volumes. I know I talked about that in the past that our products by '22, '23, we had a significant reduction in volumes when the prices were very high in the marketplace. But we are on our way to recover a significant part of that volumes and what we -- our goal is the most reliable supplier in this market.

I'll -- since I mentioned this inventory thing, I'll ask Melissa to provide a little more color on that.

Melissa Schaeffer

So we are changing our inventory accounting method starting in FY '27 for helium. This is really to align with the industry standards. This is going to an average cost accounting. Now this will create a modest headwind in FY '27. And which are, as Eduardo mentioned, currently considered in our range for the guidance.

Eduardo Menezes

And that's not a cash headwind.

Melissa Schaeffer

Not a cash headwind. Purely an accounting.

Operator

We will take our next question from John McNulty with BMO Capital Markets.

John McNulty

So Eduardo, I think you spoke early on around an early contract termination and asset sale. I guess, can you give us a little bit more color on that? Maybe how much of a benefit it gave you in 4Q on the sales and operating income side? And also should we be thinking about that, okay, if it's a contract that's now ended and you sold off the asset, is there any drag going forward with the absence of that business? And then, I guess, finally, in that, how would you characterize excluding this termination and asset sale, the overall Americas volumes just so we can kind of get a picture of kind of what you're seeing in the market?

Eduardo Menezes

Okay. Let me divide the question in two. I'll take the first part, and I'll ask Melissa to answer the second part.

But in related to that transaction, right, those are -- this is part of a collection of hydrogen plants that Air Products bought I would say, during COVID. And that this specific facility, it's probably 60 years old. And so a very old reformer that sits in the middle of the refinery. And with time, I think both Air Products and the customer, they understood that the customer is probably the best owner for that asset as they can provide O&M services for a cost that is lower than our cost, right? And so we -- I think we both understood that. We were able to get to a resolution of the case where they are buying back the facility.

They believe they can have a reduction in cost, and we believe we can have a reduction in the, let's say, the difference between what we're actually spending and what we're charging them for O&M.

So I think it was a win-win approach for both sides. In going through '27. I would say that we do not expect an impact from our deal or the performance of that specific asset because we -- it's true that we've made some money this year with that sale, but it's also true that we're going to save O&M going forward. So there will be no impact year-over-year in '27. And I'll ask Melissa to answer the question specifically on '26 with the caveat that this transaction was part of our guidance and was part of what we expected.

And as you know, in this business, we're always going to have some events like that. Last year, we have this one that was positive. We have the loss in the equipment sale that we had in the first half of the year that was negative. So these things, they tend to balance each other at the end, and I expect that we're going to have more in '27, but that's the nature of the business.

But Melissa, in the '26?

Melissa Schaeffer

Yes. Sure, absolutely. So thank you, Eduardo. So from a volume perspective in the Americas, to answer your question, it was a good portion of the volumes. But I will remind you, we had very strong HyCO volumes in the Americas, and we also had the contribution of new assets as well. Now one thing I want to note for as we lead into '27, this will be recognized as a financing agreement.

So at closing, we did remove the net book value on the balance sheet and established a financing receivable at the present value of the fixed payments. So what we will see next year, as Eduardo mentioned, will be neutral and the customer will pay us a monthly fee for the purchase of the asset over the remaining 9 years.

Operator

We will take our next question from Duffy Fischer with Goldman Sachs.

Duffy Fischer

I was hoping maybe just walk through where your coal gasification business in China is today, particularly the 3 plants with Lu'An, Debang and Jiutai, 2 held not for sale, but there's a bigger coal the chemistry business around that. So I would assume that just like your HyCO business, that's doing very well, given the stuff in the Middle East. But just year-over-year, what does coal gasification do from '26 to '27? And then kind of what were the results of the held-for-sale assets?

Eduardo Menezes

Yes.Yes. As you know, we had 3 assets in China. We took 2 of these assets, and we announced that they were set aside for sale, that were Jiutai and Debang. Jiutai was closed. We sold the asset at the end of the fiscal year, beginning of this fiscal year '27. I believe we collected something a little over $250 million for that, and that will be out of our numbers going forward.

Debang is an asset that we also put for sale. We still expect to conclude that sale. But that is also -- has some issues there with the customers, some legal proceedings that are going forward. And because of limitations on how much time we can keep an asset held for sale, in our books, we decided to take an adjustment a write-down of this asset this quarter. So this is also out of our books at this point.

Again, we expect that as soon as the arbitration is concluded that we're going to be able to proceed and close the sale of that asset as well. Those 2 assets, as you said, the coal gasification is going very strong in China right now. The issue that we had in these both assets were the quality of the counterparts that we had and a history of very complicated relationship in payments.

The third asset that we have, which is the largest asset, which is Lu'An is running basically above the both nameplate capacity, doing very well. And we do not expect any changes on that. So that's, in a nutshell, the story of our 3 projects in China.

Operator

We will take our next question from Matt DeYoe with Bank of America.

Hakim Sanfo

Hakim on for Matthew. So EBIT growth for 2027 seems strong, with interest and tax being a more headwind to EPS growth. Can you provide some context into why they're rising? And does that pressure kind of skew toward any quarter?

Eduardo Menezes

I'm sorry [indiscernible].

Melissa Schaeffer

Yes, absolutely. I think I can handle that one. So I think, Hakim, what you were asking about is the nonoperating items that as we head into fiscal '27. So the nonoperating items are a headwind. So as we are aware, because of the canceled projects, we have higher interest expense that was previously capitalized. So that is providing a headwind as we enter into next year. Additionally, we have a higher tax rate, and this is driven by the absence of U.S. tax credits and a decrease in foreign incentives associated to some of our foreign investments. So as we've mentioned, it's going to be about a 2% headwind versus '26.

Operator

We will take our next question from John Roberts with Mizuho.

John Ezekiel Roberts

Does your 2027 CapEx include anything for ammonia cracking? Or maybe give us an update on your plans there?

Eduardo Menezes

No, we do not have anything specifically for that. We have one project we are still developing -- a smaller project we're still developing in Rotterdam that we'll see how that goes. But we do not -- did not include anything material for 2027 in our guidance. I would say that the effort that we did as a company to reduce our CapEx was one of the things that I'm most proud of our performance in '26. And as you see we had 3 years consecutive years that we were having CapEx of $5 billion. We're able to reduce this year to $3.3 billion.

Our estimate for next year. It's still in this range of $3 billion to $3.5 billion. That includes some of these legacy projects that we will finish by '27, '28. And at the same time, we're being able to raise our backlog and raise our expenditure in our traditional industrial gas projects. Our goal long term is to have a backlog in the -- for regular industrial gas projects in the range of $4 billion to $4.5 billion that allow us to start every year, $1.5 billion to $2 billion in projects, which is our goal in the -- at this point as a company. So '26 was also a very important year that we proved to ourselves that we can win in the marketplace so we can bring these new projects on the traditional gas separation projects, we got $2 billion more in CapEx.

So the direction of our CapEx is going to be more in the direction of this traditional gas separation, HyCO projects and less on these energy transition projects, which I include the ammonia dissociation. We are still pursuing some of these projects in Europe. The regulation keeps being a little fluid.

At this point, there is an expectation that there will be a demand -- greater demand for our RFNBO hydrogen by 2030, 2031. And we still have time to do that starting in '28, if it makes sense. But we are only going to move after we understand exactly what the regulations are. And we have firm commitments from customers that justify these projects.

Operator

We will take our next question from Josh Spector with UBS.

Christopher Perrella

It's Chris Perrella on for Josh. Can you just talk through, I guess, the puts and takes of the Corporate line in the quarter and the outlook for '27? I think some Corporate costs are supposed to roll off with the start-up of GCA and just how that's going to compare how you guys are penciling that in with the equipment sales and all the moving parts there?

Melissa Schaeffer

Yes. No, thanks for the question, Chris. You are right. Corporate was down versus prior year for this quarter. We saw very strong Corporate functional productivity, but that was largely offset by the sale of equipment cost increases that we saw largely in the beginning of the first 2 quarters. but we did see some trail into the fourth quarter. So yes, again, strong functional productivity, but it was offset by the sale of equipment cost increases. And that will not repeat in FY '27.

Christopher Perrella

Right. So what would be the, I guess, the step-up or the step down in Corporate that you guys are expecting next year with the increased cost savings and the less SOEs drag?

Melissa Schaeffer

So as you are aware, we had around a $70 million cost increase that will not repeat associated to the GCA project throughout the year. We do anticipate that to not repeat. And so that will be a tailwind for us in the Corporate segment going into '27.

Operator

We will take our next question from Aleksey Yefremov with Barclays.

Aleksey Yefremov

In your $4 billion pipeline in electronics and space, what's the related time line for awards? Is it something inside of 12 months or something longer term? And if this is a shorter-term number, how do you see the total TAM for electronics pipeline over, say, next 2 to 3 years?

Eduardo Menezes

Aleksey, good question. I -- it's a little -- we asked this question ourselves because these projects, they are moving very fast, as you can imagine. We expect that the decision for some of these projects to come very soon. I'd say that the main hurdles that our customers are facing now are both in the side of regulatory and a little bit on labor availability in -- even in countries where they didn't have that before. So it's getting -- with the numbers that they have been published in terms of CapEx, you see that in Taiwan. You see that in a little bit in Korea, in U.S. and so forth.

So I think the customers are trying to push as hard as they can to make these decisions. We are trying to be responsive and be there. I would expect that you're going to see some -- probably some major definitions being done in the next 12 months. I don't think they have good visibility much after that, but we'll see.

In terms of the total market, we still believe that the semiconductor industry, it's -- with all the CapEx we see all the projects, they're still, let's say, behind the expected demand that we -- especially when you see what people talk about data centers and so forth. So I think if a fraction of these data centers that people are talking about if they go forward it's still going to see a significant increase in semiconductors demand for the next 5 to 6 years. But at this point, the things are moving so fast and furious that our main objective is really to stay close to these projects that were going to be decided in the next 12 months and try to get our fair share or more than our fair share on those.

Operator

We will take our next question from Abigail Eberts with Wells Fargo.

Abigail Eberts

I'm curious about what your assumptions are regarding the conflict in the Middle East. It seems like the market is expecting, given election results that it might conclude sooner than originally expected asking specifically as this pertains to what you called out on Slide 20, regarding your expectation for elevated U.S. refinery rates for the full year '27?

Eduardo Menezes

Yes. If I know the answer for that one, Abigail, I will be selling that. But as you imagine, it's very important for us. The Middle East is -- we have a very large facilities. We have a very large project we're building there. The impact of the Middle East crisis in the oil side, we see that in Europe in the form of higher prices. We see that in the U.S. in the form of higher demand for hydrogen and for refineries. We see that in China in the form of higher demand for oxygen for gasification.

And on top of that, we have the impact on helium that the 1/3 of the global capacity was basically put to the side by the conflict. So I follow this very closely. I would try not to be moved by these short-term events, like if the election goes this way, what will be the impact tomorrow or the day after tomorrow. I think at this point, we do not expect any meaningful resolution on the -- that will affect the helium market for at least 6 months. That's our assumption.

I would say, for the demand of refined products in U.S., I would say that, that will continue to be very strong, not because only the U.S., I think there is a shortage of refining capacity globally. And I think that will take several years to be resolved. So we expect that to continue to be very strong in the next 12 months. And those are the main impacts that we see and the assumptions we're making. But again, things can change very quickly, and the Strait may be open in a month and things can go back to normal, but that's not the base assumption that we use today.

Operator

We will take our next question from Salvator Tiano with KeyBanc Capital Markets.

Salvator Tiano

Just wanted to check firstly on the Alberta project, what's kind of the expectation base point for startup and contribution as well as -- where do you stand on contracting the volumes? And on the same front on contracted volumes on NEOM. I don't think there's been any new developments or agreements. At the same time, there's been actually a pretty steep pickup in activity for green ammonia by other suppliers in Asia. And I wonder, is there any reason, for example, why you haven't participated in these agreements? Is it a matter of price, for example, and the margins you could get?

Eduardo Menezes

Yes, 2 very different questions. So on Edmonton, we are working hard to finish the facility by the end of '27. So we do not expect any impact on that on our fiscal year '27. We are working on how to improve this project. We already made it clear that the project as it was expected to start, would not contribute to our operating income. Of course, we are trying to see how we can improve that. I would say that the changes in Canada in the direction of the prices of renewable diesel and credits and so forth. They gave us some hope that we can improve our position on that. But again, these are also part of all these geopolitical and tariff situations, and these things can change very quickly. We understand the ins and outs and -- but we see some light there on trying to be able to commercialize the balance of the volume. But we'll keep you informed.

And again, we still have more than a year to be able to get to the point that we need to do something there. On NEOM, again, everyone can read all these announcements. A lot of those are MOUs and LOIs and from projects that do not exist today. Again, I tell people that it doesn't matter where you're making green ammonia, if it's in Saudi Arabia or in Japan or in India or in the U.S. it will take 10, 11 megawatts to make a ton of ammonia.

And when I see people coming with prices that -- doing LOIs with prices that do not make a lot of sense versus the cost of the power plus all the CapEx you need to invest. I'm always very suspicious of that. So our project is basically construction completed. We're going to go through commissioning. It is a very complex commission. I mentioned that before. We're working on that. We expect to have the plant completed up and running at 100% by the second half of '27. And in the meantime, we're probably going to start making some product that we're going to test the market, but will be very different because it's going to be a real product and not LOIs or MOUs and promises from things that are not being even in the construction stage.

So that's my take. We'll see how that develops. I mentioned before that I believe we're going to be the lowest cost producer of green ammonia forever. And we'll see how that positions us in the marketplace to sell the product.

Operator

We will take our next question from Patrick Cunningham with Citi.

Patrick Cunningham

Just in terms of your line of sight to positive free cash flow. It seems like most of the legacy clean energy projects will be near completion at year-end. Are your base assumptions cash flow neutrality this year. And if you do expect to achieve more meaningful positive free cash flow in 2028, are you considering commencing a buyback program?

Eduardo Menezes

Well, Patrick, I think we we're probably going to get to that point. Of course, when we get there, we need to go to our Board first and get authorization for all that, and we're going to let you guys know. But yes, we expect that with these projects, as I said, we have a little over $2 billion to finish these projects. The majority of that will be spent in '27. We'll have a tail in '28. And assuming that everything goes as expected, even as we grow our CapEx and backlog for traditional industrial gas projects, we should have enough room on our cash flow to do that. And at that point, we'll discuss with our Board, and we'll make a decision on how to allocate the capital.

Operator

We will take our next question from James Hooper with Bernstein.

James Hooper

Can I follow up on your portfolio optimization comments you made, Eduardo, please? And I know you've already talked about the gasification assets. But if you could give us a bit more color on what that means and how you're thinking about what assets in the portfolio and how you test them for returns, please?

Eduardo Menezes

Yes, I -- it's not anything major. I think we talked about the -- these gasification projects. We talked about the transaction we did in the U.S. for that reformer. I would say that the next one, which became public a few months ago, was the work that we're doing, trying to understand if we're going to go forward with the IPO of our subsidiary in India. It is a fantastic business that we have, probably our fastest-growing JV.

And the market in India is at very high multiples at this point, and our partner wants to go for that IPO, the obligations of disclosure obligations that you have in India with the local regulations, SEBI, they are very, very specific. We published like an IPO prospectus of more than 500 pages. And we cannot say more than what is there. We had to say a lot of things, and then we cannot say more than what absolutely is there. So I cannot make more comments on that.

The only thing I would say is that if you read the prospectus, you see that the sponsors, which is Air Products and our partner, we are proposing to -- or considering to sell between 10% and 15% of the company. And we, by the Indian regulations, if we go forward we will have an obligation to do 25% in between 3 to 5 years. Of course, this is a question of opportunity, how you see the valuation and we expect this decision for the initial tranche that will also make us basically liable to do the entire 25%.

We should take this decision during the first calendar quarter of '27. And that -- if we make that decision, it will be a function of what we think the proceeds will be and we'll inform the market about that. But it's -- you've seen several -- I've seen several numbers around I think sometimes people miss the point that this is 15% what we have in the prospectus and in the total obligation to sell is 25%. But this is the largest one.

And other than that, we always had some small things here and there, but they are not material to our overall results.

Operator

We will take our next question from Kevin McCarthy with Vertical Research Partners.

Kevin McCarthy

Curious to hear your thoughts on volume trajectory moving forward. And so maybe a 2-part question on that subject. First, what are you baking into your fiscal 2027 EPS guide related to volume specifically? And then second, maybe more broadly, Eduardo, as you look across the portfolio, where would you expect volumes to accelerate sitting here today in '27 versus '26? And where would you expect deceleration either from an end market perspective or regionally?

Eduardo Menezes

Yes, our '27 numbers guidance. I would say that you guys probably got that from the presentation the remarks that in '26. We had a very strong performance on our business, and we had a very strong performance on our affiliates. So our equity affiliate income in '26 increased around 14%. And that's a very significant number for our products. So 20% of our operating income comes from that equity affiliate income, nonoperating income, our EPS comes from that 80% comes from our operating income from the business we consolidate. And both had strong performances in '26 with the AI growing faster than our business.

For '27, for several different reasons, we expect the equity affiliate income to be flat year-over-year. And when you have 20% of our EPS being flat you imagine the pressure that it's putting on the rest of the operating income. So our operating income -- our volumes that are embedded in our total number is around 2%, with another 3% coming from -- additional coming from new assets that are coming on stream. So -- but that is on the overall company, I would say, for the business we consolidated even a little higher than that, but that's what we expect.

On that math, there is a lot of components we expect the hydrogen business in the U.S. to continue to be very strong and grow a little bit. We continue to expect the volumes in electronics to grow and frankly, the rest of the economy, we see the same things that everybody sees a tough scenario in a very negative scenario in Europe, a tough scenario in the U.S. and a tough scenario in China. So -- but overall, our assumption is around 2%.

Operator

We will take our next question from Mike Harrison with Seaport Research Partners.

Michael Harrison

Just a question about on-site maintenance costs in the Americas. It sounds like your Gulf Coast assets have been running pretty hard. Your refinery customers are running hard, maybe skipping or delaying maintenance or turnaround activity. Just hoping that you could provide some guidance on how we should think about maintenance costs during fiscal '27? And are there any quarters where turnaround activity is maybe expected to be different from the normal cadence?

Eduardo Menezes

Yes. We continue to make progress with our maintenance costs. I think in '26, we made meaningful progress reducing our overall maintenance costs in the company. '27, we are still making the assumption that we're going to be able to do that. You are correct that there is some pressure on trying to run our assets as hard as possible. And we'll do that. We'll try to work with our customers, but there is always a physical limitation of what you can and cannot do. But I would say that our goal is always to spend less on our maintenance.

I have to say that the same labor restrictions that we see in new projects. We see them in turnarounds and projects as well. So we are -- in fact, we are in-sourcing some resources to make sure that we have a little more internal capacity to do some of these turnarounds and try to control the cost of a little better just because the -- what we see in the marketplace from suppliers and contractors, especially when you go for turnaround at the same time your customer next door is doing the same, and they are normally much, much bigger than we are, has been a headwind for us in terms of maintenance costs for several years. So we're trying to be creative and try to find different ways to reduce our costs.

Operator

We will take our final question from Laurence Alexander with Jefferies.

Kevin Estok

This is Kevin on for Laurence. So most of my questions have been asked, but just on maybe margin expansion. I just wanted to get a sense of after the first quarter, what the sort of cadence of margin expansion would be maybe from Q2 to Q4.

Melissa Schaeffer

Sure, absolutely. Thanks for the question. So as we look into our guidance for FY '27 and our margin forecast, we are expecting a sizable improvement. This is driven by new asset contributions and base volume driving a good portion of that improvement. We are looking for also a strong price over recovery as we continue to see those cost inflations that we talked about previously. The headwinds that we will be seeing are obviously the assets for held for sale in the gasification space that will -- we have sold down, so those will not continue. And any other significant headwinds from cost inflation. So again, improvement through '27, largely driven on new asset contributions and base volume.

Operator

That concludes today's question-and-answer session. I will now turn the call back to Mr. Menezes for any additional or closing remarks.

Eduardo Menezes

Thank you all for joining our call today. We appreciate your interest in Air Products, and we look forward to discuss our results in the next quarter. Have a safe day. Thank you. Bye.

Operator

This concludes today's call. Thank you for your participation. You may now disconnect.