Johnson Matthey Plc

Robert MacLeod - CEO Anna Manz - CFO John Walker - Sector Chief Executive Clean Air & Executive Director Alan Nelson - Chief Technology Officer and Sector Chief Executive, New Markets

Nicola Tang - Exane BNP Paribas Adam Collins - Liberum Neil Tyler - Redburn Sanjay Jha - Panmure Gordon

Thank you very much and welcome to the Johnson Matthey's Half Year Results Presentation. And this is going to be live webcast as well.

So if I can remind you to switch off mobile phones, devices or put them on silent for the presentation. We will have a presentation from Robert and Anna, as usual and then time for Q&A afterwards.

And with that I'll hand over to Robert. Thank you.

Good morning, everybody, and welcome to Johnson Matthey's First Half Results Presentation. Today's presentation is in three sections.

First I'll take you through the highlights. I'll then hand over to Anna to review our financials, and after that, I'll give you an update on our strategy, following which we'll be happy to take questions.

We've had a good start to the year and I'm pleased by our continued progress on executing our strategy of sustained growth and value creation. We delivered double-digit sales and underlying profit growth, and we now expect full-year operating performance towards the upper end of our guidance of mid to high single-digit growth.

Our Clean Air business continues to perform strongly and Efficient and Natural Resources grew well. In Health and Battery Materials we are making good progress as we position for breakout growth over the medium term.

We increased the interim dividend by 7% and our return on capital was 16%. Also through our strategy - a bit more later on.

But first, let me hand over to Anna to talk you through the financials.

Thanks, Robert. Good morning, everyone.

We've had a good first half as we expected. Both sales and underlying operating profit were up 10% at constant rates and underlying EPS growth was up 9%.

We've increased the interim dividend by 7% reflecting the confidence that we've got in our current and medium-term growth prospects. First looking at sales for the group.

Sales grew 10% with growth across all of our sectors. This was driven in particular by double-digit growth in Clean Air in both Light Duty and Heavy Duty businesses.

Despite volatility in the macro environment such as Europe and China autos we continue to deliver exactly as planned. And we expect this momentum to continue across the Group as we continue in to the second half.

Operating profit also grew 10%. The underlying businesses overall grew strongly, with Clean Air and Efficient Natural Resources, both performing particularly well.

Health declined in line with our full year expectations and New Markets operating profit was also lower. We continue to drive further efficiencies throughout the Group.

And we're investing in the systems and processes to realize further future efficiencies. Some of these investments are reflected within the sectors' operating profit while others are in our corporate costs.

So you are not yet seeing the full benefits of the current savings being delivered. Overall, a good operating performance from the Group with underlying businesses delivering strong growth and cost savings on top of that, whilst also continuing to build the platform that will position us to deliver on our strategy.

Moving now to the sectors, Clean Air had a very good first half with sales growth of 11%. We delivered double-digit growth in both Light and Heavy Duty, well ahead of growth in global vehicle production.

In Light Duty the growth was driven by our European business. Our diesel catalyst sales grew 18%, in a market that declined 6%, as we've seen the share gains that we previously talked about ramping up.

Our share in the Light Duty diesel, European market increased from around 45% at the start of the year to around 60% by the end of the half. And to remind you, we expect it to be at 65% at the end of the full year.

Our gasoline business in Europe grew 4%. This was behind the market growth of 8% and largely due to a weak performance by some of our customers.

Our Asian Light Duty business grew ahead of market production with growth in all of our key businesses across the region. While our Americas business slightly underperformed the market.

In Heavy Duty we outperformed the truck market in Europe and Americas and we were in line in Asia. Our double digit growth was driven by continued strong performance in the Americas where we grew 24%.

Here we've outperformed the US Class 8 truck market. Strong demand in this market remains and we now expect high levels of production to the middle of the calendar year 2019.

Our European Heavy Duty business grew 8% in a low growth market, driven by outperformance by our customers and a strong performance in non-road. In Asia, our sales were flat.

As anticipated, the China truck market was weaker in the period following the strong growth over the last couple of years and our sales also reflected that. However, sales in India grew strongly.

Clean Air's operating profit grew 15% with a slight increase in margin due to the volume leverage, particularly in Europe and tight cost control. I'm pleased with the first half results and we expect continued strong sales growth in the remainder of the year, as the rest of our share gains in European light-duty diesel come through.

Benefits from operational gearing in the second half will be offset by price downs and trade tariffs and some additional costs as our share gains ramp up further. Therefore the margin for the full year will be in line with the prior full year margin.

Looking now at Efficient Natural Resources. Sales grew 3% driven by growth in Catalyst Technologies and Pgm Services.

Catalyst Technologies grew 3% delivering double-digit growth in sales of refill catalysts and additives. This strong growth was partly offset by a significant decline in sales of first fill catalysts.

First fill catalysts are inherently lumpy and are driven by the timing and number of new plants being commissioned. As expected, after a number of years of decline, our licensing income was broadly stable.

Activity around new plant builds, especially for the technologies we license remains at low levels. That said, we are seeing signs of improved activity in certain markets such as methanol.

And development and commercialization of new technologies is also progressing very well. We've won several new licenses in the period that we might see the benefit in the near term as revenue is recognized over a number of years depending on the length of the project.

In Pgm Services sales grew 2%, benefiting from higher precious metal prices, partially offset by lower sales of industrial products. As we said in our ATM statement in July, we had unscheduled downtime in one of our Pgm refineries in the half and that's resulted in the significant increase in our precious metal working capital.

The downtime did not have a direct impact on sales, although we have incurred additional costs as our refineries are working at higher utilization levels and as we invest to improve their resilience. Moving to operating profit, this was up 26% and margin improved 3.2 percentage points.

The business benefited by 10 million from the higher PGM prices. Additionally we saw savings from restructuring and efficiency benefits from initiatives across a number of areas including operational excellence and procurement.

Some of these benefits are ongoing although around 5 million will not repeat. We also had higher operating costs in our Pgm refineries as we continue to invest to improve our safety and resilience and this partially offsets some of the benefits.

Looking to the full year, our outlook for Efficient Natural Resources is unchanged. We expect slight sales growth and operating profit growth ahead of this, because of the operating leverage and restructuring cost savings on top.

If the current momentum continues we could potentially exceed this. Health started the year in line with our expectations, and remains on track for the full year.

Although sales overall were flat, there were a number of moving parts. Our generics business declined slightly.

Sales of APIs were down as expected, with certain high margin contracts for APIs, for AVHD treatments coming to an end. Non-controlled APIs however, continue to grow.

Here we saw increased volume across a number of products. This was partially offset by a decreased contribution from dofetilide, which is now being impacted by competition in the market.

The Innovator business continued to grow well, with increasing sales from APIs where our customers are moving into late stage validation. As we expected, operating profit was down 31%, our margin declined significantly.

This was primarily driven by the change in product mix, as our current portfolio moves through its natural life cycle. Additionally, we've been taking actions to optimize our manufacturing footprint.

In the period, we realized some cost savings from the closure of our Riverside plant in the US, but these were more than outweighed by transition costs. We continue to expect a small net benefit for the full year and over the medium-term from this footprint optimization, which will over the medium-term deliver significant benefits.

The full-year outlook is unchanged and we expect broadly stable sales, with operating profit to be down. In New Markets, we saw strong sales growth, driven by the alternative powertrain.

This benefited from demand for battery systems for e-bikes and our fuel cells businesses also grew well. We continue to make good progress in the development and commercialization of eLNO.

We incurred higher costs in battery materials as we invested in strategic customer relationships to support the commercialization of eLNO. And so New Markets, operating profit declined.

In the full year, operating profit is now expected to be down, although profits in the second half will be ahead of the second half of last year. Moving down the income statement.

Finance charges increased in the period, primarily due to the higher cost of funding metal across the Group. This was a reflection of both higher lease rates continuing from the second half of last year, as well as higher volumes of leased metal following the Pgm refinery downtime.

The underlying tax rate decreased to 16.3% as expected, following the lowering of the US corporation tax rate, and this will be around 16% for the full year. Underlying EPS grew 9% at reported rates, slightly ahead of operating profit, benefiting from the lower tax charge, partially offset by the higher finance charges.

The interim dividend is 23.25%, a 7% increase. Free cash flow was an outflow of GBP206 million due to net working capital outflow of GBP391 million, primarily driven by PGM refinery downtime.

This working capital outflow is disappointing. However, the business has strong cash generation characteristics.

Metal working capital volatility can distort this in any particular period, but the business is and should be cash generative. CapEx in the half, was GBP104 million with cash spend of GBP96 million and Robert will comment on a number of our big projects.

Precious metal working capital was significantly higher at the end of March - September, I think. This is mainly due to downtime at one of our Pgm refineries, which meant we had to go into the market to source metal that we were contracted to refine and return.

We're working hard to reduce this working capital, and while we expect to have made significant progress by the end of the year, we will not yet be at normalized levels. You can see from the chart that our precious metal working capital does fluctuate.

This is due to metal prices and volumes and we have significant experience in managing this volatility. Looking now at non-precious metal working capital.

Our continued focus on improving working capital, and running the business as efficiently as possible everyday has resulted in progress in the period. Working capital days excluding precious metal at the period end was broadly similar to the end of the first half of last year at 65 days.

Average working capital days excluding precious metal improved by 2 days when compared to the first half of last year. This takes us to an 8-day average reduction over the last 18 months, and was despite a planned inventory build during the period ahead of the start of our rollout of our global IT system SAP.

We will continue to drive an underlying improvement in working capital throughout the year. There are however some specific factors this year which could distort our performance, including the nature of the U.K.'

s withdrawal from the EU, and the continued rollout of SAP across our business. Moving to the balance sheet, our net debt has increased by GBP357 million since the year-end, which reflects the increase in precious metal working capital.

Our balance sheet remains strong with net debt-to-EBITDA, of 1.5 times. We target to net debt-to-EBITDA, of 1.5 to 2 times, allowing us to invest in value enhancing opportunities to accelerate future growth in-line with our disciplined capital allocation framework.

Now to give you a quick update on the progress related to my three focus areas. Firstly, rigorous resource allocation.

We are continuing to focus on ensuring our spend is targeted to the highest areas of growth. Our annualized return on invested capital was 16% compared to 16.4% at the full year, primarily reflecting an increase in our net pension asset.

Clearly, this is not an operating asset. So we are reviewing, whether we have the right basis for calculating this to ensure that we give our shareholders the best measure of our true performance.

Excluding the net pension assets, return on invested capital is 16.5% in line with the full year, '17, '18 on the same basis. Our target return on invested capital over the medium term is 20% and despite the recent reduction we have a clear path to achieve this.

Secondly disciplined management of working capital. I've talked about this already.

We continue to target year end non-precious metal working capital to be between 50 and 60 days. My aspiration is for our average working capital days to also be in this range, although as I mentioned, working capital this year could be distorted by factors such as the U.K.

planned withdrawal from the EU for which we're building inventory in order to minimize supply chain disruption. Lastly, increasing business wide efficiency.

We can see tangible results in this area with further benefits to come in the medium term. This is an ongoing process, and we are continually identifying opportunities to run our business more efficiently.

The Group restructuring program that we started last year is progressing well. We realized an additional cost saving benefit of GBP7 million in the period, and we anticipate the annualized savings to be around GBP25 million from this program.

On procurement we've continued to invest and expect to deliver 60 million of savings over the next three years. Roughly three quarters will directly benefit the P&L.

This initiative has started to deliver savings in the half, with benefits of 5 million and is expected to deliver a total of 13 million for the full year. We're moving from over 40 ERP systems to one global system with the implementation of SAP.

We completed the first site implementation over the summer, with the rollout across the remainder of the Group over the next couple of years. So we continue to incur costs with regards to this but we will drive future cost savings as we run our business more efficiently.

Overall, I'm really pleased with the continued progress in this area. Turning now to the outlook, we're confident in the outlook for the full year.

And now expect the Group to deliver operating profit performance towards the upper end of our previous guidance of mid to high single digit growth at constant rates. This will continue to be led by Clean Air, as share gains in Light Duty European diesel catalysts ramp up further.

We currently expect a GBP2 million benefit for the full year on underlying operating profit from foreign exchange translation. Working capital continues to be a focus, targeting a further reduction in underlying average working capital continues to be a focus, targeting a further reduction in underlying average working capital days, and we expect CapEx to be up to GBP350 million for the full year with some spend now phased into next year.

So a pleasing first half performance overall. I'll now hand back to Robert, who'll take you through our strategic progress.

Thank you, Anna. As I said earlier, now I'm going to talk about our strategic focus and progress.

But first, let me remind you of what JM is all about. Johnson Matthey is a world-class technology company.

We provide solutions for cleaner air, improved health and the conservation of the world's natural resources. And at the heart of our business is world-class science.

We apply this cutting-edge science to solve our customers' most challenging problems. We deliberately focus on complex issues.

We don't do easy, we develop partnerships with our customers to solve the problems that others can't. And our competitive advantage is the combination of our fundamental understanding of science and technology with an ability to design and develop scalable solutions for our customers.

There are four parts to our strategy. Through our science, customers, operations and people, we will deliver sustained growth and value creation over the medium term.

We invest in our science and technology to deliver competitive advantage. We focus on serving our customers in high-growth, high-margin technology-driven markets.

Our advanced technology supports our customers and this enables us to develop and subsequently maintain leadership positions. We relentlessly focus on operational efficiency and are driving improvements across all aspects of how we manage our business so that we are more connected, agile and efficient.

And our strategy is of course delivered through attracting and retaining the best people, those who are aligned with our vision and who embrace the opportunities that come from working both across JM and with our customers in an increasingly complex and rapidly evolving world. We deliver our strategy through four sectors; Clean Air, Efficient Natural Resources, Health and New Markets, and over the medium term, each sector will contribute to the delivery of shareholder value, which we define as mid-to-high single-digit earnings per share growth per annum, expansion of our return on invested capital to 20% and as a result, a progressive dividend.

In Clean Air, we will deliver sustained growth over the next decade with share gains in Europe and tighter global legislation. In Efficient Natural Resources our focus on technology and higher growth segments will enable us to deliver market-leading growth with efficiency gains driving profit growth ahead of sales growth.

And in Health and battery materials we are positioning ourselves for breakout growth. In Health, our new generic product pipeline is expected to deliver an incremental GBP100 million of operating profit by 2025 and in battery materials, we are progressing our plans to commercialize our next generation eLNO materials.

So that's our strategy which we laid out at our Capital Markets Day last year. We are confident that this will enable us to deliver on the promises that we have made and indeed whilst the world is constantly changing around us we have and will continue to deliver successfully.

Over the last six months, we've seen increased concerns over global economic growth prospects and uncertainty in the outlook of China, given weak economic data. However, rising oil prices provides us an opportunity for our Efficient Natural Resources sector.

There are a number of market factors which continue to impact the automotive market, most of which will be well known to you. In Europe, the well harmonized light vehicle testing procedure or WLTP for short came into force this September and whilst this is proving challenging for some OEMs in the short term, it provides us an opportunity for more complex catalysts systems in the medium to long term.

On the other hand of course the diesel share of the market in Europe continues to decline, but this decline is in line with the forecast we made last year. Further developments in automotive powertrain over the next decade and beyond provide further opportunity as our technology leadership means we're well positioned for success in this dynamic landscape.

And of course the global political backdrop is quite uncertain too. Going forward, there will inevitably be noise around all of these and potentially other factors, but we have successfully navigated change before and I'm very confident that we will be able to do so again effectively and deliver against the strategy that we've laid out.

So now let me provide an update on our strategy by sector. First, Clean Air, I'm pleased to say we are on track to achieve our goal of sustained growth in this business.

Our strategy is underpinned by our global leadership supporting our customers and meeting increasingly stringent legislation requirements, with the best technology and an efficient manufacturing footprint. Our European light duty business is growing strongly in the short term as we benefit from platform wins, which are driving share gains.

And as Anna mentioned, we've seen continued share gains in our European Light Duty diesel business and we are on track to achieve a market share of around 65% by March 2019. In gasoline whilst the profit impact is immaterial, if the market stays as it is currently.

We may not achieve our previously anticipated 5% market share gains by 2021. Taking all these factors together I'm still confident that following a strong period of growth in European Light Duty in the short-term that elements of our Clean Air business should be broadly flat over the next decade, as diesel declines and battery electric vehicle penetration increases.

As I've mentioned, tightening legislation globally is a key driver of our growth in Clean Air. Our Asia business will transform, led by tighter legislation in China across both Light and Heavy Duty.

We'll also see growth from India and Southeast Asia as legislation is upgraded. On the Light Duty side in China, we are on track with platform wins for China 6 and we expect to maintain a constant share.

And on the Heavy Duty side in China, we are planning to at least maintain a consistent share. The phasing of China 6 maybe earlier than expected given the Chinese government's BlueSky legislation, which requires early implementation across some provinces from early 2019.

Although this doesn't alter our medium-term strategy, the timing of our customers' platform launches maybe earlier than expected. More broadly across the Heavy duty side of our business we've maintained leadership with good growth in heavy duty, particularly in North America due to Class 8 truck but also in India, albeit from a lower base.

To support our growth in Clean Air we have taken steps to expand our manufacturing footprint and capacity in Europe and China. Construction of our plants in Poland and China is underway and we are likely to need further additional capacity in India to meet increasing demand there.

But overall, I'm really pleased with the momentum of our Clean Air business. I'm confident in our ability to deliver mid-single digit sales growth over the 10 years with a broadly stable margin.

In Efficient Natural Resources, we're making targeted investments in higher growth segments. We have categorized our portfolio based on the growth potential and we're aligning our CapEx and R&D investments to these opportunities.

For example, we've redirected resource to high-growth segments such as methanol gas processing and areas of oxy alcohols. Alongside our investments, we are taking steps to increase efficiency, Anna has given you the financial detail on this, but I wanted to add some context from a strategic perspective.

Firstly, our product portfolio review will continue to drive improvements across the business over the next couple of years. And secondly, we have instigated a program of increased investment in our Pgm refineries, to improve our safety and operating resilience.

And in an ever changing world the security of supply that these refineries, provides a cleaner is a key element of our strategy. We also continue to look at additional opportunities for long-term growth that will benefit from our science and technology.

And I previously talked about our plans to commercialize newly developed technologies. For example, we've won our first license for our recently developed mono ethylene glycol or MEG technology which enables the production of MEG from a variety of raw materials.

And we've also recently commercialize our waste aviation fuel technology. So to summarize, I'm really encouraged with our progress to-date and we will continue to grow sales and drive efficiency across our operations.

In Health, we are taking action to improve the performance of our existing business through identifying new sales opportunities and partners as well as improving our operational and manufacturing effectiveness. In the last six months, we have optimized our manufacturing footprint with the closure of our Riverside plant in the US and we are ramping up on our UK side, plant in Annan, UK which is expected to be fully operational by the end of 2019, '20.

S key area of focus is expanding our new product pipeline and portfolio across both generics and innovators. Firstly on generics.

Through investments in our generic pipeline we will deliver an additional GBP100 million in operating profit by 2025. We are still on track to deliver this pipeline and I'll cover this in more detail on the next slide.

Secondly on Innovators, although this business is only around 30% of our sales at the moment, we do see significant potential here. The Innovator side typically involves more complicated drug design and this complexity demands better capabilities and material characterization and particle technology.

And this plays right into our sweet spot. Our Innovator pipeline is also progressing well with three products in late stage development and nearing commercial launch.

All of this will deliver breakout growth. So moving on now to the generic pipeline in more detail.

On this slide, we've given some additional detail on that pipeline. The top chart shows the potential operating profit by product per annum.

And we've categorized the products by time to launch. Below this, we've given some additional detail on how the pipeline is progressing.

Our generic API products move from development to market through key stages, from the early stage to formulation, development to filing and obtaining regulatory approval through to launch. And as you'll see from the chart, we currently have 20 products in early stage, 19 in formulation development, 6 in regulatory and 1 product is launched this year.

Throughout the process we work closely with our customers. Timings however depend on our delivery.

Our customers timeframes, and the time it takes to get regulatory approval and subsequently to launch. You can see here our progress since April 2017 from the arrows in the bottom of the slide.

As you can see we've had one product launch, five have moved into the regulatory stage to bring this total to six. Of course, this does not mean that all of these will launch in the next couple of years because some take much longer and are awaiting patent expiration.

There's been a net loss of one from the formulation development stage, reflecting five products moving along the process and one drop out, which is to be expected. And a net increase of six in the early stage reflecting 5 products moving into formulation developments and additional products being added to the pipeline.

This hopefully gives you a sense of the progress we're making and the size of the opportunity across various timeframes. We have a diverse portfolio.

We're not reliant on any one drug, and we now have 46 products in our pipeline of generic APIs. Moving on now to the battery materials.

In new markets we are positioning for breakout growth in battery materials with our ultra-high energy density next generation eLNO materials. Over the last few years, we've been making working hard to develop our battery materials business.

Our progress has been driven by our science and technology leadership. That is what JM does best.

Given this is such an exciting opportunity for us, I'm going to spend some time on this topic over the next couple of slides. But let me start by saying that we have made tremendous progress accelerating our battery material strategy.

We are adding resources to further develop eLNO and we now have around 80 R&D scientists and engineers in our battery materials team which we scaled up significantly in the past year and our total R&D investments in eLNO has increased by 60% in the period. Customer sampling is still progressing well and feedback remains excellent and our commercialization plans are on track.

All of this will lead to breakout growth. As we've previously talked about eLNO is a significant development.

It offers a step change in energy density, lower cobalt and lower dollar per kilowatt hour per cycle compared to current and future cathode materials. eLNO's superior performance is attractive to our customers and will enable increased penetration of long range battery electric vehicles.

This gives JM a sustainable competitive advantage and today, I wanted to give you some insights into the battery material production process and where we play in that value chain. On this slide, we've shown a simplified version of the overall battery production process, starting with raw materials, all the way through to the battery pack that is used by the OEM.

JMs expertise and investment are in the cathode material production. The blue box at the top of the slide, which can be separated into the wet end where we make the precursor and the dry end where we make the final cathode material.

We have chosen to operate across the entire production process from metal salts to eLNO because this allows us to differentiate and optimize eLNO through every step of the manufacturing process. This further enhances our ability to maintain our technology leadership and deliver market-leading solutions for our customers.

We're also assessing the opportunity within battery materials recycling, which utilizes our core competencies. It will be sometime before sufficient batteries need to be recycled but we are looking at all areas of battery activities across their lifecycle.

Our commercialization plans for eLNO are on track. We've come a long way and I'm excited about what we've achieved so far.

On this slide, you will see our progress to date and key milestones over the next 12 months. We have developed the best-in-class next generation battery material, eLNO.

And we continue to receive positive feedback from our customers. We've also progressed our scale up activities.

The dry-end of our pilot plant is operational and the wet end will be operational next year. Our full scale commercial plant, which will be built in Mainland Europe is also on track and we received Board approval for the initial CapEx in July.

We are now completing the front-end engineering design and progressing land purchase and permitting. Over the next 12 months what can you expect from us is that we will continue to expand and invest in our R&D team to ensure that we maintain our competitive advantage.

We will also continue eLNO customer qualification with our strategic partners. We've previously shown you the stages of qualification and their timelines and you can find this in the appendix.

We expect to break ground on our first commercial plant in Europe and of course we are already thinking about increasing capacities above 10,000 tons. We are investing in our custom application center in the U.K., which will be operational next year.

And to support future expansion we will enhance our capital projects team to add further rigor in our investment strategy. In summary, we're on track and I'm really excited by the opportunity that lies ahead.

There's a huge amount of activity in battery materials and I look forward to updating you on progress over the next years. So to summarize on the progress, we made in the last six months.

Firstly, I'm very pleased with our good performance this half as we continue to successfully execute on our strategy to deliver sustained growth and value creation. Against an evolving market backdrop, we have delivered on our promises whilst at the same time being incredibly busy investing across the business, to build our platform for future growth.

Our strategy remains strong and I'm extremely confident that our core technology strength and ability to solve the increasingly complex challenges the world and our customers are facing will enable us to drive attractive returns. So thank you very much for listening.

That concludes our presentation for this morning. And with that, I'll pause and Anna and John will join me up on the lectern and we're happy to take any questions you may have.

Who'd like to go first? So we start over there, if you could state your name and where you from?

[Indiscernible] with Morgan Stanley. Maybe first one for John, just around HDD.

I think last time you talked about Class 8 perhaps normalizing calendar year next year. Any change there?

It seems like the orders look pretty good. So just thoughts around that.

And then also in HDD have you benefited at all from the retro fix with Cummins and what they've set aside there? First question.

Second question Pgm benefit. So 10 million in the first half, at current market pricing.

What do you expect for the second half? And then finally, you didn't touch on it, but the license you signed for GEMX - G-E-M-X how you pronounce it, what do you get with that?

Are you the only guys licensing it? Who else if any others have licensed it and what does that bring to you?

So John do you want to start-off with the HDD question?

So Class 8 I think we said in the announcement that we expect the Class 8 cycle to continue through the middle of middle of next year. I don't think that's different than what we said at the end of the full year.

So we expect that, if it continues, great we're ready for that as well. But we are not changing our guidance there.

And on retrofit yes, we have had some benefit from the retrofits in North America.

Anna do you want to answer the Pgm question?

Yes, we had a 10 million benefits in the first half. I'm not going to guide explicitly on the benefits in the second half, but it's less significant.

And firstly, it will depend on what happens to metal prices, which one never knows and on the license that we announced today that just gives us protection and protects our portfolio position or IP position, doesn't give us anything particularly other than the protection that we need to make sure that we can continue the development of the eLNO. Who else has it, we don't know and that's, I guess maybe other license may happen in the future.

I don't know, but it's - that's still our issue.

Were there any costs associated within the first half?

No.

So we are going to - actually I think there was a lady behind who was first. Sorry, Adam we will come back, but we do it in the order.

It's Nicola Tang from Exane BNP Paribas. And I wanted to ask a question on the outlook comments you made in Clean Air, sorry, around tariffs and whether that was more a comment on indirect impact or whether it was direct for JM.

Staying with the macro, you also mentioned Brexit and then your comments on working cap. I was wondering whether you could maybe expand on that a little bit or maybe talk about wider impacts beyond working cap and what you're doing ahead of Brexit?

And finally, I was just trying on understand on Clean Air the margins in H2 and why - what was the reason behind the ramp up cost in the second half given, I would have thought the volume - given you've been seeing in the market share gains in diesel and the volumes going up. I was wondering why you arent' going to see more volume leverage in the second half on that.

Thank you.

Well, we keep going with the theme, John, you answer that. John will answer some of the Clean Air questions.

Well, tariffs I guess, split into two categories. So it's what the vehicle makers are going to do.

So whether the tariffs, have any impact on where vehicles are made. We have some room to be flexible with that.

But the other area where tariffs in North America, have an impact is in North America with some raw materials that we import from China. So we do have some impact on that.

We've made good progress in the first half at mitigating some of those tariffs. But some of those tariffs increase in January of 2019.

So we'll continue to try and mitigate those tariffs. But the challenge of mitigation is getting bigger.

And the team are doing a very good job of mitigating them and you can't mitigate them overnight. It takes a bit of time to put in alternative supply chain options, but we are doing a really good job there of mitigating, the team is doing well there.

So John the second question, I think on Clean Air, if you just keep going, was on margins and the question about the sort of new products, do you want to?

So I guess there was a Brexit question as well.

Well, we will do the Clean Air one first.

So for Clean Air margins in the first half, as we reported, our margins are up 0.5%. We've got positives and negatives in there, as you pointed out.

We've got strong volume growth leverage in the first half, and as we just talked about, we've been able to mitigate some of those tariff impacts. Anna talked about some of the procurement savings that we have.

So we've had a lot of those benefits flow through in the first half. In the second half of the year, our product mix becomes more challenging.

We're starting to ramp up some of our new facilities. So we're going to have additional costs to be able to start up some of those facilities and our product mix is getting more challenging because of the more complex products that the new legislation is delivering.

So we're just forecasting more challenges in the second half and forecasting to hold margin, same as last year.

I was just going to finish off. If you recall at the full year results, we've talked about the fact that we've been able to maintain our margins for the year and our guidance is absolutely to do that.

We've done better in the first half. But as John said, there are some competing sort of headwinds that will reduce the margins in the second half.

But overall it'll still be consistent margin compared to where it was last year. And finally, Brexit question was sort of working capital question, and do you want to --

Yes, I'm not going to guide on the working capital impacts of Brexit. I mean beyond saying we are working with each customer individually on Brexit plans across all possible withdrawal mechanics from the EU.

Those plans differ customer by customer and in some cases involve us building working capital ahead of time. We also have other plans in place here.

We've already started recruiting some additional people to help us process things. So we feel we're well positioned to navigate whatever comes to pass.

So we go to the next question here and then afterwards we'll go over to Neil.

I have three questions. It's Adam Collins from Liberum.

First one is to help us understand the China Catalyst exposure, you tell us what the Asia exposure is, it's 14% of HDD revenues and 21% of [ODB] but are you able to just give us a sense of the China bit to the extent that some of us are concerned about the slowing market conditions there? That's the first one.

The second one is on the process catalysts where you're talking about increased licenses. I wondered if you could talk a little bit about specific areas where that is being booked and then improved activity, besides methanol, what are the other areas where you are now seeing signs of progress?

And then the third one, perhaps for Anna is on just clarifying where we're at now in terms of the global procurement savings plan. A couple of years ago you mentioned there was going to be GBP100 million CapEx, three-year program roughly similar savings.

And I think it was slightly delayed on your arrival as you reviewed it. Could you just give us an update on what the associated investment will be.

What the extra depreciation that will be, I understand it's accelerated and - yes, that would be helpful. Just to put out in context of what you said historically.

Okay, thank you for those questions and give Anna some time on the last one. On the first two sorry, we're not going to give the detail by country.

We already gave you a fairly detailed analysis by region and that's as far as we are going to go, I'm afraid. We do talk about the opportunity for China 6, both in Light Duty and Heavy Duty, which is tremendous and tripling of content in Heavy Duty side, and the doubling in the Light Duty side and the fact that we've got Blue Sky which is potentially pulling forward some of that benefit, could help us in - not this fiscal year but maybe next fiscal year.

Doesn't change the medium-term outlook, but it does - might help us in the short run. But we're not, I'm afraid going to go down by country level.

On the catalyst technology side, we've had a couple of light - we have had a few license wins in the first half. Very little revenue associated with those in the first half because they get spread over the plant build.

And so the revenue associated with those will come through into - in the forthcoming few years as they - as those plants get built. Couple of methanol licenses within that but relatively small ones not massive license wins.

And the improved activity, besides methanol well I talked about the two actually which are kind of methanol ones. The mono ethylene glycol is a good win and the one with waste to aviation fuel, which obviously has huge sustainability benefits, but also is a nice license and it's a sort of kind of small pilot - not quite a pilot projects it's a proper project, but the opportunity across the US to roll that out is potentially quite exciting.

And on well - it was procurement but I think you actually - is the ERP systems as well.

My favorite subject, SAP. So as we said previously, we've invested over 100 million and in SAP system that we will roll out across the globe.

And this is moving on many sites. We have over 100 sites.

On to standard systems and processes. Which will give us significant benefit going forward?

Just on your financial question, depreciation in the year will be about $7 million and yes, we are depreciating it. What savings does this give us?

It underpins everything actually. So in the first instance, we are now live in Royston.

Royston is a boosting cleaner, a big complex site. So we didn't start with a little site, we've gone with a big contract site And we now have standard transparent processes there.

I'm pleased to say that Royston production it's now is consistently hitting fairly high levels of output, higher than we have previously. That's in part system driven and it's in part driven by transparency as to how those processes work.

So as we rollout site-by-site what we'll see is specific low levels savings, small number of million associated with tidying up systems and processes, greater transparency and understanding of our process. The second layer of savings, which we don't get with the first rollout is that you can start to retire these faulty ERP systems that we're running, and I can't tell you how many instances, we've got of those 40 systems.

And as you start to retire those legacy systems. That's a material reduction in support costs which would be the second tier saving.

The third tier saving about which I am most excited is clear visibility on data with which to run our business. So yes, we're making really good progress with procurement savings, but right now we have to extract data from 40 ledgers around the globe to try and figure out what we're spending.

And in every ledger it's quoted differently. Certainly it's getting at all of that quite hard to do, and we've got a standard set of data and processes we will be able to manage our pricing real time.

understand customer profitability, understanding product profitability real-time in a way that we can't today and that will materially underpin our ability to drive efficiency across the rest of the group.

And let me talk about operational efficiencies, as Anna said the systems is a foundational basis to have to enable you to drive some of those operational efficiencies. So it's really important to get this in.

And just two follow-ups slightly on the second area of progress in Pg, did I hear you right, you said you're adding resource in methanol oxo alcohols and oil processing. And if that's the case or are you also signaling therefore that the other two areas which you didn't touch on, oil processing and Oxo have got better?

Well, I think I talked about oxo alcohols, methanol and gas processing were areas of sort of additional - as we said we're adding massive resource there, so it's resource allocation, putting more resources there and less resources in other parts and lower growth areas. So it's really targeting the areas where we think have greater potential.

We are seeing massive cost savings. It's more of a resource allocation issue.

Good morning, Neil Tyler, Redburn. Two questions please, first on Clean Air and then on ENR.

And John, on Clean Air, the sort of renewed - or the additional optimism with regard to the China 6 timings. And can you perhaps shed some light on what has prompted that?

Is that platform wins, is that conversations with customers or just your own hunch? And the second question on ENR, the first fill catalysts, I was wrongly it seems under the impression that, that was at a very minimum level and it seems, every time we think that there's another - there's another drop.

Can you give us an indication of where that stands perhaps percentage terms now relative to its peak in revenue terms?

So we start with the first question. Is it your optimism, John or --

This is government pulling forward the legislation. So they pulled it forward effectively a year and a half which brings with it challenges.

The first part of that, as we said, which will start in July of 2019, we are getting ready for that now. As Robert said we have a new factory coming on.

We'll be doing the validations in that new factory in the second half of the year. So as the volumes ramp up we will transition from some of the products being made in our existing factory to the bulk of those new products being made in our new factory.

This is all about China government improving air quality, hence the reason why it's called the Blue Sky initiative. So they're bringing forward, I think you cited in 13 provinces the larger provinces in China, and they're pulling forward the legislation which obviously for all sorts of reasons is a good thing.

So there's no change in legislation, it's just a timing impact, and this is not about market share gains, or - this is purely the Chinese government changing that.

I guess my question is sort of at what point do you do - would you anticipate the wins in the platforms that are required, or that will ensue from the additional technology, requirement.

For the wins that we've had in our plan we've won more than 80% of those, and that was in our plan already, so --.

Thank you.

And only the first fill catalysts, they are quite lumpy, of course as new plants come on stream. And of course as you go to a lower number of license wins, then you're going to have a lower number of our first fills and it becomes lumpier when you had multiple license wins a year, then - it would be slightly less lumpy.

So it's probably down about 60% from where we were at the sort of peak or, at a higher level. And so I think we've talked already about the sort of licensing income, so not licensing, a number of licenses sort of flattened out, it's kind of at low level still.

But hopefully that's where the end of that sort of downturn, but it is inherently lumpy, unfortunately with first fills. The refill catalysts is much more predictable and more - not quite an annuity but it's a more predictable income stream.

We got another question.

This is Sanjay Jha from Panmure Gordon. I have two questions on eLNO, if I may.

You have talked about step change in energy density. Could you give us some idea of what is the specific energy density, you can get from your technology?

And secondly when you talk about lower dollar per kilowatt against current and future materials, is that a factor of the price of current the raw materials you are using or is there something specific about the way you build the battery cell that makes it sort of lower dollar per --

So I'm going to ask Alan to answer - give a little bit more color in a second. So if you can get a mic to him.

It's - we're not going to go into specifics about some of the details about energy density and give you an absolute number, I think we can give you more qualitative comment relative to competition. And on the dollar per kilowatt cycle, it's a range of things.

But Alan do you want to give a bit more color on that.

Yes, of course. What we had talked through at Capital Markets Day, to put in relative terms is that eLNO has between 5% and 10% higher energy density relative to NMC 811 and it's somewhere in the region of 20% to 25% higher energy density compared to NMC 622.

But importantly where we're really making a difference around eLNO is also increasing cycle life or overall lifetime of the materials as well as increasing the stability of those materials as well. And those are key aspects because in order to be successful in the long-range EV market space, it's not only about high energy density, it's about having all of those other characteristics that will enable widespread adoption as well.

So it is perhaps a lower dollar per kilowatt hour per cycle life, is adding the per cycle life important because you maintain the ability for the material to charge and discharge and charge and discharge for longer and longer and retain its energy density, because the stability of the material is really, really important. We took that stability from a - how does it work, does it catch fire.

That's one element of stability, but there's another element of stability and how long it can maintain that energy density without - as you put the electrons in and out, there's quite a lot of stress on the material. But lower dollar per killowatt hour, clearly one of the things that we have here as well, there's lower cobalt and that's a factor as well.

So there is a range of factors that go into the overall arching…

Well, obviously you have to make quite a big investment, if you think this is the way forward.

But of course, of course.

But given that loss of Chinese and other countries spending heavily in this kind of technology, I just wanted to know how sure one can be, that they have the lowest dollar per kilowatt hour given the various variables.

I think there's lots of variables here. It's not just one variable.

And of course when you look at the overall cost of the material, the largest portion of the cost of material, of the absolute catalyst material is the bill of materials themselves, the lithium, the nickel, the cobalt, et cetera, the raw materials that go in. The actual element to do with the sort of manufacturing cost and the labor cost relatively speaking, out of the overall cost is a lower - much, much lower element.

So in reality you can get - if you can get better material, with better energy density, and you can - that can outweigh the benefits of maybe a lower capital cost or lower running cost.

Thank you.

So question over here.

[Charles Bentley], Bernstein. So a couple of things.

Just on European LTV gasoline. So the first thing you highlighted was the fact you've seen a lot more growth in larger vehicles rather than smaller.

And that you are -over-indexed to smaller LTV engines. Is that - is there something structural there, does that represent somewhat of an opportunity?

So that would be the first part. And then secondly, you're talking about some of the delay to the 5% share gains.

Is that something that is a threat. So this, and I understand that some of that might be reopening of platforms.

So is there an opportunity that, that might not be achieved. And then just on - going back to the CAMX license, can you just explain to me what specifically you need for that?

Why do you need that for, what does that give you that you were lacking in terms of IP protection? And then just finally in one of the slides, you said that in the next 12 months, you need to build projects team for possible further capacities for eLNO.

Is that something we could therefore expect in - to kind of hear an announcement from in the next kind of 18 to 24 months. Thank you.

So we start with the two questions on - the gasoline John, if you want to.

So on gasoline, the platforms that we're on today and the mix of our platforms was determined three or four years ago. So we are where we are in terms of being indexed to small vehicles or large vehicles.

I think that anecdotally with some of the information that we have from governments making some statements, I think some of the people who are moving from big diesel vehicles they wouldn't move to small gasoline vehicles. They'd probably move to big gasoline vehicles, if they didn't want to buy a diesel.

So I think that's the issue there. And I think in terms of timing, I don't see this as any threat.

There are some things we talked a little bit about WLTP which has delayed some customers in getting some of their systems approved. So I think some people are still working on the architecture to be able to get through the WLTP testing and that's just thrown up some uncertainty in the market.

But I don't see any long-term threat there. We've talked before about reallocating, reorganizing our R&D activities and concentrating on gasoline.

That's all progressing very well and we expect that we'll have a good share of the gasoline market in the future.

So to be specific, I don't think there's anything structural here at all. It's just the nature of where the market is today, where we were over-indexed historically on the smaller accounts or on the large accounts.

And as we - as those new platforms come through over the next few years where there's no structural issue here, that puts us in a weaker position for larger gasoline cars versus smaller gasoline. On the sort of - I'll ask Alan to provide because he's probably, being a CTO as well as running the New Markets business can give you a little bit more color on the CAMX license, if you want.

But the further capacity for - I was really talking about building up sort - there is building up the sort of capital capability of the organization in the battery materials business to drive - to deliver the first pilot itself. Let's not get ahead of ourselves about when the next new build will come on.

I know you - maybe you want to hear the next big thing we have - we are thinking about what that next big thing will be, what - how we can enhance our capacity even longer, and I talked about that and we've said before, it's we can't do everything in series. We can't wait for the first patent - the plants built and running and then wait a year or two to see how it's done and then start building and all of them.

There will be an element of overlap but we not ready to talk about the specifics of that at this stage. Alan, you want to talk a little bit about the CAMX license which we --

Get ready to talk about some chemistry. So look, I'll be very clear, eLNO is a proprietary JM product.

All of our products including eLNO and all the products across all of our sectors are enabled and supported by detailed intellectual property strategy that sits beneath them. And we put those intellectual property strategies in place really for two key reasons.

The first is to ensure that we have freedom to operate all the way from raw materials, to the composition, to the process, all the way through into the end markets in which those products are used. The second of course is to create a long-term sustainable competitive advantage for us.

In other words, it's a block. It's a barrier to entry for others coming into the space.

There are times when we pull these strategies together and we periodically review them, that we identify an opportunity to acquire license, a background intellectual property. And that's simply the case in eLNO.

We don't get into the details as to why we license or acquire a particularly intellectual property, only because that thought process and that analysis in and of itself gives us competitive advantage. It's how we think about the unique aspects around our material.

But suffice to say what the CAMX license is what the GEMX license is what the 3M and MC licenses and all the licenses that we have today what they provide is an opportunity to improve and extend our intellectual property portfolio to give us a long-term competitive advantage.

That answer your question, good, okay. Any more, Adam, you'd like to come back for another question.

Of course, you're just on your previous one.

I wanted to ask John a question about WLTP/RDE testing and its implications. It's pretty obvious from what we've seen so far the delays that have occurred, have occurred mainly on gasoline.

And this may be due to the fact that are more variants on the gasoline side but one sort of theory is the OEMs are having difficulties in getting cars certified without particulate filters and I wondered whether you thought this might herald an early implementation of particulate filters as well in Europe before the next stage, the EURO 65 that you might be more optimistic about the segment rate because of this.

John?

I kind of agree with everything that you said. I don't think that the ramp rate that we had anticipated before is going to be affected by that.

We still believe that gasoline particulate filters are coming in now. They are ramping up.

We had small volumes last year, we have bigger volumes this year. Over the next two years is when we're really going to see those volumes increase.

But it can provide as you say an opportunity as John said, as he agreed with you, but I think one of the issues is WLTP is clearly making it harder for OEMs to meet the regulatory requirements. And that is - can only be a good thing for Johnson Matthey because it requires more complex cathode systems.

So it's a good news that this legislation comes in place for all sorts of reasons because this enhances air quality as well of course. It's an opportunity for us.

Any more questions. Well, thanks very much indeed for coming.

And very nice to see you all and we look forward to seeing you again next time. Thank you.