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Clean Air

roundtable

Monday, 7th February 2022

Clean Air roundtable

Monday 7th February 2022

Clean Air roundtable

Stephen Oxley

Chief Financial Officer, Johnson Matthey plc

Introduction

Good morning / afternoon everyone. Thanks all for joining and welcome to our Clean Air roundtable. Our focus for today is to give you greater insight into our Clean Air business and how it may evolve over the coming decades with the transition to electric vehicles.

We talked previously about our cash generation target of at least £4 billion over the next decade under our range of scenarios - we'll explain why we're confident we can deliver on this, and that the business has durability with significant profit and cash generation beyond fiscal year 2031.

So when you think about the £4 billion, what I'd like you to takeaway is our confidence in that number…and it being at least that amount. It could of course be higher depending on the scenario and remember we're only talking about the next 10 years. We have a business that is likely to continue for many years after that, particularly in Heavy Duty Diesel where we are the market leader, generating further profits and cash.

Before I introduce the Clean Air team, let me first say a few words on how I see the group to put this session in context. JM's technologies and solutions are completely aligned with our challenge and responsibility as a planet to reach net zero. We're not a business that just talks ESG or sustainability, sustainability is our business. We're targeting high growth, high return opportunities in hydrogen, in circularity and the decarbonisation of chemicals. And we're well positioned given our leading technologies, strong market positions and customer relationships.

The foundations of Johnson Matthey are strong. Our metals expertise and position as the world's leader in platinum group metals is at the core of what we do - it's been developed over many years and, this, combined with our catalysis expertise in Catalyst Technologies has been fundamental to our success in Clean Air, and will be to our future. This core expertise underpins our competitive advantage and is critical to developing the new technologies that are needed to tackle climate change.

I've been at JM coming up a year now. These last 10 months have been tough, and disappointing for our shareholders and our employees. But we have faced into some difficult and necessary decisions. We have clear requirements and opportunities to improve our execution, drive greater efficiency across the group, be disciplined in our allocation of capital and aggressively commercialise our growth opportunities.

As the world accelerates its transition to net zero, our opportunities are coming towards us more quickly and I'm genuinely excited about JM's future. Over recent weeks, we've been working closely with Liam - he's already heavily engaged and as we mentioned before, you'll hear more from him in May.

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Today's presenters

I'm very pleased to introduce our Clean Air leadership team who have been instrumental in driving the recent transformation in this business.

Alastair Judge - our Clean Air CFO and Interim CEO. Alastair has been with JM for over 3 years and led the strategy refresh with Joan Braca in 2020.

Peter Hill is our Chief Commercial Officer and Transformation Director. Peter joined JM in early 2020, after spending most of his career at Honeywell in a variety of commercial and operations roles.

And Millissa Flanagan is our Clean Air Operations Officer. Millissa joined us 14 months ago and brings over 35 years' experience built in a variety of operations, supply chain and business roles across the Automotive, Chemicals, Plastics and Refining industries

Alastair, Peter and Millissa don't walk alone, they are supported by a great team, including an operations leadership with over 130 years' experience blending a depth of knowledge of JM, Automotive, Chemical, Private Equity and other global businesses.

So with that, I'm delighted to hand over to Alastair and the team. We've got about 40 minutes or so for the presentation, followed by Q&A. This session will be recorded for our purposes but the Q&A discussion will not be published.

Clean Air overview

Alastair Judge

Clean Air Chief Financial Officer and Interim Chief Executive, Johnson Matthey plc

Introduction

Thank you Stephen. I'll start by briefly setting the scene. Peter will then share our view of the market. Millissa will explain the changes we're making in our operations to drive out costs. And I will wrap up by showing how the business will deliver at least £4 billion in cash by fiscal year 2031. We'll present for about 40 minutes and then open up for questions.

Clean Air overview: delivering on our strategy

As you know, Clean Air is the engine room of Johnson Matthey. It plays a vital role in reducing harmful vehicle emissions as regulation continues to tighten globally.

It's founded on our expertise in catalytic convertor technology. Clean Air generated sales of £2.4 billion in fiscal year 20/21 - sales that were well diversified across Light Duty Diesel, Heavy Duty Diesel and Light Duty Gasoline.

In May last year we committed to delivering at least £4 billion of cash by fiscal year 2031 using four key levers.

First, we will deliver strong sales in a durable market that still has growth opportunities

We have long standing relationships with the key global OEMs, underpinned by strong technology positions. We will maintain our leading market positions in both light and heavy duty diesel and we will selectively target platforms in light duty gasoline to ensure a robust market share. On Light Duty Gasoline this means we will focus our internal resource on winning

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Clean Air roundtable

Monday 7th February 2022

the opportunities that match our ambitions, and not dissipate our energy on smaller non-core platforms in a very fragmented market.

Overall, we expect to retain a 1/3 share of the global market over the next decade, with our position supported by our global share of about 60% in HDD.

We are continuing to develop world leading catalysts to support our customers with the tighter regulations coming into force from 2026 and we are already winning critical business linked to Euro 7 and new regulation from the US Environmental Protection Agency.

The second priority is driving cost efficiencies. 25% of our costs are fixed at around £550 million per annum. We plan to reduce this by a minimum of £100 million by fiscal year 30/31, and this could be as high as £200 million depending on the rate of electrification. The biggest driver here is the consolidation and optimisation of our manufacturing footprint.

We have 16 sites globally. Within this portfolio our five newest plants are highly efficient. This gives us the option to consolidate volumes as the market matures. We started moving production out of our most expensive facility in Royston in the UK in fiscal year 21 and this will deliver cumulative savings of £29 million by the end of fiscal year 22 and run rate savings of about £50 million by the end of fiscal year 23.

We have also established a new global operating model to enable us to respond to market scenarios as they evolve with agility and flexibility. As part of this change, we now manage our business by the segments you see on the left rather than by region, and it's important to note that the new model is leaner and lower cost that the old regional model. This sets us up well to deliver further overhead cost reductions over time.

Third we are on track to reduce capital expenditure from an average of £135 million over the past 3 years, to c.£50 million in 2024/25 now that our major strategic investment in new plants is complete.

Lastly working capital will unwind in line with sales as the business matures from around £2 billion last April to c.£800 million at the end of fiscal year 31 in our base case.

Clean Air remains a cash generative business of scale in 2030/31 and beyond

Our business will still have material value after 2031. It will be smaller than today and in our base case scenario it will have sales in the region of £2 billion of which around half will be Heavy Duty Diesel. It will be lean and generate low double-digit margins. And we will have significant working capital to release from fiscal year 2031 onwards.

I'll talk more about this at the end of the presentation. Now I'd like to hand over to Peter Hill, our Chief Commercial Officer, to talk about the market.

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Clean Air roundtable

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Market

Peter Hill

Clean Air Chief Commercial Officer and Transformation Director, Johnson Matthey plc

Thanks Alastair and good morning/afternoon everyone.

Clean Air is serving a durable, global market

In the coming decade, global demand for automotive catalysts will be driven by four main trends

- two acting to increase demand, and two to bring it down.

Over the next 24 months, we expect shortages of semiconductors and other critical components to be gradually resolved. This will enable an increase in vehicle production to meet pent up consumer and business demand.

Later in the decade, new regulations to limit tailpipe emissions will require OEMs to integrate additional emission control stages. This will increase the value of catalyst per vehicle.

On the downside, battery electric vehicles will take a larger share of vehicle sales, which will gradually reduce our addressable market.

Finally, the share of European light duty vehicles fitted with diesel powertrains will decline further in favour of gasoline hybrids. While these still require aftertreatment, the value of catalyst coating excluding precious metal will be lower.

The exact timing and impact of each trend is uncertain. This chart shows our forecast of market value for two core scenarios. I will share more details of our assumptions for each scenario over the next few slides.

Nonetheless, you can see that in both cases we expect total catalyst demand to remain stable for the first half of the decade, before entering a period of decline as battery electric vehicle production replaces internal combustion engines.

We have two key scenarios for powertrain evolution for 2030/31

This shows you the key assumptions behind our two scenarios.

In the base case, which we believe is the most likely, we expect global light duty production to grow from 75 million this year to 100 million by 2031. This is in line with the current baseline scenario from IHS Markit. The timing of this growth will depend on availability of semiconductors and other key commodities. New emissions legislation will come into force in Europe in 2026, and shortly after in the US and China. Battery Electric Vehicles will account for 30% of global light duty vehicle sales in 2031, up from 6% today. In Europe, only 10% of the remaining vehicles powered by internal combustion engines will use diesel, and these will all be commercial vehicles.

The faster electrification case assumes that more aggressive government action accelerates the transition to zero carbon transportation. In this scenario, light duty vehicle sales increase to around 90 million, constrained by taxation and traffic restrictions. In light of announcements at COP26, we have updated this scenario to show 50% of light duty sales as battery electric, compared to 40% in the scenario we shared last year. We still expect new emissions regulations

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