Johnson Matthey : Transcript

Johnson Matthey Plc

Presentation of Results

for the Year Ended

31st March 2021

Thursday, 27th May 2021

Johnson Matthey Plc Presentation of Results

Thursday, 27th May 2021

Welcome

Martin Dunwoodie

Director of Investor Relations, Johnson Matthey

Good morning, everyone. I'm Martin Dunwoodie, the Director of Investor Relations at Johnson Matthey. Welcome to the London Stock Exchange this morning and our full-year results presentation. Unfortunately, we don't have a live audience here today, but hopefully we will be able to see each other soon. We have a presentation followed by Q&A, as usual, with our Chief Executive Robert MacLeod, our Chief Financial Officer, Stephen Oxley, and our Sector Chief Executives for Clean Air and Efficient Natural Resources, Joan Braca and Jane Toogood. And with that, I will hand over to our Chief Executive, Robert MacLeod.

Introduction

Robert MacLeod

CEO, Johnson Matthey

Thanks, Martin and good morning, everybody, and I hope you're all very well.

Robust results

To start with, I'm very pleased that we have today delivered a robust set of results. In the context of a global pandemic, where some of our key end markets saw significant volatility, this is a testament to the efforts of everyone across JM. After a challenging first half, we saw a strong recovery through the second half and it's pleasing to report that this momentum has continued into the current year. More so than ever, over the last 12 months we've worked to support each other, keep everyone across JM safe and well, while continuing to deliver for our customers and driving significant changes across JM, which will enable growth going forward.

As the world moves at pace to solve urgent challenges such as addressing climate change, improving air quality, enabling the transport and energy transitions, decarbonising chemicals production and creating a more circular economy, JM has never been more relevant.

At our core is our world-class expertise in metals chemistry and we are leveraging that to develop sustainable solutions to solve these challenges. We have clear strategies for our businesses. We will capitalise on tighter legislation in the coming years to grow our Clean Air business, and Joan will also detail the levers we can pull to ensure that we will generate at least £4 billion of cash in the coming 10 years as Clean Air's markets mature.

We're also strongly positioned to win in a net zero world and are well positioned to benefit from the push for decarbonisation and increase circularity. This will drive growth in Efficient Natural Resources, as well as in Battery Materials and Hydrogen.

A more focused and efficient business

However, to manage the transition in our end markets successfully, our business needs to be agile, to take advantage of the fast-changing world around us. That's why we're creating a more focused and efficient business and promoting a high-performance culture to set us up for success. This will save costs and drive clear accountabilities. And at the same time, we're

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actively managing our portfolio to ensure that we focus on businesses where we have clear competitive advantage. Across all of JM, we're really excited to be playing our role in a transitioning to a more sustainable future, helping our customers achieve their ambitions. We've also recently announced our own new sustainability goals, as I'll explain on the next slide.

Ambitious targets

As you'll see throughout this presentation, we have a growing number of solutions to help achieve our vision of a cleaner, healthier world, but at the same time we need to be doing our bit, by decarbonising our own operations and supply chains. We've set ourselves some ambitious targets and we've committed to being net zero by 2040. Alongside this, we've outlined science-based targets, an absolute reduction in Scope 1 and Scope 2 greenhouse gas emissions of at least 33% and Scope 3 greenhouse gas emissions of at least 20%, both by 2030.

These will be challenging, but by moving to renewable energy, improving our plant operations to minimise processed greenhouse gases, and working with our supply chain partners to reduce their emissions, we can achieve this. And furthermore, through our asset renewal programme, we'll be reducing our dependence on natural gas by switching into alternative energy sources such as hydrogen as they become available.

And it's pleasing to see that our efforts are being increasingly recognised by our stakeholders. And I'll talk more about our strategy shortly, but first let me hand over to Stephen to introduce himself and give you the financial highlights. Stephen.

Financial Highlights

Stephen Oxley

CFO, Johnson Matthey

Thank you, Robert and good morning, everyone.

I joined Johnson Matthey in April, which was straight after year-end, so you can imagine it's been a pretty hectic few weeks. But I do know JM well from my time at KPMG, when Johnson Matthey was previously a client. And what's great about JM, which is really why I'm here, is not only the opportunity to help transform the company but also to genuinely provide solutions that will help transition to a more sustainable, greener and healthier world.

Key priorities

I'm going to start by looking at my priorities for the company. Firstly, it's ensuring that JM just executes on the basics, doing what we say we'll do, continuing to improve our controls, our systems, delivering efficiencies and improving our cash generation.

Secondly, we need to move quickly to commercialise our great science and capture value from it. That means JM being more focused, more disciplined in our investments, and being more agile and moving at pace to drive growth. And we'll do that with a strong grip on our balance sheet and a clear, disciplined allocation of our capital to prioritise investments in growth, both organic and bolt-on, and to continue to pay a sustainable dividend, after which we'll consider the return of any excess capital.

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A year of two halves

Let's begin by looking at this year's financial highlights, where we've delivered a robust performance throughout the pandemic. It's been a year of two halves. Following a challenging first half, our end markets recovered strongly, particularly for Clean Air and helped by higher precious metals prices, and our second-half operating profit was up 30%. This momentum has continued, with a strong exit rate into the current financial year, where we're performing well.

We're continuing to run our businesses better. Our efficiency initiatives are on track, delivering £66 million in the year, with more to come from our manufacturing footprint. And despite higher precious metals prices, we've delivered significant reductions in working capital and generated improved free cash flow of £305 million. We ended the year with lower net debt, at £775 million, down by over £300 million from last year. And we've proposed a final dividend of 50 pence per share, making it 70p for the year as a whole.

Sales and underlying operating profit down 5%

Now let's into the financials in more detail. Starting with sales, which were down 5% over the full year for the group as a whole. The impact of Covid-19 was mostly felt in our first half, and particularly in Clean Air, where sales were impacted by customer shutdowns and by weaker demand. In the second half, demand recovered strongly, with total sales up 11%. And I'll go through sales for each of our sectors in detail shortly.

But first, group underlying operating profit, that was down 5% for the year. The impact of Covid-19 was partially offset by the benefit of higher metal prices. We incurred higher corporate costs, that include the impact of bonuses payable this year compared to a very low base for 2020. Again, second-half profits were significantly stronger, up 30% year-on-year, with a strong recovery in Clean Air, as well as the benefit of those metal prices.

Clean Air business most affected by pandemic

Turning to our sectors in more detail, our Clean Air business was most affected by the pandemic. We saw demand weaken and our customers temporarily closed plants, which led to a weaker - a significantly weaker first-half performance. Whilst there's been volatility in demand, we saw a strong recovery in the second half, with sales up 16% over the previous half-year. And for the year as a whole, sales were down just 7%. In Light Duty, we outperformed global auto production, due to increased value from tight legislation - tighter legislation in Europe, in China and in India. And in Heavy Duty, the Americas and Europe performed in line with the depressed market, whereas in Asia, we outperformed, benefiting from the value uplift, driven by China 6, which is now about 25% of the way through its adoption. Looking at US Heavy Duty and the Class 8 truck cycle, where JM is the market leader, we did begin to see that market recover in Q4, with continued strength today.

The bars on the right-hand side of the chart here show the quarterly progression of Clean Air sales. You can see the full impact of the pandemic at the start of the year, with a strong recovery from Q2. The business has had a good start to the current financial year, with April showing a strong performance and with continued strength in end-market demand. However, we are seeing the auto supply chain struggling with a number of shortages, including microchips, so we do expect some volatility through the course of this year. Overall, Clean Air operating profit was down just 8% year-on-year. And the work to consolidate our

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manufacturing footprint is well under way, and with volume recovery, our second-half margin of 13.6% is moving back towards pre-pandemic levels.

Efficient Natural Resources sales broadly flat

In Efficient Natural Resources, sales were broadly flat. The two main drivers here were a strong performance in PGM services, offset by a weaker performance in catalyst technologies. In PGM services, our refining and trading businesses benefited from higher average PGM prices that made a net contribution of around £80 million, as well as benefits from a more volatile price environment.

In CT, we saw good sales growth in our first fills business, as new hydrogen and ammonia plants came on stream. Recurring catalyst sales were lower. Here, our methanol catalyst business declined in comparison to a strong performance in the prior year, with the phasing of customer change-outs. And some of our end markets were impacted by weaker demand, affected by the pandemic, particularly in formaldehyde and additives.

In Licensing, sales were also down as we saw delays on new plant builds, also because of the pandemic. However, we have a strong pipeline of projects and we signed 10 new licenses in the year, thereby locking in future catalyst sales.

We've also started to recognise our first income from our new technologies, including catalysts used in the production of sustainable jet aviation fuel and from low-carbon blue hydrogen projects, both of which point to a really exciting future. Underlying operating profit for the sector grew by 6%, primarily as a result of the metal price benefit in the year. And our margin expanded to 25.4%.

Health

Moving now to Health. Despite Covid, sales grew in both our generics and innovator business. This included sales from our API product pipeline of around £60 million. In generics, sales grew 11%, primarily driven by new agreements for the supply of opioid addiction therapies. Our innovators business grew 3%, as we saw increased demand from Gilead, where we supply the active ingredient for Trodelvy, used in the treatment of triple- negative breast cancer.

New Markets sales down 6%

In New Markets, sales declined 6%. In fuel cells, we continue to see strong demand, with sales up 24% in the year to £41 million. Growth was driven by increased demand from our automotive customers, particularly in Asia. Sales to auto customers have now doubled since the prior year and now represent around half of all fuel cell sales. We expect further rapid growth in fuel sales and Robert will talk further about our recent wins.

We also saw sales growth in life science technologies, a business that provides advanced catalysts to the pharmaceutical and agricultural chemicals markets. New Markets sales were offset by lower sales in battery systems and medical device components, which were both impacted by the pandemic. Our sales decline includes the disposal of two small non-core businesses in the second half. And I've included a note in the results release to say that we're making some small changes to our reporting segments for FY22. These will provide you with greater transparency of our New Markets' green energy businesses and, separately, our value businesses, which are non-core as we continue to focus on our growth opportunities.

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