Johnson Matthey PLC Executive Insights: Chinese Environment, Sales Margins

On Thursday, Johnson Matthey PLC (LSE:JMAT.L) reported its fourth quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Chinese Environment

Neil Carson – Chief Executive: Yes, the deal with trucks in China was purely down to the fuel. They do have, we believe, a strong desire to keep going with emissions legislation. You probably visited China, you know the air quality in their cities is unacceptable. So they do want to address that issue and are committed to moving forward with it. But it’s a slightly different market for us, China and for – as we kind of hinted in the presentation, the trucks aren’t very expensive and they are pretty simple. So neither the after treatment system can’t be as exotic as it is western markets either. So it’s going to be a smaller market in terms of sales per vehicle for us, but we are confident it will arrive when the legislation comes in and we are as we’ve already said making some sales. Do you have anything to add, John, on that front?

John Walker – Division Director, Emission Control Technologies: I’ll just stick to the legislation and actually it was delayed twice, so one from January 2012 to January 2013 and the second delay was six months. As Neil said, I think the Chinese government is definitely doing more to clean up the environment. The people that I’ve spoken to recently, they said that this is it. There was a few local suppliers who will put some pressure on their local governments to kind of – because they weren’t quite ready to meet the legislation. But the people that I spoken to said that this is it, there is not going to be any more delays. So the market is going to develop from 2013.

Neil Carson – Chief Executive: Do you want to take (indiscernible).

Larry Pentz – Executive Director, Environmental Technologies: Just to add that, that was all heavy duty decent sort of answers, but you can look at the light duty side as well and there is certainly the same desire to improve emission controls there as well. So you would expect the natural progression through to kind of year or six sort of legislation and of course the penetration of vehicles in China is much lower than the rest of the world, so we expect volumes to continue to be strong.

Neil Carson – Chief Executive: On new business development, well we’re going to be a little bit cagey there. You know what we’re trying to do I think. What we have spent some time doing is analyzing, I think, objectively the kind of skills that we have in Johnson Matthey, what we think we’re good at, what are our core competencies, and then we’re trying to think out of the box and find another market, where it might be applied successfully. Now I don’t want to talk too much about the areas we’re looking as it is a fairly competitive thing I would say, but certainly that would we hope, once we get started there and obviously where we get started will likely be based on some R&D capability that we have that might be applied to another completely new market. So then it’s definitely an area where some smallish M&A might be appropriate to perhaps provides us with a route to market, or provide us with a bit missing piece of technology or something like that, but I rather not to be too specific about that right now for I think – (for good) reasons.

Rhian O’Connor – Credit Suisse: Rhian O’Connor from Credit Suisse. Couple of three questions, but two of them are relatively short. On the special dividend you also said in the press release, you would look at a share consolidation as well. I know this has to be proposed to the AGM, so nothing is definitive yet, but can you give us a bit of detail about what you are intending to propose to the AGM? The second question is on the Environmental Technologies division and particularly the oil and gas component of AMOG. There has been a couple of developments in oil and gas recently. The oil price is going down, also we had Halliburton (moan) last night on fracing potential for shortages there. Can you talk us a little bit through if that will affect your business? Then the third and final question on Precious Metal Products, if PGM prices do stay at the level they are this year, how exactly do we expect that to impact the service? I know you can’t talk about your deal with Anglo Platinum, et cetera. But can you tell us will it be a sales hit, will it be a margin hit? How do we see that kind of reflecting in the numbers?

Neil Carson – Chief Executive: Okay, special duty share consolidation.

Robert MacLeod – Group Finance Director: Yes, share consolidation is rather it is straightforward. I think it’s, we’re effectively returning a pound of share on a share price if, let’s call it, GBP21, GBP22 depending exactly where it ends up. So, it’s roughly about 4% of the capital of the Company and effectively we’ll reduce the number of shares by about 4%. The exact number will be announced when we issue the circular, which I think is on the June 20 and that will then depend on share prices on the particular day and it will be sort of I guess, 24 to 25 or 23. Well, exactly what the number is will depend on the market – relative market values we talk.

Neil Carson – Chief Executive: Just the consistency of share price and consistency of earnings per share and all those –

Robert MacLeod – Group Finance Director: — every old metrics become comparable.

Rhian O’Connor – Credit Suisse: This is our first one for living memory, but this is quite normal to do this, I think?

Robert MacLeod – Group Finance Director: Yeah, a lot of companies do share consolidations. It’s not abnormal, but you are absolutely right, it needs to be – well as does the special dividend itself, it need to be approved by shareholders at the AGM. I’ll hope that most of them would approve it, but you never know.

Neil Carson – Chief Executive: Larry, the oil and gas?

Larry Pentz – Executive Director, Environmental Technologies: Certainly, softening of oil prices I hope will have a modest impact on our business. There is some parts of our business like Tracerco is – or the Tracerco bits of our business are tied to oil prices to some degree, but the overall impact of oil price is softening, it is not substantial to Johnson Matthey in any sort of way. Of course, as fracing grows on the gas side of things then as fracing grows that offers opportunity for us because we are a gas based process technology organization as a generality.

Sales Margins

Neil Carson – Chief Executive: In PMP, Ryan, we talked in the presentation about the sort of GBP8 million to GBP10 million for a 10% fall in a full year of precious metal prices or a 10% increase to same rule applies, plus a little bit of softening that’s a short-term effect in refining in terms of volumes going, people hold back a little bit to see if the prices are going to improve, but that’s a shorter term effect which has an additional impact, but is usually very short-term. Sales, margins what do you think Bill any color you can put on that?

Bill Sandford – Executive Director, Precious Metal Products: Yeah, I mean it’s a margin issue for us really. As we’ve said, it’s GBP4 million to GBP5 million in PMM, GBP4 million to GBP5 million in refining, and then I always add all things being equal and, of course, things are never always equal. So there are other factors that come into play and in the PMM side it’s trading and volatility and trying to call out is, of course, extremely difficult. We don’t even know what’s happening tomorrow. So for the rest of the year that’s a really difficult one. Then in refining, it’s volumes and Neil has already referred to that. Volumes are down at the moment. It’s mainly in the autocat sector. The rest of our business, the primary materials and the refining of JM customer scrap which is on the slide there, they remained relatively constant. They go up and down with GDP a bit, of course – but the autocat sector has a very long supply chain and in times of high prices that supply chain gets cleared out and that was certainly the case last year, which is why we were so busy in the first part. In the second half of the year and going into this year prices have been lower, volumes have been lower and that’s a sign that the supply chain is filling up again. There is some stage though it will have to come back out. It can’t carry on like that forever. They will run out of cash. So it’s a question of predicting when and that’s a really difficult one.

Larry Pentz – Executive Director, Environmental Technologies: But you should remember that these businesses tend to be relatively high fixed cost unlike the services business. I think we’ve described before that take our auto-related businesses, very high variable costs; in the PM services businesses it’s relatively high fixed cost. So, as I think both Neil and Bill have said, it becomes a margin issue.

Adam Collins – Liberum: Three questions please, two to Larry. Larry, could you update us on the situation at SEC? What was the loss last year and where do you see that heading in the coming year? Then secondly, in the past you’ve talked about the capacity utilization across both the LD and HDD platforms by region. I wondered if you could just give us an update on where that stood through last year. These are two for you Larry. I had one on the metal side.

Larry Pentz – Executive Director, Environmental Technologies: I mean SEC I think we’ve talked about SEC before, certainly not performing anywhere at level that we had expected. We’ve talked about the write-off of asset in China, the coal-fired power plant, emission control opportunity there, not developing anywhere that we liked. Certainly, as a part of that write-off that affected – that came into last year sort of numbers and the number was GBP7 million-ish sort of loss in the year. Like I said that it did include that write-down of the China asset as well. So, generally speaking the markets that we’ve talked about before in stationary emission control are not developing as quickly as we would hope. Opportunities like marine are still out there, but they are certainly longer in term in development, so that’s SEC.

Adam Collins – Liberum: Do you expect breakeven this year or better or worse or…?

Larry Pentz – Executive Director, Environmental Technologies: We should approach breakeven if not breakeven this year.

Adam Collins – Liberum: Capacity utilization, do you want to pass it on to John or…

Neil Carson – Chief Executive: By region, John, by plant even if you have it.

John Walker – Division Director, Emission Control Technologies: I think what I said last year was that divisional number on (24-25 basis) was kind of in the mid-60s range. We talked last year about Europe because we were going to – we’re talking about the Brussels plant. In Europe, capacity utilization last year dropped down into the very low 60s, maybe actually get into the high 50s there for a while, which is why we took the action on Brussels. I guess I’m happy to say that Europe is now up in the high 70s. So shedding down Brussels is put it into a good spot in capacity utilization now. With Euro 6 coming on, that’s why we just made the announcement about Macedonia, because we’re going to need new capacity for some of the new products that are coming out for the Euro 6 legislation there. But, all in all, for the global ECT, we are setting at around 70% capacity utilization right now.

Adam Collins – Liberum: The question on the metal price side. At the nine-month (time at stage), Robert, you mentioned that working capital to be flatted by some additional consignment of metal from automakers, taking advantage of lower metal prices. I wondered if that had been a fact also in four quarter, and whether you think that will continue in the coming year. Then on the sort of related notes, can you help us understand what kind of impact on working capital there might be from lower metal prices this year? How we maybe think about the impact from that?

Robert MacLeod – Group Finance Director: It’s pretty difficult to tell to be honest. Metal and consignment metal is very difficult for us to be sure exactly what’s going to happen. There wasn’t particular change in the fourth quarter, so the benefit that we had at the end of the third quarter sort of roll through the rest of the year. I think, rightly saying, Bill, it hasn’t changed since the end of the year either. So, that benefit has continued. Exactly how the impact on precious metal prices fit through our working capital with the vast majority of our precious metal working capital is in receivables. So, as the prices come through the receivables balance and you know our working capital days tend to be around this year it was 54, so assume that the majority of the working capital is receivables based, which a lot of it is. We’re going to have sort of conversation two months worth of working capital tied up and so that will start dropping through within two months, the previous metal prices drop through to the absolute numbers. That’s roughly how we think about it. Exactly how consignment stock metal changes, we can’t tell.