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23 July, 2020 - 10:44 By Tony Quested

Johnson Matthey sees more than green shoots of recovery

Robert MacLeod

Global science and chemicals company, Johnson Matthey – anchored in the Cambridge UK technology cluster – is building a sustained recovery from the coronavirus pandemic.

Chief executive Robert MacLeod urged shareholders to keep the faith at today’s AGM and had some welcome good news on progress in key areas of the business despite a decline in first quarter sales. 

MacLeod said: “We are seeing recovery in customer demand and automotive production across Clean Air. Efficient Natural Resources was resilient and we signed a large licence in China, whilst Health is benefiting from our new customer contracts. 

“We continue to make progress in commercialising eLNO and anticipate soon having five customers in full cell testing. We have also started to deliver the additional efficiency benefits we recently outlined and expect initial benefits of at least £30 million this year.”

Ever rooted in pragmatism, JM made it clear that visibility on demand remained limited and the company could not provide financial guidance for the current year.

“ Having said that, we expect operating performance will be heavily weighted to the second half with first half operating performance materially below last year, largely due to weaker activity in Clean Air,” he said.

MacLeod added: “We are busy on multiple fronts and I remain grateful to all our employees for their hard work and dedication as we navigate through this difficult period. 

“Appointments in the last year have strengthened our senior executive team and brought increased commercial focus to the group, enabling us to execute at pace and focus on creating a simpler and more efficient business. 

“I am also excited about all of our strategic growth projects, consistent with our vision for a world that's cleaner and healthier, as well as the attractive returns they will deliver over the medium term.

“We look forward to sharing more detail on our growth opportunities in Fuel Cells and Hydrogen at an investor seminar in September.”

In the first quarter, group sales were down materially at constant currency, as expected, due to the effects of the COVID-19 pandemic. The decline was driven by Clean Air as a result of lower consumer demand and temporary customer shutdowns, although sales in this sector steadily improved through the quarter. In aggregate, sales from other sectors were broadly flat compared with the prior year.

Clean Air sales were down c.50 per cent in the quarter, primarily driven by weaker consumer demand and temporary customer shutdowns in Europe and the Americas. 

As the quarter progressed, JM saw improvement with April, May and June sales across Clean Air down 75 per cent, 60 per cent and 20 per cent, respectively. All of JM’s plants are now operating. 

By region, better consumer demand drove a strong recovery in automotive production in China supported by early implementation of China 6 legislation, and in Europe and the US there was a steady ramp up in demand.

Looking forward, JM anticipates July sales to be down c.20 per cent, with improvement through the remainder of the second quarter. That said, the market remains volatile with consumer demand, inventory through the chain and the extent of automotive OEM summer shutdowns hard to forecast, MacLeod emphasised.

He added: “External data continue to suggest automotive production in Europe and the US will be down c.25 per cent in our fiscal year, better in China, but down slightly more in heavy duty. 

“However, visibility on the path of recovery remains low and the outcome could be materially different. We have a flexible cost base in Clean Air enabling us to manage different levels of activity, with c.75 per cent of costs being variable before mitigation.”

Sales in Efficient Natural Resources were slightly down in the first quarter. Catalyst Technologies sales were lower due to weaker demand in some end markets such as additives and formaldehyde and as some customers began delaying orders. 

MacLeod said: “Whilst business has been disrupted by COVID-19 in the short term, we are seeing medium term decisions being made and we signed a new oxoalcohol licence in China in the period, which will benefit future years. PGM Services (PGMS) saw sales growth, benefiting from continued strength in precious metals prices.”

Health is relatively unaffected by changes in the macroeconomic environment. Sales were up in the quarter as JM started to benefit from new customer contracts and orders delayed from March into April due to COVID-19.

For the full year, JM expects to benefit from new customer contracts for active pharmaceutical ingredients (APIs) used in generic opioid addiction therapies as well as its continued work with innovator customers. 

In Battery Materials, commercialisation of eLNO remains on track. JM made further progress with customer testing and anticipates soon having five customers in full cell testing, comprising two automotive, two non-automotive and one cell manufacturer for autos. 

It continues to expect its first commercial plant in Konin, Poland, to be on stream in 2022 and supplying platforms in production in 2024. Fuel cells grew strongly and the investment to double manufacturing capacity is on track and expected to be completed by the end of 2020/21.

JM continues to invest in strategic growth projects, consistent with its vision for a world that's cleaner and healthier, which are expected to drive attractive returns for the group. As previously guided, it expects capex for the year to be up to £400 million.

JM has a number of exciting growth opportunities including battery materials with its portfolio of eLNO cathode materials and hydrogen-based technologies. It will host a hydrogen seminar, rescheduled for September 18, which will provide an insight into the market dynamics, its capabilities and the attractive growth prospects in this area.

The business maintained a strong balance sheet and currently has good access to liquidity of c.£1.3 billion.

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