Johnson Matthey's (JMPLD) CEO Robert MacLeod on Q2 2017 Results - Earnings Call Transcript

| About: Johnson Matthey (JMPLD)

Johnson Matthey Plc (OTCPK:JMPLD) Q2 2017 Earnings Conference Call November 17, 2016 4:30 AM ET

Executives

Robert MacLeod - Chief Executive, Executive Director

Anna Manz - Group Finance Director

John Walker - Executive Director, ECT

Alan Nelson - Chief Technology Officer and Director of New Business Development

Analysts

Adam Collins - Liberum

Neil Tyler - Redburn

Martin Dunwoodie - Deutsche Bank

Andrew Stott - UBS

Mathew Hampshire-Waugh - Credit Suisse

Operator

Good morning everybody and welcome to Johnson Matthey’s Half Year Presentation Results. Just before we start, could I please ask you to turn off mobile phones, so we don’t get any interference on the webcast.

And with that I’ll hand over to Robert.

Robert MacLeod

Thank you, Sally and good morning to every one of you today and welcome to our interim results presentation. Today obviously we’ll follow the normal format, but first of all I’d like to express my welcome to Anna, Anna Manz who you’ll obviously hear from in a few minutes, joined in the middle of this month.

And my senior management team is hear in the front row to hopefully answer some of your questions later on if I can’t answer them, but also hopefully afterwards then if you got any follow up questions, please feel free to ask them.

So without further due just getting into the presentation, I’m pleased to report today the trading is in line in the first half, in line with our expectations and we have once again confirmed our outlook for the full year.

Sales as you can see, we’re up 5% and underlying profit before tax also up 5%, but earnings per share up 12%. So that’s obviously benefiting partly from the favorable exchange rates as a result of the weaker pound. And at constant rates and on a continuing basis, sales and operating profit were down a little on last year, but overall broadly in line with our plans.

At ECT, the first half in Europe was especially strong and our Asian business also performed well, but as expected results were held back a bit by North America because of the cyclical weakness in the Class 8 truck market.

Process Technologies held its strong positions and benefited from last year’s cost reductions, which have improved return on sales, the trading across the division remained pretty tough. Precious Metal Products, was steady and performance there has stabilized.

And as I indicated in our Q1 release, the timing of business in Fine Chemicals this year is very much weighted to the second half and so first half performance reflects that. But the medium term prospects for the group remains strong and so to reflect this, the board has raised the interim dividend by 5%.

And of course as you know health and safety is very important to us and remains our priority and as you can see from this chart, we made good progress in reducing the number of accidents and incidents across JM.

The graphs here show our statistics and our stats are moving in the right direction, but in this particular area it’s not just about the data and the statistics, it’s more about what’s going on in the company and how behaviors and attitudes are changing across our employees.

And I’m delighted to say, it seems to be we’re making traction and real progress and really changing that behavior and that mindset across the group. But there is some plateauing in the results as you can see, so reinforce is the need for us to keep our focus on health and safety across the group.

Before I move into results, just a little bit on our long term strategic priorities and first of all Johnson Matthey remains very well positioned. The three major sectors that I show here, all require high technology science based solutions which are valued by our customers and as a result have high barriers to entry.

Automotive as you know is our largest sector, almost two thirds of Johnson Matthey’s sales today and the market today is good, even though we’re going through a couple of years whether it’s no new major legislation coming through. But there are strong structural drivers ahead and a big opportunity for us.

Quality as you know is a major global issue and Johnson Matthey has a robust number one position in technology for both emission control and high power lithium iron phosphate battery materials. And on battery materials, we’re also broadening our portfolio into high energy materials to position us for growth as that market develops.

JM is also a leader in catalysts and technology for the petrochemical sector, about 11% of our sales today. This is as you know a cyclical market which right now is at a low point in the cycle and we’ve taken actions as we talked about last year to reduce our cost accordingly.

But the medium to long term opportunity is attractive, the drive has remained positive, consumer demand for fuels, plastics and other M&A products will drive the need for chemical intermediates which require our catalysts and technologies in order to be economic.

Finally the pharmaceutical sector, the smaller part of JM’s business today, but attractive market too and bigger in the future driven by an ageing population and the trends towards lower cost healthcare. JM is already well placed as a leader in small molecule APIs and we’re investing to build a broader API portfolio, so we can take advantage of this market opportunity.

So in summary, we’re well placed with strong positions in markets with sound medium term growth drivers. And we’re also investing in our business accordingly and driving efficiencies. And on that we’re expanding our emission control capacity globally to enable our automotive customers to meet upcoming legislation.

We’re also continuing to drive efficiency through focus on operational effectiveness and supply chain optimization and you can see that coming through our results in the return on sales in our ECT business. And as the trend towards electrification continues, we’re investing to expand on lithium iron phosphate capacity by 50% and we announced that today.

In petrochemicals, as I mentioned already, we substantially reduced our cost base and reallocated resources accordingly to drive efficiencies, but at the same time we’re maintaining our investments in new technologies. That way we’ll ensure that we’re in a position to respond when the market starts to recover and that we continue to have a pipeline of new technologies coming to market over the medium term.

And for the pharma industry, we’re investing to expand our capacity in Europe and realize opportunities to improve efficiencies across our global manufacturing base and at the same time investing in R&D to build our future API portfolio. And at the group level our priorities remain, to invest in R&D and we’re running about 5% of sales to create the sustainable technologies of tomorrow.

Continue our investment program in our business systems to drive efficiencies and provide scale for the future. And we’ll maintain our strong focus on capital efficiency, which gives us the capacity to invest for future growth and support long-term value for shareholders. So JM is in good shape and our strategy remains robust.

And with that I’ll hand over to Anna to talk you through our first half performance. Anna?

Anna Manz

Thank you, Robert and good morning everyone. Today is the completion of my first month at Johnson Matthey. I joined JM because four things excited me about the company; the strong market positions that we have, the long history of collaborative relationships with customers, the deep and the inquisitive expertise in chemistry and its applications to solve problems and the strong value set which match my own.

My experience over this first month has been absolutely consistent with these expectations. As I enter the business, I’ll have three areas which I’ll be focusing on over the coming months to fully understand and get underneath. And as you may expect they are, resource allocation supported by an understanding of return on investment, a focus on working capital to drive cash conversion and a focus on running our business and its processes as efficiently as possible.

So let me turn to the underlying results. As Robert said, the group delivered solid performance and the results are in line with our expectations. You can see that sales grew 5%, asset underlying operating profit and profit before tax.

However, adjusting for translation of foreign exchange which had a significant impact in the period on research chemicals which was disposed out and that completed in September 2015, sales was slightly lower, down 1% and profit before tax was down 3%.

The tax charge is fairly steady year-on-year and we expect the tax rate for the full year to be less than 17%. In the period EPS is up 12%, by the benefit of foreign currency translation on reported results and by the share consolidation following the special dividends that was paid in February 2016.

Now, let’s look into a bit more detail of what’s driven the group’s underlying profit before tax, starting with the impact of foreign exchange. This is the translational impact of foreign exchange on the conversion of profits from over subsidiaries into sterling. In the half the translation gain is 27 million.

On 30 September exchange rates this will become a 65 million gain full year. The gain at today’s rates would be within a couple of millions of that. As a result of our hedging policies, there was no material impact or transactional effects in the period.

The second adjustment is to remove the impact of research chemicals which we sold in September 2015. This business contributed 7.5 million of underlying operating profit in the first half of last year prior to its disposal.

Performance against the rebase per year has been steady across four of our divisions. ECT profits are flat, process technologies are down 1% and Precious Metal products are up 4%. We’ve also reduced our losses in new businesses. Taken together with corporate costs, these divisions are growing underlying profit before tax.

The reduction in underlying profit before tax in the first half is Fine Chemicals, where profits of the continuing business have fallen by 26%. Now the weak first half in Fine Chemicals was flecked and it’s predominantly driven by our active pharmaceutical ingredients business. The API business is a portfolio of products including new products which are in growth and older products which are maturing and therefore declining and that product mix is continually changing.

So for example this year we’ve had dofetilide which was launched in June as a growing product and we have mature products such as Oxymorphone Patent revenue from Endo which is within prior but wasn’t in this year. Now, it’s this weak product mix coupled with shipment placing which has contributed to the weak first half.

But looking forward, I’m confident it will be substantially better because we’ll benefit in the second half for a full six months of dofetilide launch and in addition we have another new product which was approved at the end of the first half which we’ll see growth in sales from too and that phrasing will come back.

The interest charge is reduced slightly compared with prior year. This is due to the lower interest charge in relation to the UK post-employment benefits as the UK pension scheme was in surplus at the start of the year. It’s offset by higher financial interest due to the transaction exchange on that and greater average levels of net debt through the period.

Now, taken together, this is a solid performance and it’s in line with our expectations. On looking forward we see a stronger second half particularly in Fine Chemicals and process technologies. And therefore our full year guidance is that we would expect our performance to be in line with our expectations, so we’ll be delivering slight growth on a continuing constant currency basis full year.

Now, turning to cash flow performance in the first half, cash flow from operations was 124 million in the half, compared with 545 million last year. However cash flow last year was unusually high with regard to material reduction in working capital in the period of almost 400 million, around three quarters of which was Precious Metal working capital.

In the half year, cash flow has been impacted by higher levels of working capital. This is predominantly due to the buildup of inventory in ECT Fine Chemicals and precious technologies ahead of stronger expected sales in the second half. But I’ll get into more detail on the drivers of working capital in my next slide. However, I do expect our working capital to normalize by the full year.

Looking at working capital in a little more detail, working capital has increased 237 million in the period; 111 million of this increase was in Precious Metal working capital. Now, Precious Metal working capital fluctuates according to customer mix. As for some customers, we procure the Precious Metal and other customers supply their own. Consequently, this can vary quite significantly at different balance sheet days.

Excluding Precious Metal, working capital days at the 30th of September are 69, this compares with 64 days as of the 30th of September last year. Part of this increase is driven by exchange rates. Our sales are calculated at average and working capital is calculated at closing rates. This foreign exchange difference accounts for three days of the increase. The remaining increase is due to the buildup of inventory ahead of an increase in sales expected in the second half of the year.

Now, the order book is strong for the second half which gives me confidence that our working capital position will be significantly improve by the year end and back within our normal range of 50 to 60 days, albeit towards the upper end. And as I previously said, working capital management and cash conversion will be an area of focus for me.

Moving on to net debt, our net debt including post-tax pension deficits has increased from 657 million at the yearend to 1.2 billion. The decline in corporate fund yields has closed the U.K pension plan to move from a 100 million surplus at March to 141 million deficit as of September. This has resulted in the post-tax pension deficits increasing by 123 million. Now, this number is stated net of the corporate bonds which we hold to fund the pension deficit.

The increase in working capital has impacted net debt by 237 million. Now, as I previously said, I would expect this to partially unwind in the second half. Despite the increase in net debt, the balance sheet remains strong with net debt to EBITDA of 1.6 times. This is well within our target of 1.5 to 2 times and gives us the results that we need to continue to invest in the growth of our business.

Turning to rewards and benefits and starting first with the post-retirement medical plan. We benefited from a one-off gain in the first half, following the implementation of an inflation cap on our U.S. post-retirement medical plan. We have therefore recognized a noncash accounting gain of 16 million in the first half. This has been included within the division’s underlying operating profit, with the majority of the benefit in ECT and Precious Metals products.

Looking at the group’s other reward schemes, there has been an increase of 7 million in the accounting charge relating to the long-term incentive plan, which applies to around 1,300 employees. This cost is also included in the division’s underlying operating profit and it partially offsets the post-retirement medical gain. For the full year, we would expect an increase of approximately 16 million in the long-term incentive plan.

Therefore, taking the one-off post-retirement medical gain and the increased charge in the long-term incentive together, the first half performance benefits by 9 million and by year end based on current expectations, the two will broadly offset.

Now, let’s move to look at return on invested capital. This was 17.6% and broadly in line with last year and well ahead of our pre-tax cost of capital which is 8.1%. But it is below our target of 20% for the group. We remain committed to our 20% target. But in the short-term, while the macro environment is challenging for our Process Technologies business and while our new businesses division had not yet progressed into profitability, we’re likely to remain below the target.

We will continue to invest for the future thoughtfully and have strict investment criteria. Return on invested capital continues to be a key metric, although one of a set of metrics that we will use to assess any project. The Board of Directors has increased the interim dividend by 5% to 20.5 pence.

So, in summary, I think this is the solid set of results against a backdrop of challenging marketing conditions. It leaves us on the half year exactly where we expected to be and I’m confident that for the full year, our continuing business will deliver slight growth on a constant currency basis, and I expect working capital performance to improve.

I will now hand it back to Robert who will take you through the performance of the divisions.

Robert MacLeod

Thank you, Anna. So, as Anna just said, I will go through each one of the divisions and the performance of those. But just to be clear, as I go through these, I’ll talk - all the numbers I’ll talk about is on a constant currency basis. So, this is excluding the impact of foreign exchange. Obviously the numbers, in the report it will be on an absolute basis, but all my comments tonight will be on a constant currency basis.

And turning first to ECT, our largest business which had a solid first half, really strong in Europe and Asia and as expected weaker in North America as a result of lower production of Class 8 trucks. Sales were up 3% just over a £1 billion and operating profit was flat. And the outlook continued to strength - the outlook has continued strength in Europe and Asia and we expect Class 8 production levels to continue to fall, but despite this our North American heavy-duty diesel business as a whole should see sales stabilize at current levels. And overall, we expect ECT to continue to perform well.

I look here the light duty business first. Here we’ve had a great first half. Our light duty catalyst business has outpaced the market and our sales were 9% up versus global light duty production growth of just over 4%. Particular strong outperformance in Europe as you can see where our sales grew 16% and that compares to a 3% growth in the underlying market. So, why is that? Well, it’s partly driven by the continued benefit from the tail end of Euro 6b coming through and also demand from customers shifting towards more complex high value systems ahead of the introduction of real world driving emission standards in the future.

It’s interesting to note that despite all the noise going on in the moment, the share of diesel costs produced in Western Europe was stable on last year. And we’re also continuing to work with our customers on products for Euro 6c, which primarily, as you know, impacts gasoline costs. Our business in Asia had a solid first half, growing to and growing sales by 4% and that’s been boosted by strong volume growth in China, but sales were held back a little bit here as some tax incentives are in place just now, which favor smaller costs.

In North America, our sales were down a bit, but there is no real change in the competitive position there, just a slightly less favorable product mix. This year we have more sales of lower value catalysts compared to last year. So, overall, continued focus on emissions around the world and a strong first half from us.

Moving on to our on road heavy duty diesel business, and the story here is really strong first half in Europe and Asia but more than offset by lower sales in North America. In Europe where sales were up 22%, we’ve benefited from cost of demand from our more complex higher performance technologies, including those which we manufacture using our extrusion technology out of our facility in Germany, which we’re just expanding now.

In Asia, very strong growth from [indiscernible] but will be of course quite a load base. And that’s driven primarily by China where we are seeing early benefit from sales of Euro 5 systems as that tightened regulation starts to roll out in some cities and provinces. In North America, our sales fell in line with the market. Class 4-7 trucks held out pretty well, but as expected demand for Class 8 trucks was falling sharply and it has to say more sharply than we had previously expected.

A peak in September last year and since then production levels have declined. But it’s a very cyclical market as you can see here in this data from LMC Automotive. So, whilst we still expect Class 8 production to continue to fall in our second half, albeit less sharply than in the first half, according to this data, they are expected to bottom out in the early part of 2017, ‘18. That said, as I’ve already mentioned, we expect our total North American business on, On Road HDD sales to stabilize at current levels in the second half as a result of some new business coming through.

Now, turning next to Process Technologies, conditions here have continued to be tough, as demand in PT’s end markets remained at a low point in that cycle. However, I’m pleased to say that we’ve retained our strong shares in a challenging environment of low licensing activity and longer catalyst replacement cycles. We’ve also benefited from the actions we took last year to reduce our cost base and that’s come through in the increased return on sales.

The sales fell 12% and operating profit was only slightly down. On outlook, although we expect the cycle to remain at current low levels, we do anticipate a stronger second half and that’s normal in PT and our order book is strong. Getting a bit more granular, in our chemicals business, sales were down as a result of weak demand in both licensing and catalyst.

Demand in both licensing and catalysts. Our licenses sales declined as demand for new plants utilizing our technologies was weak. With limited investment going into the new capacity right now due to a combination of overcapacity in China and pressure on commodity prices, this weakness is expected to continue in the second half. And we anticipate signing only a couple of small licenses.

On the same gas side, catalysts replacement cycles have been pushed out. This particularly impacted our ammonia business where the longer replacement cycle has come from our customers as a result of overcapacity in their end markets, in methanol a similar story, but as a result of a sustained low oil price.

Here our customers are seeing lower demand from methanol as their end users look to take advantage of cheap oil as an alternative fuel to methanol. On the flip side, our petrochemical business showed strong first half sales mainly due to demand for zeolite catalysts for use in SCR systems.

Our Oil and Gas business continues to feel the impact on demand of the lower oil price, with sales down 14% and performance is mixed across our business. Our sale of hydrogen catalysts were weaker as our customers pushed out their refills. This was due to lower demand in their end markets as refineries process sweeter crudes, which require less hydrogen for desulphurization.

On the other hand, demand for our refinery additives was good. And our diagnostic services business continued to see weaker trading as a result of the sustained lower oil price. However, it did benefit from the reduced cost base and broke even in the first half.

So, turning now to Precious Metal products, which had a steady first half, sales slightly down, but operating profit higher. Our manufacturing businesses grew in line with our guidance and has been steady. Strong positions in more mature markets that they have, have been maintained.

Conditions in PGM refining and recycling remain subdued, but don't forget it remains a strategic part of the business giving us security of supply for this important raw material for our products. Overall, return on sales has picked up slightly helped by good cost control and we expect steady performance for the rest of the year.

So, looking at Precious Metal products services, predominately the PGM refining and recycling business, and that's impacted, as you know, by lower average metal prices when compared to the first half of last year, particularly palladium, which is down about 9%. And we saw refining intakes fall sharply last year, when the PGM price dropped. Since then, intakes have been steady, but albeit at fairly low levels.

In particular, intakes of end of life auto catalysts remain low due in part to low scrap steel prices. Of course, the economics, sorry, of scrapping all vehicles aren't solely dependent on PGM prices and they aren't quite as attractive as they used to be. And therefore our outlook for intakes remains similar for the remainder of this year. We have, though, opened a new refinery in China, which gives us capacity for when scrap auto-cat volumes come through there.

But in the meantime we'll be recycling industrial catalysts, so we’ll take some time to fill our capacity and we don't expect a significant impact on the numbers in this year or next. However, this is a strategic investment for us to position ourselves in this important future market. As I've already stated, the manufacturing businesses have been steady.

Noble Metals had a mixed half with lower demand for PGM catalyst used in the fertilizer industry, but other industrial products were ahead and medical device components was stable. And finally, our AGT, that’s our Advanced Glass Technologies business is doing well with sales ahead in the first half supported by strong demand from the auto industry in China.

So moving onto Fine Chemicals and as we indicated in our quarter one statement, Fine Chemicals’ first half was significantly impacted by product mix, and in this case with sales were up by 4%, but profit down 26%. And of course don’t forget that’s for the continuing businesses, not just a constant currency. But we expect the second half to be stronger.

We expect a very strong contribution from dofetilide. It was approved in June, but takes some time to ramp up, hence the bigger benefit in the second half. We have another product where we’re supplying sub units at relatively low volumes. The customers’ product is now been approved. So, these volumes should pick up in the second half.

And also on product mix, we’ll be selling high quantities of specialty opiates, which tend to be at higher margin in the second half. And some of these sales have already come through. So as Anna has already said, we're optimistic about the second half for Fine Chemicals.

In the first half, we've already mentioned that we've seen a less favorable product mix for us. Demand was good for our bulk opiates, which are lower margin, but in addition as Anna has already explained the timing of declining sales for maturing products versus sales from new products, means that the phasing of income is more heavily weighted this year to the second half.

In the U.S., abuse of controlled substances is an area of increasing focus. As a result, the DEA has reduced manufacturing quotas for some substances. However, the impact on us for the current year is not expected to be material. And looking forward, it's important to remember that much of our investment in our new APIs are for non-controlled substances which are not subject to quotas.

In CCT, business has been fairly steady. Demand for our heterogeneous catalysts was strong from our customers in the farmer and agrichemical sectors, which supported our first half sales.

And our final division, new businesses, I’m pleased once again with the progress we make - we are making and I expect it to continue. Battery technologies delivered a small operating profit. Within that battery materials is doing well, maintaining its leading position in lithium iron phosphate where we've just approved an investment of around GBP30 million to increase our manufacturing capacity by about 50%.

And we're also continuing to progress the development of high energy nickel-rich materials, helped by the license agreements we signed with CAMX Power and 3M. And we're making progress in our other new business areas too and so the division overall should see a much improved second half.

So in summary, we confirm our guidance once again for 2016-17 that we gave in June. And we are on track to deliver that for our full-year results. And on a constant currency for continuing businesses, we expect our performance to be slightly ahead of last year. We will also get the benefit of foreign exchange translation if the pound remains at current levels.

And exchange rates on the 30, September, that equates to a transitional benefit of around GBP65 million for the full year. That's approximately GBP50 million higher than we expected back in June, where we expected the benefit to be about GBP15 million. But in the medium term, which is of course more important, Johnson Matthey remains well positioned in attractive markets. And if we move forward into our third century, we will continue to invest in R&D, our infrastructure and our people to deliver growth for our shareholders and sustainable technologies that makes the world a cleaner and healthier place.

So, finally, before we move on Q&A, I just wanted to give you an update about what we're going to do next year for our Investor Day. And we're going to do it in September or October next year rather than the usual February time. And the reason for that is we've got a lot going on next year as we celebrate our 200th anniversary. So, I hope you'll forgive us for delaying for six months our presentation to you.

But we'll give you the date for our diaries as soon as we can. I will let you know about that near the time. So, with that, if you just bear with us a little bit, John, Anna, I will get ready for your questions and look forward to hearing from you. Thank you.

Question-and-Answer Session

A - Robert MacLeod

So, if I can ask you when you ask your question - I know you bear with me a second, if you can give your name and wait for the microphone, because this is being recorded and it will help people on the playback to hear the question, as well as the answers, so if you can say your name and wait for the microphone.

Adam Collins

Good morning, Adam Collins from Liberum.

Robert MacLeod

How are you?

Adam Collins

Three if I may. So, firstly for John, you mentioned, John, you mentioned two positives affecting the strong ECT result in the first half. Tell us that from Euro 6b and the early stage of pre-fitment benefits as we move towards RDE testing. I wonder if you could give us a sense of the relative significance of those two factors, because, of course, one of those is going to start to peter out and the other one might start to accelerate. So, just a sort of sense of how those two might interact in the second half on an ongoing basis?

Robert MacLeod

You want the three questions. You want to just go and ask them all and then ask them all or is it just one?

Adam Collins

As you wish?

Robert MacLeod

Go on, on your game [ph].

Adam Collins

Okay and then on FX, a couple of things. So, Anna you mentioned no transaction impacts because of hedging. By that, do you mean that there is no - that there is derivative hedging in the form of forward options or forwards, such that there will be some sort of impact looking forward? Or you should have hedged some other way that we need to understand, so just to understand the transaction side-effects.

And then on the calculation 65 million, using your sensitivities, I work out for the three currencies, it's about 55. So, it looks as if there is a rest of the world exposure in addition to dollar, yen, and euro, which makes sense. Could you just sort of quantify how much that is? It looks as if it's about 20% of the exposure? That's the second one.

Robert MacLeod

You’re making these long questions, aren’t you? Good guy.

Adam Collins

Yeah, but they are important. I think that’s it, because that was two-part, so I’ll leave it at that.

Robert MacLeod

That’s a two-part. Okay, we’ll look. I'll definitely leave Anna to talk about foreign exchange. I mean Euro 6b real world driving; John can explain it a little more into detail. But there's a whole pile of moving parts here and we don’t want to get into great levels of detail, because of course I think there's all sorts of moving parts where clearly the drivers for real world driving is a positive for us and no pun intended. So, if you want to go ladies first, you want to go do the FX.

Anna Manz

Yeah, sure. So, transaction FX, what I said was there was immaterial impact in the first half and actually the full-year impact would be very low. Why is that? Well, the first thing is actually many of our sales are in the same location as where we produce. So, our underlying transaction exposure is not particularly great. But we do have transaction exposure. We do hedge it. We do hedge it forward, so there may be some slight benefit that we will see going into next year on transaction FX, but not this year.

And on the 65 million, well, a couple of things, the three currencies we give you relates to 80% of translational FX exposure. The second point is it's a bit of an oversimplification that we give around the $0.10 movement. And so, the reality when you see such extreme exchange moves is that oversimplification doesn't hold. So, there is two things going on. One, using your mechanic for calculating it doesn't quite give you the right answer, which is the bigger piece of it, and then there is a smaller piece of it, which relates to that 20% of exposure that is not in those three currencies.

Robert MacLeod

And I’m sure you got a good calculator, but [indiscernible] as the rates go down, the impact actually gets greater. As rates go the other way the impact will be lesser. So, it's not a - it's not a linear impact.

Adam Collins

Are you able to tell us what the net foreign currency exposure is, the transaction exposure in pounds sterling?

Anna Manz

Sorry?

Adam Collins

The net foreign currency exposure - the transaction exposure - the foreign currency sales - foreign currency cost?

Anna Manz

That’s not a number we shared and frankly it moves as you see the sorts of fluctuations in geographic mix that we've seen in the hour.

Robert MacLeod

John, do you want to talk a little bit about the balance between the Euro 6b tailing off and the real world driving?

John Walker

Okay. Well, the new product introduction cycle, if you think about that as the whole end to end cycle, clearly the Euro 6b stuff is at the end of that cycle and the real world driving is at the front end of that cycle. So what we're seeing now is for the real world driving impact we're seeing a very large increase in numbers of samples and people getting ready for the homologation process to be able to introduce new technologies to be able to improve the NOx control under real world driving conditions. So, there are a lot more samples, a lot more activity in the front end of that MPI cycle. One that's going to translate into volume is really not next year. It’s kind of ‘18, ‘19, so effectively I kind of see that as accelerating things by kind of six to 12 months, but not really having a huge impact through the end of this year or really into next year. It’s really a year or two from now impact.

Robert MacLeod

Thank you, John. Next question, who went first? Actually I think Neil you had your hand out first last time and then we’ll go to Andrew - no, we’ll go to Martin and we’ll come back to Andrew.

Neil Tyler

Thank you. It’s Neil Tyler of Redburn. A couple of things. Sticking with ECT business in the U.S., John, the business there has, in terms of its organic or underlying sales growth X currency, has over the last two or three years tended to grow less quickly than car production. I understand there is mix changes in terms of vehicle mixes that impact that. But to what extent is that also a reflection of your customer mix? And if at all, can you do anything about that? That's the first question.

Then on HDD, you mentioned, Robert, in your comments some new business that you're anticipating. Am I right in interpreting that as new platform wins that would deliver some second half growth over and above the market growth? Thank you.

Robert MacLeod

I think the answer to the second one is an easy one. Yes and that’s what John has meant [ph]. And the first one, John, do you want to just talk?

John Walker

It's also a new technology on existing platforms as well.

Robert MacLeod

Yeah, so it’s a combination of that. Would you want to answer the first one of that?

John Walker

To the first one on mix is there is again a lot of moving parts in terms of that. We have a lot of platform wins and we've had a few platform losses in this particular half of results. The platform loss that we had was a high value loss and the platform wins were lower value wins. So, that's kind of what happened in the first half.

Robert MacLeod

Any sort of number - that sort of changes over time and some years you have good years and some years you have less good years and -

John Walker

One of the things that we’re looking forward to, I guess, is what's going to happen in the light duty diesel pickup truck market in North America and we feel that we're strongly positioned there. So, if truck sales go up for pickup trucks in America, we're in a pretty good position there with oil prices staying as low as they are.

Robert MacLeod

So, that would be a classic - in American systems that’s the low Class 4 trucks that sort of Class 1 and 2s and sort of pickup trucks?

John Walker

SUVs and pickup trucks.

Robert MacLeod

Okay. Okay. Martin, do you want to go next?

Martin Dunwoodie

Thanks. Martin Dunwoodie form Deutsche Bank. Can I pick up on firstly ECT and then battery materials? On the ECT side, you said there is not a lot of material legislation coming over the next couple of years. So, I guess, your sales are probably going to trend more with auto production. But what are your customers telling you about production schedules and rates? I know you probably only got about three months hardiest visibility. But what are they saying next year, particularly in the U.S. about wholesale production? How do you think that will go and how they're telling you?

And then second on battery materials, three parts to it. Firstly, I may have misremembered this, but the operating result there seems to come a bit earlier. The profit seems to come a bit earlier than you had indicated. I think you’ve said full year, but I might be wrong about that. But that seems to be going a bit faster than you maybe thought before. Secondly, option two end licenses on high energy materials, what should we look for in future on that? You’re clearly focusing very heavily on it now. But what should we see in future on this, are there more licenses that we should see come in more products that you’re talking about?

And then the third thing here, I know it’s a very quickly meeting area and you indicated the opportunity there. Do you see this as a bigger opportunity now that maybe you saw even six months ago going forward? Thanks.

Robert MacLeod

Okay. John, do you want to start off with ECT and the wholesale production schedules and what you're hearing?

John Walker

Okay. So, the U.S. in particular, so U.S. auto production for next year, we probably see down a bit and I think we probably have a few cost levers that we still have to apply there to be able to help offset some of that and moving some product around in cheaper manufacturing locations. As far as Europe goes, I mean directionally not very much of a change and we expect to see Asia up again. Then on the heavy duty side even these trucks are going to be light duty comment.

Robert MacLeod

There is a light duty comment. There is a light duty question. Okay, on the sort of battery material side, I’ll let Alan Nelson say a few words in a minute. But I mean we're making good progress in the battery material space. And if you remember this is relatively new for us. We've only got in it a couple years ago and we are making progress. The operating profit for this year and next year will kind of depend upon the level of investment. You mentioned of course we've taken these licenses for the high nickel chemistry and it’s the balance between the investments we make versus driving for today's profit.

Now, of course, the shareholders, they want to balance between the two, don't they? They're kind of greedy. They want both investment for future and delivery in the short run and that never quite happens like that. So, we've got to try and get that balance right and so on the high nickel, so we've got to invest a bit more to make progress there. But, Alan, do you want to answer that? Did you get the three questions?

Alan Nelson

I think so. We’ll give it go and if I don’t hit them all, then I'm sure you'll ask them again. So, you asked a question about the timing for NMC and NCA, and in particular regards to additional licenses. So, the two licenses that we signed earlier this year give us broad composition of matter access into both NMC and that was through a license with 3M and also other high nickel containing materials including NCA type of materials. And that was the license that came in from CAMX Power. So, very broadly speaking we have broad composition access to a wide range of high nickel materials. We are continuing to look at other technologies that exist out there and looking at additional licensing opportunities that would further enhance that portfolio. So, yes, this is the short answer. We're continuing to explore different opportunities in that space.

We're also actively looking at developing these materials and bringing these materials to market internally. So, we’re ramping up our efforts to put pilot scale equipment on the ground and bring these to customers sometime next year. And in fact we're working with both 3M and CAMX Power today to bring these materials to our customers, to our current customers as I said today.

You also asked a question. Is this a bigger opportunity now than we had thought previously? And I think really the answer is we're just seeing the natural evolution of the power train. It's important to remember today that most of the battery materials that are produced actually go into consumer electronics and we're starting to see increased pickup and traction in the automotive power train and that's where we're seeing the increased pull and the increased audience.

So, it's not necessarily that we're seeing something that's unexpected. We're just seeing growth in the automotive sector and that's reflected in our investment in LFP and of course the technology licenses that we acquired earlier this year.

Robert MacLeod

Thanks, Alan. If you could hand the microphone on to Mr. Stott, if you remember here in this lane. Andrew, how are you?

Andrew Stott

Thanks. I’m Andrew Stott of UBS. So, a couple of questions; first is on the Process Tech. I just wondered where specifically you're seeing the order book improvement. It looks sizable if I take the working capital comments on board. Or is that more weighted towards Fine Chemicals? So, a couple of questions within Process Tech and then a second one is more high level. I'm not sure whether you’ve been to Trump Tower yet and had your consultation. But I just wondered if you got some high level thoughts about, you're a big player in North America. There's lots of issues here that could affect Matthey exposure to Mexican OEMs, your corporate tax rate infrastructure, et cetera. I just wonder if you could share any thoughts at this stage on what you see as opportunity.

Robert MacLeod

Okay. Well, why don't we do PT first? And I think remember the PT is a very lumpy business. We said this many times before. Replacement cycles tend to happen over the summer months. So, the orders - our catalyst tends to get shift in the spring months, March - January, February, March tends to be our biggest quarter. Maybe, Jeff, do you want to just talk a little bit briefly about the - maybe you can’t talk briefly. Can you talk briefly just about where the particular order book you're seeing? Give me the other mic. Sorry about the technology.

John Walker

It’s okay. Actually I'm not sure. I’d say a whole lot more than Robert said on it. When we look at the order book, it is pretty much across all the entire portfolio whether it's the methanol, ammonia, same gas range, and even some of the things like the hydrogen and even some of our formaldehyde business. So, we do see pretty strong order book in the second half relative to the first.

On the catalyst, so most of this is catalyst refill. So, it would be pretty much around the - I wouldn’t say a whole lot any different in the U.S. So, in the U.S., yeah, in the U.S., Middle East, where we have good positions, China, would be the main areas.

Robert MacLeod

Thanks, Jeff. And Andrew on the sort of working capital point. I mean I think it's - the orders in days terms and for the group, I mean, as more of the working capital is in [indiscernible] because of course the sales are bigger and the quantities of raw materials, because it is a greater component in PT. But in absolute numbers in terms of days’ terms, both of them are pretty high at the moment because of that buildup ahead of the second half. I haven't been to Trump Tower and unlike Nigel, but we did - we are looking at what's the impact of change in the administration in the U.S. and obviously there are lots of potential moving parts. It's very difficult to assess that today, because of course any politician in any country says one thing. Pre-election and then things, they are not necessarily the same after the election. So, we'll just wait and see exactly what happens.

There are some things that if they happen could be beneficial for the company and other things that if they happen might be less beneficial. So, but I think the biggest one is lots of noise around what's going on with EPA and the legislation there. And our expectations is what is already legislated is unlikely to be reversed. I mean so all the - particularly around air quality, around the sort of particular matter or NOx control and all that stuff, it's never happened anywhere else in the world, ever. Does that mean it can't happen? Of course, it doesn't mean it can't happen, but it seems to us highly unlikely that any politician we go to the country and say we're going to reverse air quality improvements rather than - different from making it accelerating further tightening and that may slow down a little, but who knows? Let’s wait and see.

And on corporate tax rates, who knows? They've been talking about changing the tax rate in the U.S. for some time. If it happens and it goes down, that might be good, but might be good, because it will depend upon what other reliefs they might offset it, because they might miss –they might remove one relief that gives people benefit to reduce the tax rate for others. So, who knows at this stage? It's an interesting time that we live in at the moment, isn’t it?

Mathew Hampshire-Waugh

Thanks. It’s Mathew Hampshire-Waugh from Credit Suisse, just another one on ECT please and Euro 6c. Is it correct to assume that for a GDI setup with the particulate filter on that doubles the value of a gasoline catalyst for you? And is that roughly sort of $50 to $100? Is that ballpark? And secondly, what's behind the 25% penetration assumption? When do you think that comes in?

Robert MacLeod

Well, the answer to the first question is interesting [ph] of course you are talking about Europe and dollars - dollars in Europe, but turning into euros and probably that's about right, doesn't it, John?

John Walker

Kind of yes, yes, and yes, to the first two parts.

Robert MacLeod

Yes to the first two and the assumption on the 25%? I mean that’s -

John Walker

Just remember in the beginning, the kind of generation one filters, some of that filter fitment was uncoated filters as the regulations get tighter and tighter and as we finally get to a point where the particulate legislation is more understood, because just remember some of that is still not totally finalized yet, you will find that most of the filters on GDI cars will become coated. But in the beginning, that - whether it's - quarter-over-quarter it’s still a little bit unclear. And again we probably see the real impact of that similar to Adam's question that hits in terms of volumes really in kind of ‘18, ‘19, fiscal year ‘18, ‘19.

Mathew Hampshire-Waugh

Just to clarify that's going to be 25% of the market will be GDI and that will be full value by 2019.

John Walker

Something like -

Robert MacLeod

25% of the gasoline.

John Walker

Gasoline.

Robert MacLeod

And that’s an estimate. So, don't hold us to that number if it ends up being 20 or 30. I mean, look, it’s an estimate today. We'll see what happens with the pace of implementation. Remember real world driving, everybody thinks real world driving impacts diesel costs. Of course, it does impact diesel costs, but it also impacts gasoline costs too. And some of these requirements that John was talking about these filters that need to be fitted.

John Walker

It’s a rapidly changing space, so.

Robert MacLeod

So, because it's changing so much, it's quite hard for us to know exactly what that penetration will be. But it feels like that sort of order.

Mathew Hampshire-Waugh

Thank you.

Robert MacLeod

Adam, you would like to follow up, but since you're right next door, yes, you can. And the last one, you're only hitting one this time, aren’t you?

Adam Collins

I’m going to take three, but all to Anna, so it’s going to be quick. So, just a couple of things you guided to. You guided to higher central cost this year due to improving bonuses, profit-linked in bonuses. Has this got something to do with - [indiscernible] and what would be your thinking there? Presumably they go up too if FX is driving profits up. And then you also got it to 10 million higher, the fixed asset depreciation this year and next. I wondered if you could just update us on your thinking there. And then final thing was only ERP rollout, just an update in terms of the implementation that's going on there.

Robert MacLeod

I’m not sure I should allow all those questions, but we really are getting into the minutes right now Adam. So fine to do, but I’m not sure that’s great use to do it around in this table. But anyway on the bonus side, let’s be clear on bonuses, there’s a difference between bonus and LTIP. LTIP is on underlying earnings per share on an absolute basis, bonuses we do on constant currency basis, so we’re on track to deliver the budget for the year, for the group, so bonuses will be kind of a little bit better than last year because we missed budget by a little bit, but not material. The bigger impact is on the LTIP side.

Anna Manz

Yeah, the central cost increases entirely due to LTIP, there’s nothing else going on.

Robert MacLeod

So do you want to talk a little bit about fixed asset depreciation, which I have to say, I’m not sure I could also. So I’m hoping you can.

Anna Manz

Maybe will end up taking the detail here off line. The ERP go live will take place in calendar year ‘17, so if was behind your question is will we see an acceleration of depreciation from that in this fiscal? The answer is no. That will occur next fiscal and otherwise depreciation is unchanged from our previous guidance. And in terms of the pay, we will do the roll out in calendar 2017 and as we said before it will be a phase roll out over a five year period.

Unidentified Analyst

[indiscernible] Just on the auto again, under RD [ph], if you see more introductions of the Adblue type solution, are you a net winner or not out of that?

John Walker

Net winner, yes, we’re net winner.

Unidentified Analyst

What do you supply in that space?

John Walker

And Adblue, what do you mean in Adblue?

Robert MacLeod

So we don’t supply Adblue. Adblue is the urea dosing, the thing that gets urea. We supply SCR catalyst, we have nothing to do with Adblue and making Adblue per say, but it’s the SCR catalyst and as I mentioned there’s move to real well driving is enhancing the complicated catalyst system, SCR systems principally which are there to control NOx.

John Walker

We’re net winner solidly improved catalyst systems.

Unidentified Analyst

[indiscernible] Firstly, with the Class 8 truck sales in the U.S., back in June you were talking about GBP25 million drop in Class 8, this year it’s been probable, what do you think it might be in dollar terms now. Secondly, can you just clarify, when that expansion to the Canadian battery material spend comes on stream? And then following your - regarding the 15.6 million item that Anna talked about, is it sort of clarify roughly where the benefit did come, I mean you have indicated it might become an ECT and PMP, but is it possible to just sort of - yeah, GBPx million et cetera?

Robert MacLeod

I’m going to answer that question, the answer is no. We’re not going to get into that level of detail, because it’s far too granule and you asked me a question on expansion of the Candiac plant, that’ll take a couple of years or so - three months, before that comes on stream and of course they might go to fill it up. And of course we’re building it because we need additional capacity, but it’s not going to go from 0 to 100 in one week, it will build up overtime. So wait for a couple of years before that starts to make an impact on the numbers. And on the Class 8 trucks, John do you want to give a? This 25 million we talked about last time we got together?

John Walker

Yeah, probably closer to 75.

Robert MacLeod

Pounds or dollars?

John Walker

Dollars.

Robert MacLeod

Okay, so I guess GBP25 was worth a few more dollars back then when we were talking. So $75 is probably not quite as much.

John Walker

And most of that’s behind us now as well.

Robert MacLeod

Okay, any other questions?

Robert MacLeod

Well, thank you very much indeed for your time. Thank you very much for coming. We find that helpful and we look forward to seeing you again in six months’ time because again we’re not having an Investor Day in February. We’ll do that later on next year. So thank you very much everyone.

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