Johnson Matthey's (JMPLY) Group Finance Director Den Jones on Q3 Trading Update Call Transcript

| About: Johnson Matthey (JMPLD)

Johnson Matthey (OTCPK:JMPLY) Q3 Trading Update Conference Call February 3, 2016 3:00 AM ET

Executives

Den Jones - Group Finance Director

Analysts

Simon Fickling - Exane BNP Paribas

Neil Tyler - Redburn Partners

Martin Dunwoodie - Deutsche Bank

Mathew Waugh - Credit Suisse

Charlie Pick - Numis Securities

Operator

Good morning ladies and gentlemen and welcome to the Johnson Matthey Q3 Trading Update Conference Call hosted by Den Jones. My name is Stam, and I’m your event manager. [Operator Instructions] I would like advice all parties this conference is being recorded for replay purposes.

And now, I’d like to hand over to Den. Den please go ahead?

Den Jones

Thank you, hello and good morning everyone. I’m going to start by giving you a quick overview of trading and then I’ll be happy to take any questions. In the third quarter, the Group sales for the continuing businesses were up 3% compared to the same period last year. And in the current business environment, I’m pleased with this result. ECT continued to perform well, our new businesses made good progress. However, challenging macro conditions in PT and PMP which you notice back in November persisted in the period and these had an adverse impact on operating profit. The actions we announced reduced costs by around GBP30 million per annum are well under way and the cost savings from this will benefit us in the fourth quarter.

On our tax for the quarter we have just finished, the exchange rate had a slightly negative impact on underlying operating profit. Based on how rates have moved over the last month or so, we expect limited FX impact for the whole – the year as a whole. Working capital remains on track and I continue to expect us to be between 50 and 60 days for the ex-PGM’s components at the year end. Balance sheet remains strong. And yesterday as I’m sure you’re aware, we paid a special dividend of 150p per share and [indiscernible] consolidation occurred on the 11 January when the shares went ex-dividend.

Okay, now turning to the divisions. ECT performed well, its sales were up 6% and operating profit was also ahead. In light duty, our sales grew by 11% at constant rate in a market where global vehicle production was up by 4%. Here we continue to benefit from the implementation of Euro 6b which came into full force for all diesel production on the 1 September 2015. As I said before, this legislation results in additional technologies to control NOx of diesel cars and adds around 20% increased catalyst value per vehicle for JM.

It’s also worth noting that the diesel share in Western Europe remains stable at just over 50% for the quarter. In heavy duty diesel, sales were up 2% in constant rates. As expected, the Class 8 truck market in US has started to moderate and production was slightly down in the quarter which impacted our sales. On the other hand, our sales in Europe were supported by strong growth in Western Europe production. And in China, the rollout of Euro 4 continues in line with our expectations. So, continued good performance by ECT and the outlook for the remainder of the year remains positive.

In Process Technologies, as expected, the order book for Q3 was weak. Chancy market conditions due to the low oil price and the slowdown in China as well as normal timing of orders meant that sales reduced by 11% and operating profit was significantly down. Our Diagnostic Services business continues to serve the impact of the low oil prices. And the licensing businesses remain subdued. We did however find two small licenses in the period taking the total for the year so far to 3. On the catalyst side, methanol catalyst sales decreased. The sales from other higher customers in our refineries businesses were both good.

We continue to expect the fourth-quarter to benefit from strong demand for refill catalysts. The trading in PT remains difficult in the current macro climate. Checking out our Precious Metal Products, sales were 17% lower than last year and operating profit was significantly down. This was primarily due of course to the absence of gold and silver and the lower average PGM prices. Platinum and palladium were both over 20% down versus the same period last year. This is a reminder here; a 10% moment in the basket of PGM prices has around GBP5 million impacts on EBIT in the year, primarily in our PGM refining businesses.

Prices continue to fall through Q3. And as a result of this, volumes for our PGM refinery were down in the period and are expected to remain weak in the fourth quarter. So, at current metal prices, we continue to expect the performance of PMT in the second half to be lower than the first half. In Fine Chemicals, the research chemicals business was sold in 30 September 2015 last year but did not contribute in the third quarter. In the continuing businesses, sales were up 4% with growth in our API Manufacturing and our Catalysis and Chiral Technologies business doing well. The product mix was a little unfavorable for us in this quarter. That said, we still continue to expect the performance of Fine Chemicals in the second half to be ahead of the first half despite the absence of research chemicals.

Just want to touch briefly on the new businesses. Here we continue to make good progress in division with sales doubling compared to Q3 last year. This was supported by the contribution of battery materials and atmosphere control technologies business which we acquired recently. Overall, the loss for the division reduced steadily this quarter. Finally, some comments on the outlook for the current financial year. Trading conditions remain tough, particularly in Process Technologies and Precious Metal Products.

However, we do expect to deliver a strong fourth quarter partly as a result of our normal seasonality and also due to the start of the cost savings from the restructuring actions. Overall, the performance of the continuing business in the second half should be slightly ahead of first half. And the full-year outlook for the group is in line with the current market expectations. Looking ahead a little further, given the challenging macro economic conditions have worsened slightly since we spoke to you at the half-year results. We do expect that these will limit the Group’s short term growth opportunities especially in PT and PMP. Having said that, long term structural growth drivers of the Group’s technologies remain robust and Johnson Matthey is well placed to create value as they develop.

With that, I am happy to take any questions.

Question-and-Answer Session

Operator

[Operator Instructions] We do have several questions. The first question comes from the line of Simon Fickling. Please go ahead, Simon. You are now live on the call.

Simon Fickling

Thank you. Good morning, everyone.

Den Jones

Hi, Simon, how are you doing?

Simon Fickling

I have got some queries. I’ll kick off with ECT and real world testing. Could you just give us an update on the sort of legislation schedule for the real world testing? I think I did see some news on delays for the potential implementation and some relaxing of conformity factors. But can you just update what came at these as the landscape and timeline for real world testing? Secondly, Process Technologies and on the - obviously refinery catalyst has been – remains pretty strong, but I do – I mean, you flag general caution for the division, but I wonder what the scope could be in few years’ time if production does decline sharply as expected, what that would mean for PT. And also potentially changes to the crude mix, I think the general expectation is that it’s going to be slightly less power heavier grade which will need less upgrading and what that means for PT if that’s the trend that you are seeing? And then finally in PMP as well, can you just confirm refining fees. I know volumes are a bit weak and I think the competitive environment probably is still tough, but have you seen pressure on refining fees at all in that business. Thank you very much.

Den Jones

Okay, just quite a lot of questions there. Hey, Simon, I mean on the first one there is no real change to the update that we gave in November around real world driving, but you come to the capital markets that is - question for John, but we haven’t seen any change in the kind of drivers there at all. But John will be able to give you more specific details on that.

On PT and the refining catalysts, I mean, on the refining side, obviously it does depend on the power, make sure some of the crude [indiscernible] changes. My own view is that crude is becoming more sour over the near term anyway, so that will be beneficial to us, but over the long term if that makes changes obviously that would impact us as would if this production kind of came down over the next couple of years.

PMP on the volumes there, we’ve seen a GBP0.10 drop quarter-on-quarter on the volumes coming through, but we are not seeing any pressure on fees at all. That division has obviously been impacted by the PGM prices and that’s obviously impacting the people bringing us that kind of recycled auto catalyst come to us as well, so we are seeing those volumes decline and that is 10% quarter-on-quarter.

Simon Fickling

That’s great. Thank you very much.

Den Jones

Thanks , Simon.

Operator

The next question comes from the line of Neil Tyler. Please go ahead. Now you are live in the call.

Neil Tyler

Yeah, good morning. Good morning, Den.

Den Jones

Hi, Neil.

Neil Tyler

Couple from me, please. Firstly, just a point of clarification on the share count for the second half of the year. After the consolidation, is that - that’s 199 million shares that we should be looking at. Is that a right number to be using, just wanted to make sure I was looking at that correctly? And then secondly, in the PGM basket that you refer to, I am slightly confused as to why that’s still a 5 million impact given the sort of the lower diminishing numbers and the 10% move in that basket and seems to have been a GBP5 million impact for as long as I could remember. And I would have thought that 10% is becoming a smaller and smaller number. So I wonder if you could help understand the dynamics there. Thank you.

Den Jones

Okay. On the number of shares we will get back to you, so I want to give you the exact number. So I have just been handed it, actually the exact number of shares is 193,533,430.

Neil Tyler

Okay. And then treasury share is on top of that?

Den Jones

Yeah, that’s right. I mean on your second question, [indiscernible] 17, 18 moths, it’s always been 10% movement the PGM price with the impact full year cost is by 5 million. I mean, remember ECT is the pass [indiscernible] so the impact is quite small, but obviously we are going quarter-on-quarter here, but the impact in the quarter itself is about GBP3 million or GBP4 million compared to last year on a year-to-date basis and come up maybe 30%, 25% to 30%, so it’s a big impact, but mainly just around the refinery. That’s where we see the PGM prices and the other businesses.

Neil Tyler

Okay, all right. Thank you.

Den Jones

Thank you.

Operator

The next question comes from the line of Martin Dunwoodie. Please go ahead, Martin, you are live on the call.

Martin Dunwoodie

Thanks. Good morning, everyone. Couple of questions. Firstly, you mentioned the macros were since November - obviously you announced cost cutting at that point still awaits, the pressures you are feeling, but if things are getting worse are you considering further cost cutting going forward. Is that something that’s an option?

And then secondly, you talked about the timing of all this in Process Technologies, obviously a delay there, is that that’s sort of more into Q4 or are you anticipating a benefit coming through in the ‘16, ‘17 fiscal year? Thanks.

Den Jones

Cost cutting always remain an option on how far we want to go, but we want to have a business that kind of represents the longer-term macroeconomic conditions that we see. And the kind of balance we need to do to make sure we end up with a base, a cost base that supports -- that's able to support growth when that returns to that business. So that's key there. It does remain an option, but we've been through a lot of that and we're going to keep it where it is for the moment.

I mean, on the timing of orders around Process Technologies, it's always lumpy, it always tends to be around Q2 and Q4. So, there's no additional lumpiness. I mean, we highlighted this in November of the year, at the interims. So we're not seeing any further -- hey, we're in February, so we've got a clearer view and we're more confident of our Q4 numbers for Process Technologies now than we were back in November last year.

So when we talk about timing, it's just the normal timing that we spoke about in November. Q3 was down and we see in Q4 that that will come back. So expecting a strong quarter from Process Technologies. And as I kind of sit here today, we've got the orders and still expecting them to come in.

Martin Dunwoodie

That's great. Thank you for that. Very helpful.

Den Jones

Okay.

Operator

The next question comes from the line of Mathew Waugh. Please go ahead, Mathew. You're live on the call.

Mathew Waugh

Den, just a quick question on -- just to clarify on the guidance. Could you just give us what the continuing PBT was in the first half please?

Den Jones

Well, basically, if you take the 208 million, so the underlying PBT was 208 million, if you then take off Research Chemicals, which is around 7.5 million, 8 million of that, you get to around 200 million, which is underlying PBT.

Mathew Waugh

Okay, fantastic.

Den Jones

Okay.

Operator

The next question comes from the line of Charlie Pick. Charlie -- Charles, please go ahead. You're live on the call.

Charlie Pick

Thanks very much. Just had three questions please. On the heavy duty diesel catalyst, and the reduced amount of Class 8 trucks, is it possible at least to provide a pointer as to how significant that Class 8 business has been in the US in the recent past. I know it was emphasized, but that's where that particularly big uses of HDD catalyst and the severity of the decline in the Q3 period. Doesn’t sound like to be not there as yet, is there a net debt figure available please for the end of Q3?

And also in terms of the outlook guidance, is that simply more or less as per what you indicated at the time of the interims, when you talked about the underlying performance as a continuing business has been similar to last financial year and you've simply reworded it from a slightly different way when you talk about second half being slightly above the first half for the continuing operations?

Den Jones

Okay. I mean on the guidance for HDD, we're not going to give you details of Class 8. It's early for us. I mean, if you want a kind of a longer-term view of what's going on there, actually look at the PLMC data [ph] and you can see the comment within our news release about the outlooks for ‘16, ‘17, coming off, you can actually see that's come off around 20% of the forecast forward, not going to give you specifics about our data.

Net debt, we're not going to give balance sheet data for Q3 and Q1, kind of, we invest to manage the business in a long-term basis, so we're going to keep those kind of numbers for the half year and the full year.

On the outlook for this financial year, I mean, if you go back to the guidance we gave by division, in our insurance, that still remains hold. So that was around ECT been on balance, the same for the first half to the second half, PT, PMP been slightly down driven by PGM prices.

And Fine Chem and Process Technologies being slightly ahead of the first half. So I don't, I think you made a comment about language, but my view, if you look at the guidance we gave for the full year, the second half versus the first half, it remains as in our interims and it remains in line with market expectations as we said in the release upfront. Does it answer your question, Charles?

Charlie Pick

Yes, very helpful. Thank you very much. And just one supplementary one actually, on the Fine Chemicals, the adverse product mix effect, is it possible to just clarify exactly what that was?

Den Jones

It's just as we called, the bits and pieces moving around in that, so it's actually quite difficult and I don't want to give too much, go into real detail around that, but it's just within the normal range of product mix that we see within that division.

Charlie Pick

Okay. Thanks.

Operator

There are no further questions.

Den Jones

Okay. Thanks for your questions and I just wanted to summarize the key messages from Q3 before we wrap up the call. ECT fared well, with growth across all regions and new businesses continue to make progress. Trading conditions in Process Technologies and Precious Metal Products remained tough. Restructuring actions are well underway and will start to benefit after the full year end.

Overall, we expect strong final quarter and the full year outlook is in line with market expectations. Macroeconomic factors have worsened slightly since we spoke last and we expect that these will limit the group's short term growth opportunities. That said, the long term structural growth drivers for our technologies remain robust and Johnson Matthey is well placed to create value as they develop.

Tomorrow, we will highlight one example of this, opportunities for Johnson Matthey from the evolving Powertrain and I look forward to seeing some of you there. Finally just a housekeeping note, all of those who have registered for our Capital markets Day should now have received the detailed agenda. If you haven't registered to the event, please note that this is now fully subscribed. For anyone not able to attend in person, it will also be webcast live and on demand on our website. Thank you for your time and your interest in Johnson Matthey. Thank you.

Operator

Thanks, Den. Ladies and gentlemen, that concludes your conference call for today. You may now disconnect. Thank you for joining and have a good day.

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