Earnings Transcript for JMPLF - Q1 Fiscal Year 2021

Martin Dunwoodie: Great. Thank you, Eula, and to everyone for joining our First Half Results Call this morning. I’m pleased to have our Chief Executive, Robert MacLeod, with us on the call today. And without further ado, I will hand over to Robert.

Robert MacLeod: Thank you, Martin, and good morning and welcome, everyone, to our first half results presentation. Obviously, given the circumstances, we’re still having to hold this remotely, so I’m very sorry we can’t do this in person. But I do hope you and your families are all keeping well and healthy. Today, I am with Anna and the IR team. And I’m also joined by Karen Hayzen-Smith, who will take over from Anna as our Interim CFO from tomorrow. But as usual, we’ll go through the presentation today and then give you a chance to ask any questions that you may have. As we know, this continues to be a very challenging and uncertain time for all of us. However, across JM, we’re successfully navigating through this difficult period. Although, some of our end markets were initially badly impacted by the pandemic, they’ve recovered more rapidly than we previously anticipated, particularly in the automotive sector, where we’re seeing a strong recovery across all regions but especially China, where we’re now seeing auto production above last year. As a result, in the half, we delivered operating performance ahead of market expectations, albeit significantly below the prior year, and at the same time, very strong cash generation. In both our operating performance and cash generation, I’m pleased that we have outperformed, evidencing that we’ve managed through this period well. Over recent years, we’ve made changes across the business, and these are enabling us to create a more simple, agile and efficient organization. This has given us a strong platform and the flexibility to invest for the future into our strategic growth projects, particularly those which are focused on climate change solutions. In a moment, Anna will talk you through the detail of our performance in the half, but first, I’ll give you my highlights. As I’ve already said, our financial results given the context of changes in our underlying markets are good. During the period, we achieved this while at the same time making significant changes to our group operating model. This will deliver substantial efficiency which will benefit our P&L. And we’re also fundamentally improving the management of our precious metal working capital. We’ve also made good progress with our longer-term growth opportunity. In Battery Materials, customer testing is going well. That and the way that the market continues to develop has given us the confidence to accelerate our plans to scale up in the business. We’re therefore proceeding with the initial engineering work for our second commercial plant. Fuel Cells is going really well, and we’re seeing strong growth and making good progress with customers particularly in China, and our capacity expansion is almost complete. These are just a few examples. We’ll cover the details in these sectors as we go through the presentation today. But let me tell you about what we’ve been doing to set us up for the future. In recent years, we’ve been working hard to structurally improve our business. We’re in a strong position today because of the changes that we have made, and we can summarize them here in three broad buckets. Firstly, we’re executing on our efficiency programs, and I’m happy to report that we’re well on track. These will deliver annualized savings of around £225 million by the end of our fiscal year 2022-2023. Secondly, we’ve maintained our strong balance sheet. This is a really good result, especially so in the current environment. Many of you will recall the unplanned outage we had in our pgm refinery a couple of years ago which put pressure on our working capital, which was further exacerbated by higher metal prices this time last year. Since then, we haven’t just looked to tackle the problem at our refinery, but we’ve taken the opportunity to have a good look at our business and fundamentally improve our metal operating model. This has yielded huge benefit that you see flowing through this set of results. And of course, this drive for efficiency doesn’t stop there. We continue to actively manage our portfolio. And recently, we have divested our activities in water and atmosphere control technologies, which are not core to our growth strategy. So before I hand over, let me summarize. We’ve made good progress in the last six months delivering against our commitments, and we remain in a strong financial position. Because of this, we’re able to invest in our future and strategic growth projects which are hugely important in helping to tackle climate change. And with that, over to you, Anna.

Anna Manz: Thanks, Robert. Good morning. Today, I’ll be covering three things

Robert MacLeod: Thank you, Anna. So you’ve seen our performance in the half, so let me now talk about our future growth opportunities, starting, first of all, with our more established businesses. In Clean Air, we continue to benefit from tighter legislation especially in Asia, and this growth remains intact despite the dislocation caused by COVID. Asia is our next leg of growth, and we’re already seeing the benefit coming through particularly in China as new legislation comes in across light and heavy duty. This gives us a significant value uplift per vehicle. Our new plants in Poland and China are now rapidly scaling up. And these will support our growth but will also allow us to drive further efficiency across the sector. As we said before, these should be the last of our big investments in Clean Air. And therefore, going forward, Clean Air will have strong cash generation. Now to Efficient Natural Resources. Here, we are targeting the highest growth segments. We want to be an enabler of the energy transition, which includes our hydrogen technologies and the move to low-carbon chemical processes. In the last six months, our new license wins demonstrate the effectiveness of our technology and provide a good leading indicator for future catalyst growth. In addition, the opportunity for our pgm recycling business continues to be attractive given its low cost and carbon footprint compared with primary sources. The investments that we’re making in our refineries will enhance this as well as enabling us to drive further metal efficiency. And in Health, we secured a number of supply contracts across both Generics and Innovators. This is already starting to deliver results, and we’ve also launched two more products from our pipeline. We’ve been talking about our new facilities in Poland and China for some time, and I’m delighted that we have them and that both are now ramping up. Poland came online first, shortly followed by China, and India will follow next year. We will soon have a truly global, highly efficient manufacturing footprint focused on five near-identical world-class plants in the U.S., North Macedonia, Poland, China and India when it’s complete. We announced in June that we’re starting to consolidate our older capacity, and we’ve been gradually moving production into these newer facilities, starting with our large volume products. And as well as optimizing our footprint, we’ve also been transforming our business work, moving from one that’s locally focused to one that’s much more. This isn’t just about how we manage our manufacturing assets but also how we are managing, for example, our customer relationships, our technical, quality and supply chain teams. And together, this is making a huge difference. Now looking at the world around us, there’s no doubt that action around climate change has increased. But importantly, this remains true today despite all the uncertainty that we’re seeing with COVID. The move to net zero is accelerating. And with this, we will all see significant change. We’re ready for it and already have solutions from battery materials to fuel cells and also technologies for hydrogen production. In these areas, we have competitive advantage. So let me take you through each of these, starting with battery materials. The battery materials market opportunity is very significant. The market we are targeting, the automotive market for high energy cathode materials, is expected to be around 1.7 million tonnes by 2030. And as we bring our business to scale, we’re making progress across a number of key areas. Firstly, we’re continuing to develop our technologies as we are seeing considerable interest in our customized products. Secondly, I’m very pleased with how testing is going. We’re making good progress not only adding new customers to our pipeline but also continuing to move existing ones through our development funnel. In the first half, two nonautomotive customers moved into cell prototyping. This is a more advanced stage within full cell testing, where we are working together on their specific cell format. This is a really positive development because we’ve now moved beyond the standard testing stage and are working more closely on their specific application. The other thing to point out here is the time to market is usually faster for nonautomotive applications, the advantage being that we’ll be getting valuable learnings ahead of auto customers moving into this phase. This type of testing and customization is supported by our application center. We know that our ability to customize is something that is really valued, and we recently opened our second application center in the UK for more advanced cell testing work. But of course, having a great product in the lab is not enough. We have to be able to manufacture at scale, and that’s where our commercial plants come in. Our first commercial plant in Poland is progressing well, and we have now completed filing, so very soon, you’ll see the building going up. And the picture on the right here is a CAD drawing of what the plant will look like. The build is on track. And as a reminder, it will start production in 2022, and we will have commercial automotive production in 2024. Over recent months, we’ve continued to engage with customers particularly those in the more advanced stages of testing. That deeper engagement has given us greater understanding of their requirements. And this has meant that we’ve had to evolve the design of this first plant to ensure that we have the right flexibility to manufacture their products. But at the same time, we don’t want to compromise on speed to market, and hence, the cost of this plant has increased. We therefore now expect that the full cost of commercialization of eLNO to be around £550 million compared with around £350 million previously. But it’s important to remember that this is our total cost of commercialization, so that includes everything from the pilot plant to the commercial plant, but also the application centers, research and development and, of course, management costs. As I explained a minute ago, this is a really exciting and significant opportunity. With the way the market is evolving and our increased confidence from customer testing, we are accelerating our scale-up plans and start in engineering design for our second commercial plant, which will have 30,000 tonnes of capacity. We expect that this plant will have a substantially lower capital intensity towards a level that is similar to other European battery materials plants as we take our learnings forward. And this will enable us to deliver a return on invested capital at scale at the upper end of the industry range of 10% to 15%, reflecting the good performance in customization of our eLNO materials. Finally, all of this has to be done in a sustainable way. So as part of our commitment to our customers and the Global Battery Alliance, we are sourcing renewable energy from plant start-up. Moving on now to hydrogen. Hopefully, many of you were able to join the hydrogen seminar that we hosted back in September. On that call, we went through a lot of detail. So today, I wanted to give you the highlights and summarize why hydrogen is going to be a very significant opportunity for JM. Hydrogen is recognized to be part of the climate change solution as it plays a key role in the decarbonization of many applications that are otherwise hard to decarbonize across transport and industry. As many of you know, we’ve been a leader in hydrogen for many years, and our strong position across both hydrogen-powered fuel cells and the production of clean hydrogen is underpinned by years of science expertise from across the group. Today, the hydrogen opportunity is already taking shape, so now let me take you through these areas in turn. Our Fuel Cells business continues to grow strongly, with sales up 30% at the half. And to remind you, we manufacture key components within the fuel cell stack, the catalyst coated membrane or, for some customers, the membrane electrode assembly. The performance of these are absolutely critical to the performance of the fuel cell stack but also the cost of the overall system, too. Today, we’re seeing lots of activity and demand in the market particularly in China, where the government has recently announced a new policy to encourage the development of the fuel cell value chain in various cities, which includes supply chain subsidies. And we’ve been investing to meet that demand. Our new capacity in China is now complete, and our UK capacity expansion will be online by the end of this fiscal year. And we’re already planning our next phases of expansion including a new fuel cell catalyst plant. On the customer front, we’re already working with many of the leading fuel cell players in China as well as major European and American truck and auto OEMs. We have several joint development agreements in place which will see growth in our business as these platforms are launched. And of course, on the technology side, we’re continuing to make good advancements particularly on improving membrane durability, a key performance metric for OEMs, which will also help on the cost-down road map. And to help our efforts here, we’ve added to our headcount on both the technology and manufacturing side. So let’s now move to hydrogen production. In blue hydrogen, being the production of hydrogen with carbon capture and storage, we have leading technology. I’ve talked before about our involvement with a couple of high-profile blue hydrogen projects here in the UK, HyNet and Acorn. These are coming along nicely. And in fact, we’re already working on the second phase of HyNet. We also have a strong pipeline of opportunities in Europe, North America and Asia at various stages of development, which we’ll keep you updated on. These new opportunities are several times larger than the initial HyNet and Acorn projects. In green hydrogen, being the electrolysis of water using renewable energy, our focus is at the proton exchange membrane, or PEM. This is a nascent market which is only really starting to develop now. However, it is clear that it plays to our strengths given our expertise in fuel cells and strong competitive advantage in platinum group metal catalysis. We are significantly increasing our efforts here. And we’re already currently testing with leading electrolyzer players and have significant manufacturing capacity, which is ready to deliver products for megawatts of PEM electrolyzers. So to wrap up. We saw a strong recovery in performance through the half, and we successfully navigated what has been a challenging period, outperforming in terms of both operating and cash flow performance. In recent years, there’s been a huge amount of work going on behind teams to create an organization that’s more simple, agile and efficient. And it’s because of these changes that we’re in a stronger position today. But importantly, there are further benefits to come still. The drivers of our more established businesses remain intact despite the impact of COVID. And looking to the future, the impact of climate change is real. And in tackling this, the world is going to see significant change. We already have technologies across battery materials and our hydrogen solutions to enable this change, and we look forward to playing our part. So that concludes our presentation, so thank you for your time and listening this morning. Now with that, we’ll pause. I’m very happy to take any questions.

Operator: [Operator Instructions] Your first question comes from the line of Charlie Webb from Morgan Stanley.

Charlie Webb: Good morning, everyone. Thank you for the presentation. Maybe just a few questions from me on a couple of topics. First off, on eLNO, maybe a couple here. Firstly, perhaps you could just give us a bit more detail around what has led to the increased confidence to add additional 30,000 tones for 2024. What are you hearing from your customers that gives you that confidence that, that capacity will be utilized and needed? And then just also on the mention – you mentioned perhaps you’re having more engagement with new customers. If I remember right, you had – kind of you’re working with seven customers previously. Will this 30,000 tonnes additional capacity plan, does that allow you to broaden the number of engagements you have with new customers? And then secondly, just on hydrogen – on the green hydrogen opportunity, it seems like green hydrogen is gaining a lot of momentum in Europe, in the UK, perhaps kind of skipping over blue hydrogen. Can you just help us understand a little bit more what the engagement you have with the electrolyzer producers today is? And what kind of CapEx capacity build-out would be required if your solutions would be successful?

Robert MacLeod: Sure, Charlie. good morning and thank you for your questions. Look, on what’s given us the confidence to invest further in our next plant. It’s fundamentally about two things really

Charlie Webb: That’s really helpful. Maybe just one follow-up on eLNO. In the presentation, you mentioned – well, I think it was a consultant data, the returns of 10% to 15%. How does that fit in with the group’s kind of return target of kind of pretax returns of 20%? Just trying to understand, has anything changed there or do you still believe that – for your product, that you’ll be able to get up to those kind of returns?

Robert MacLeod: Well, I’ll ask Anna to talk about this, the returns question, if that’s okay. Anna, do you want to?

Anna Manz: Yes, sure. So I think with respect to Battery Materials, what we’re saying is upscale, I think, will be nearer the 15% return on invested capital in the context of that competitive set, but if we look at the 20% return on invested capital target as something for the group as a whole. And yes, it remains important to us. So if I just sort of talk around taxes, Clean Air prior to COVID and post the COVID disruptions will be back at the 30%-plus return on invested capital levels. Remember, we’ve done all the investment that we need to make for the best part. We’re just finishing up the last plant, and it’s really about delivering returns from Clean Air. Efficient Natural Resources, you’ve seen the efforts that we’ve made to both grow the business but also drive the efficiency of the balance sheet. And that business now is approaching a 20% return on invested capital. And in Health, we’ve made the investment in the pipeline and the footprint, so it’s now a question of bringing that pipeline to market to get the returns to where we would expect them to be. And of course, Battery Materials is early in its life cycle, so we are investing ahead. So we have a number of businesses at different stages in their maturity with different return profiles, and we manage across the portfolio as a whole.

Charlie Webb: Okay. Thank you very much, guys.

Robert MacLeod: Thanks, Charlie. Who is next?

Operator: Your next question comes from the line of Tom Wrigglesworth from Citi. Please ask your question.

Tom Wrigglesworth: Robert, Anna, thanks very much. Two questions, if I may. Firstly, obviously, in terms of the evolution specifically in China of the value uplift, where do you think we are in that in terms of the phasing of adoption of China VI? Could you just remind us, yes, how far through we think – you think that is? Secondly, you obviously talked about the higher CapEx for eLNO. Could you just help us understand a little bit better what you mean by flexibility? I’m not sure I fully understand that. Is that a technical flexibility or is it a volume flexibility? And how much of that £200 million is actually on the – maybe not the plant itself, you talk about the total all-in cost per periphery components as well? Yes, would be helpful. Thanks.

Robert MacLeod: Thanks, Tom and good morning. So why don’t we just take the questions in that order. Anna, do you want to start with the value uplift first? And I think you’re referring to Clean Air China VI?

Anna Manz: Thanks, Tom. Yes, so in light duty, I think we would say that we’re about 1/3 of the way through value uplift in light duty. And in heavy duty, really, we’ve started to see the benefit come through this half. That’s the tripling of the value of the trucks, as you know. And we’re probably about 1/4 of the way through that so far.

Robert MacLeod: So hopefully, that’s clear. On the – on eLNO and what does it mean in the CapEx, largely, the increase in cost is in the commercial plant, if I’m honest, some is outside the commercial plant increase, but it’s largely in the commercial plant. And as far as the – what does flexibility mean, it’s not around manufacturing – as in sort of manufacturing flexibility – sorry, it’s around being able to make different products for customers and customize those products. And as we’ve – as I’ve said, we’ve been working with the customers more recently, and they talked about the different levels of customization they are looking for. And with the first plant where you – we haven’t run a plant like this in Anglo before. We’ve got to build in that flexibility so that we can make sure that we can deliver for the customers. And that’s where the cost increases come from.

Tom Wrigglesworth: Okay, great. Thank you very much.

Operator: And your next question comes from the line of Ranulf Orr from Redburn.

Ranulf Orr: Good morning. Thanks for questions. Just going back to Clean Air, I suppose, could you help us understand the sort of development a bit more again for the division? How should we think about the value uplift versus volume across the whole of the LDD and HDD segments? And then secondly, I’d just like to ask about sort of CapEx over the next couple of years. It looks like you’re suggesting spending sort of £600 million in eLNO plant. So what’s the sort of timing of that sort of that fuel cell expansion there? And then very quickly on flexibility point. I mean are you suggesting with different products that you might be using it for or is this just still within the sort of eLNO paradigm, I suppose? Thanks.

Robert MacLeod: Ranulf, thanks for your questions. Apologies, you got a bit fuzzy at the end, so I think we heard you right. So if I go back to the questions, the first question was around wanting to understand Clean Air, the dynamics of Clean Air more specifically. The second one was wanting to understand more about our CapEx plan. And the third one was around flexibility of that moving away from eLNO or not. So I’ll just take the last question quickly and then hand over to Anna. So look, we want to be able to make eLNO. That’s what we – this plant is all about, to be able to make eLNO and the different – but eLNO is not a single product. And it’s a bit like NMC811 isn’t a single product. And I think there’s people where you will tweak 811, just like we will tweak eLNO. And so it’s a family of products, but you need to be able to make the different products within that family. And also, I think our plant, as well as being able to make eLNO, will be able to make 811 as well if we needed to do that. So it’s a pretty flexible plant that we’re going to have from the start. Anna, do you want to talk about the other two questions of Ranulf’s?

Anna Manz: Sure. So Clean Air development. Maybe if I start with light duty in Europe and the Americas, and there what we’ve said is we expect vehicle production to be down about 20% for our fiscal year. We’re not – we’re seeing some uplift in Europe still, but there’s not significant uplift in light duty in Europe and the Americas. If we move to Asia, we’re seeing a much stronger market there. We’re in slight growth, but that’s aided a little bit by the uplift that we’re getting with the GPF reductions, which we just said we’re 1/3 of the way through. So we expect to see Asia overall be in growth for the full year. Looking at heavy duty, no content uplift in the Americas or Europe. And Americas and Europe, we would expect to be down about 30% in vehicle production tonnes for the year. And what that means is that the Class 8 truck cycle, we’ve gone through the bottom, and we’re starting to come out the other side. And in Asia, which is predominantly driven by China, we’re seeing a much stronger performance, and we think that will continue. And as I said, it’s benefited by the regulatory uplift that it triples value of a truck, as we said, at the half year, we’re about 1/4 way through that. We’ll continue to see that benefit in the second half. And in terms of just how that plays through to profitability, as we said to you, 75% of our costs are variable. So that delaying to work it out particularly if you strip out the one-off costs we experienced last year.

Robert MacLeod: And do you want to say something on CapEx? That was his second question on capital.

Anna Manz: Sorry, remind me what the question was.

Robert MacLeod: I wrote CapEx plans. I can’t remember exactly. Ranulf, do you want to help us again on – because I wrote CapEx, but I can’t remember the specifics of your CapEx question.

Ranulf Orr: Yes, I was just wondering how we should think about CapEx spend over the next couple of years in light of the £600 million on the new eLNO plant and the second expansion for fuel cells.

Anna Manz: Got it. Thank you. So in the year that we are in, we’ve guided to CapEx of around £400 million. And really, what are the big drivers of that? Well, we’re finishing off Poland and China and India Clean Air plants, which will be largely done this year. We’re investing significantly to build our first commercial plant in battery materials. And as you know, we’re investing to improve the efficiency of our refineries. That £400 million maintained our strategic investment but was cut back in the context of COVID. So it was lower than perhaps we would have planned to spend pre-COVID. So if I look forward to next year, while we’re still building our battery materials plant, we’re continuing to build the new refinery in PGMS. We’ll have a level of catch-up capital as well, so I would expect it to be a little bit higher looking forward. I’m not going to go out ahead of that, but what I would say is I’m comfortable that our organic cash flow can fund the levels of CapEx that we need for our Battery Materials margin.

Robert MacLeod: And just to be clear, Ranulf, on Fuel Cells, the level of investment there is relatively modest. The doubling of the capacity that we’ve put on the ground just this year, last year, where we invested, it was about £15 million. If we put a new fuel cell plant down, it’s going to be tens of millions, it’s not going to be anywhere close to £100 million or anything like that.

Ranulf Orr: Okay. Thanks. I guess, when should we expect the next, yes, eLNO plant CapEx to start coming through? I mean does it sound like that’s not next year or?

Robert MacLeod: So we’re going to start with the engineering design. That’s a six-month process. And so come summer next year, we’ll have an accurate cost estimate, and then we’ll be able to guide you hopefully from there. But we’ll be starting to build – we’ll be starting to procure long lead time items, but the biggest spend will be in years two and three and four.

Ranulf Orr: Got it. Thanks very much.

Robert MacLeod: Thanks, Ranulf.

Operator: Your next question comes from the line of Alex Stewart from Barclays.

Alex Stewart: Hello, good morning. Thanks for taking my questions. On eLNO, sorry, I know you’ve had a lot of questions on this, can I just confirm two things. Firstly, the 10% to 15% return on invested capital number that you’ve been talking about, is that on the full 40,000 tons of both of the plants combined or is it on some future larger capacity number? I’m just – I’m interested to know what’s fully ramped up or fully scaled up means. And then on the – just doing a quick calculation, looks like about £315 million upwards of CapEx 30,000 ton plant, how confident are you on that number? Because obviously, the first plant is very considerably higher than the original asset back in 2017. So, I’m real interested to know to what extent do you think that could be – could it be higher than that? And then just finally, a technical point. You’re guiding to D&A of £200 million for the year. I think you did £90 million in the first half. Can I assume therefore that £150-odd million is the new run rate if I annualize it into 2022? Thank you very much.

Robert MacLeod: Okay. So, Anna, if you go through returns on the D&A and then I’ll talk about the cost of plants?

Anna Manz: Sure. So, let me do the easy D&A one first. I’m not going to guide precisely on this, but it is, yes, call it, 10% up from £250 million if you look forward to next year. With respect to returns on eLNO, so upscale, i.e., beyond the second plant, the entire business, we expect the entire business to get to the upper end of that return range. The second plant will be, on a stand-alone basis, moving well towards that. But because of the investment that we’ve been making to commercialize this product with pace, which is important because we need to get it into the bucket, the aggregate business won’t yet be at those levels.

Robert MacLeod: And as far as the question about confidence in the next plant spend, look, two things I would say. Look, first one, we’re learning a hell of a lot through the first plant, and that – and building the first plant. So our level of confidence in building the second plant and the capital spend there will be vastly greater than where we started doing our initial design for this first plant in Poland. So we will be very, very, very much more confident about what that spend will be. We won’t know – and we’re not going to give you an exact figure until we’ve done the engineering design. But what we have said and what we can be confident on is it will be much closer to the average capital cost for – like our competitors are seeing in the European market for battery materials.

Alex Stewart: Okay. Thank you. Okay. If I could just push you on that point, the 10% to 15% or the upper end of that range is probably not going to be achieved in – with the first 40,000 tons because of the initial upfront investment that you had to put into Poland. If I could push you on maybe what sort of capacity level you get at that point? Are we talking 50,000 tons or 100,000 tons. Some sort of idea of the sensitivity would be really useful. But equally, I would understand if you don’t want to say that.

Robert MacLeod: I’m sorry, Alex, I don’t think that we’re going to answer that one. I think it will – it depends partly on how the market evolves, but I think we’ve answered it as much as we’re going to answer it today.

Alex Stewart: Okay. Thank you so much.

Robert MacLeod: Thank you.

Operator: Your next question comes from the line of Chetan Udeshi from JPMorgan.

Chetan Udeshi: Yes, hi. Thanks and good morning. Two questions not on eLNO but Clean Air. How do we guide the fact that the external consultants are talking about auto production down, still sort of low single digits in Q4 versus what you guys are seeing at the moment in terms of Clean Air sales growth? So I mean, clearly, the delta is significant, so maybe to the extent you can help bridge that gap, it will be useful. And second question was, I mean in a practical term, I mean how should we think about the benefit of all the cost cutting which is going on. So let’s put it this way. Can we go back to the pre-COVID EBIT numbers in Clean Air with lower top line? So in other words, how much – so let’s say, is it 5%, 10% lower top line can still make you achieve that EBIT you had, say, in Clean Air pre-COVID? I’m just trying to understand how should we think about the sort of real-world benefit of the ongoing cost cuts. Thanks.

Robert MacLeod: Okay. So look, I’ll try and answer the first question. And then maybe, Anna, if you’re happy to answer the second one. Look, so what we’re seeing at the moment is – and actually, I think consistent with quite a few people, is quite strong growth in China for both light and heavy duty for auto production driven partly by incentives. I mean there are significant incentive programs in China. I think there’s quite a lot of uncertainty about Q4, but normally, what you would see in Q4 anyway is, in the ramp or getting closer to Chinese New Year as always a reduction in China normally. But then, of course, at the same time, we’ll be lapping last year – or is it this year, where they were going into COVID. So we should still see some relevant year-on-year growth because we won’t be lapping – because we’ll be lapping a sort of COVID impact. The biggest question, I think, if I’m honest, is what’s going on in Europe. I think people are more confident and the forecasts are more confident about North America. I think lots of uncertainty about what’s going to happen in Europe with a second wave and what the implications are going to be on auto production generally from a second wave. But then also between Europe and America, what’s the impact of GDP going to be going into 2021 and 2022 and beyond. So I think at the moment, it’s really, really hard to tell. Of course, we will not be – we’ll be lapping a tough year this year in March, April, May, et cetera, so we will be growing year-on-year. But whether the market and/or when the market will recover to pre-COVID levels, it’s really, really impossible to say at the moment.

Anna Manz: And on your second question, Chetan, are you asking around Clean Air margins? Is that what you’re asking, whether we will be able to maintain our margin post-COVID?

Chetan Udeshi: Yes, I’m just trying to understand, with all the ongoing cost cutting, I mean in theory, that should mean that we should be able to go back to the pre-COVID margins even with probably somewhat lower top line. So I’m just trying to understand how should we think about going back to the pre-COVID margin? So let’s put it this way. Is the 10% lower sales would still get you to the pre-COVID margin or better or something some sort of feel about that number.

Anna Manz: So Chetan, I’m not going to give you all of the detail, but I’m comfortable that we will get back to pre-COVID margins. And I’m also comfortable that we’ve modeled many scenarios around volume changes in Clean Air and how we would manage our footprint and cost base as those played out in such a way that we can protect our margins. And so I feel confident that we can manage our margins in Clean Air for some time to come.

Chetan Udeshi: Thank you.

Robert MacLeod: Thank you, Chetan.

Operator: Your next question comes from the line of Charles Bentley from Credit Suisse.

Robert MacLeod: Good morning, Charles.

Charles Bentley: Good morning. Good morning, Robert. Good morning, Anna. Thanks very much for the presentation and for taking my questions. Anna, I just want to say thanks for your help over the years and wish you the best. I had a few questions. So on eLNO, both the existing plant and the follow-on, can I just confirm that both of these include working capital? So does the kind of $15,000 a ton include working capital? Just to check if this is included in all the kind of return on capital employed assumption. And then a second question just on Clean Air. So I can see that in Asia, you’re kind of flagging light duty declines in share and heavy duty increases in share. Can you kind of indicate the levels this is from and to and whether this is a – what this is a function of, is it platforms one and last? Is it because of the fact – the kind of timing of you bringing on your new capacities. Thanks.

Robert MacLeod: So, thank for your questions, Charles. So, the first thing to say about eLNO, when we talk about the cost of building the plant, right, it’s a capital cost on lease, it does not include working capital. But when we talk about returns on capital, absolutely, it includes working capital. So hopefully, that’s clear. Capital costs are capital costs, but return on invested capital includes the overall capital requirement for the business. And on Clean Air, so it’s a mix of, in light duty, gasoline, we’ve lost a little bit of gasoline share, which I think we talked about – that we told you about a year or so ago through some platform losses. We’ve been increasing our investment in gasoline technology over recent years, and we would hope to see that to recover going forward. And on heavy duty, we’re really good at diesel, so we’ve been taking some share in heavy duty. I’m afraid we’re not going to go into the details of saying what from or to. But…

Anna Manz: It’s worth saying in absolute share point, and I’m not going to give the share point, but the gain in heavy duty is greater than this whole of, in light duty.

Charles Bentley: Okay. Thank you very much. Can I just ask sorry, a follow-on on that working capital point. I mean, could you give us any indication of what you’re expecting per ton? So, I mean, I’ve kind of seen kind of roughly 50% of CapEx is kind of – is a rule that some of your competitors have used? Is that kind of the right number to use maybe on that kind of normalized CapEx number for the follow-on capacity?

Robert MacLeod: Do you want to answer that, Anna?

Anna Manz: Yes. We’re not going to guide on any of this at this stage. But beyond what we would say is there’s no reason to believe we would be vastly different to other players in the high energy lithium nickel market.

Charles Bentley: Okay. Thank you very much.

Robert MacLeod: Bye, Charles.

Operator: And your next question comes from the line of Sebastian Bray from Berenberg Bank. Please ask your question.

Sebastian Bray: Good morning and thank you for taking my questions. My first one is on the financials. Robert, you mentioned UK politics earlier. There is discussion for the potential of a rise in UK corporation tax. Could you give an idea of the sensitivity of the group effective tax rate to a one percentage point rise in UK corporation tax? It’s my first question. My second is on eLNO. Why is the location of the additional 30 kilotonnes of capacity not given? I assume it’s going in Poland, but I just wondered why it wasn’t given in the press release. And is the 10% to 15% ROIC target contingent on having this plant in the same place. How does Johnson Matthey view its Europe-only strategy at the moment in cathodes? Thank you.

Robert MacLeod: Thank you, Sebastian for those questions. So, UK corporation tax rate. Politics is interesting. I’m not sure I can predict politics. A week is a long time in politics, so they say. And I’m sure – I’m not sure I can predict the implications on our corporate tax rate. But maybe, Anna, can you predict that at all?

Anna Manz: No, I can’t. I can ask Martin to come back to you with the sensitivity. It’s not something I’ve got in front of me, Sebastian, sorry.

Robert MacLeod: But it’s also quite dependent upon where the mix of profits in a particular year, so how much profit per country. So it’s quite difficult to…

Anna Manz: And we, of course, benefit from…

Robert MacLeod: And then going back to the question on eLNO, part of the reason for not giving any guidance on locations is because, of course, there are – I think when we roll forward as a business as a whole, we – I don’t imagine that we’ll have a single plant location for all the manufacturing capacity that we will have across the world. And so in order to maintain our best chance of getting grants, et cetera, it’s better not to commit that too soon and keep a little bit of attention there. But the answer to your question around do we need to have all the plants in the same place to deliver the returns that we have here, the answer to that is no because – and when we roll forward, we will not have all our plants in the same place. I don’t take that as a guidance that necessarily this one won’t be in the same place. But at the moment, we want to maintain the best chance of getting the maximum grants available to us.

Sebastian Bray: Thank you. And my follow-up on an unrelated topic, the £100 million of operating profit that has previously been guided for Health in growth terms, does that still stand for the next six years? Or has the time line changed?

Robert MacLeod: So yes, it sounds and no, the time line hasn’t changed. So yes and no.

Sebastian Bray: Thank you.

Robert MacLeod: Okay. Bye, Sebastian.

Operator: And your next question comes from the line of Andrew Stott from UBS.

Andrew Stott: I got three actually, if you can entertain three. So, first one is a long-range question on legislation. So I saw last week that the European Union is talking about Euro 7 for 2025. But the OEMs of pushback saying that the target for emission standards are just wholly unrealistic. And this, I think, in summary, seen as a political effort to get more EVs on the road. I just wonder what your technical viewpoint was on those OEM claims of unrealistic commission targets. So that’s the first question. Second question was the Chester County contingent liability in the back of the report today, I think that’s new. I haven’t had time to double check. So the question is, is it new? And can you just maybe elaborate to the extent you’re allowed by your lawyers? And then the third question is just coming back to CapEx again. So just to understand it correctly, your preference would be brownfield, so staying with the site you have in Poland for the second stage, but you need to obviously work upon various items of detail. That was my takeaway. But maybe just can’t say for reasons to do with negotiation, but if you can say something, can you respond to that comment? Thank you.

Robert MacLeod: Thanks, Andrew. Thanks for your questions. Firstly, sort of on Euro 7, so I think there’s a balance between what’s technically feasible or what’s cost effectively feasible. Our view is that the technical feasibility to meet the European – sorry, Euro 7 standards, we can do it or it can be done. So then it fundamentally becomes a cost equation for the OEMs, not just for the cost of the actual kit or per car. And I don’t think there’s going to be a massive – there’s – you’re not going to have another unit, but it’s – it would be a lot of testing, a lot of work to qualify and make sure that we meet those tougher legislation targets. And of course, the legislation target gets tougher and tougher, and so therefore, they’ve got to do lots and lots of testing to make sure that the cars will work and perform under those conditions. And then this just becomes a cost equation. And I think that’s where the pushback is coming from, not so much a particular technical feasibility. I’m going to ask Anna to answer the question on our potential issue in Chester County. But other than – but the one thing I wanted to do is congratulate you to getting through Page 19 of the – of our statement by this time of day. But Anna, do you want to?

Anna Manz: Yes. I’ll give you the bit of color I can. This is land that we occupied and we sold before I was born. What’s triggered it to become an issue now is there’s been, over recent years, an application for change in use of that land. And that’s caused the various bodies to look back at owners of that land over the intervening years around cleanup claims. And that’s really all I can say, just gives you some context as to what we’re talking about.

Robert MacLeod: So Andrew, to answer your question, yes, it is new.

Anna Manz: Sorry, yes, it is new.

Robert MacLeod: It’s the first time it’s been there. And to answer your second question, I was alive, and Anna just had to mention that just to rub it in. But anyway, I’m not going to rise to that. On the – or I probably already have. On the last question about the plant and location, I’d rather not say any more than I’ve already said, Andrew.

Andrew Stott: Okay. Well, can I just come back and move one thing. So Bain has put together the benchmarking of European plants, so I’m basically obviously trying to use that and other sources we’ve got here to come up with the costing. The problem is that nobody is up and running, right? Umicore hasn’t started in Europe. The South Koreans have only just announced their intention. BSF, as far as I can tell, are not giving much information. So I suppose my question is how confident are you with the Bain numbers.

Robert MacLeod: Well, we – they did quite a lot of work to come up with that analysis, and they know the market quite well, and they’ve done a lot of work behind it. And of course, they know what we can deliver as well. So I think it’s a triangulation of a number of data points, and that gets us to that sort of number. Now it’s hard to know for certain whether we’re – absolute certainty whether we’re comparing apples and apples directly, but it’s as good an estimate as we can make at this stage.

Andrew Stott: Okay. Thank you.

Robert MacLeod: Thanks, Andrew.

Operator: Your next question comes from the line of Lacie Midgley from Panmure Gordon.

Lacie Midgley: Hi, good morning. Robert, Anna, can you hear me okay?

Robert MacLeod: Yes, absolutely.

Lacie Midgley: Brilliant. A couple of questions from me, please. Firstly, you mentioned benefiting from the tighter legislation in China on light duty. And I think with the impact of COVID, I would have expected slightly better performance in light duty Asia in that case. Can you give a little bit more color on the moving parts there, if possible? And secondly, I might be wrong, but I think you’ve previously given rough targets for Asia heavy duty in the medium term as a percentage of total Clean Air. I might be wrong, but if it’s not, can you remind me of those, please? And thirdly, on eLNO again, I might have missed it, but what’s the estimated timing of commercial production of the second plant? I know quite you’re early on, but any rough sort of time line, that would be good. And then lastly, on the new fuel cell catalyst plant, do you have any views at this point where it will be, again, estimated time frame to commercial production and the initial capacity? Thank you.

Robert MacLeod: Okay. A few sort of detailed questions there. So light duty Asia, I mean, I think as Anna said, we’re sort of – in light duty, we’re probably 75% through on the fitment of GPF in China. That’s a little bit accelerated than it was originally expected because Chinese OEMs tend to fit the – nowadays put the fitment on early. And as we mentioned already that we lost a little bit of share in light duty, as we said, through platform losses a couple of years ago. And that’s why you’re seeing the implications that impact in this year’s numbers. We didn’t go back to heavy duty Asia. We haven’t broken down relative proportion of the business going forward. What we have said is as you get tighter regulations in heavy duty, you’re going to see a tripling of content per vehicle. That’s both in China and in India. India is not so material, so China is the more material one. And as Anna said earlier on, I think, to an answer to a question, we’re about quarter of the way through the fitment of the new technology to meet Euro VI in heavy duty in China. On the eLNO second plant, we haven’t given an operational date, but I think it’s fair to just sort of say and it’ll be reasonably fair to say we’re probably going to be two years or so after – sorry, two years behind the first commercial plant. So therefore, you could probably add two years or so to when this plant start production from when the first commercial plant is likely to start production. And lastly, on Fuel Cells, we haven’t decided for sure where the next expansion will be in Fuel Cells. And where, it kind of it almost means whether it’s in one country only because, of course, there’s significant opportunity in China, but there’s also a significant opportunity in Europe and Asia – and U.S. And we’ve got to make sure that we invest at the right place at the right time as that market evolves. And the exact capacity, well, we’re still doing early plans, so we – and I don’t think I could give you the capacity at the moment.

Lacie Midgley: Okay, really helpful. Thank you very much.

Robert MacLeod: Thanks, Lacie.

Operator: And our last question comes from the line of Jean-Baptiste Rolland from Bank of America.

Jean-Baptiste Rolland: Hi, good morning, Robert; good morning, Anna. Just one question from me in relation to the change in business model that you have implemented in relation to metals. I just wanted to check if – I mean I understand that there are less volumes and that you lend some metals volumes on the market. I just wanted to check, can you elaborate on the risks – potential risks related to this new business model? Or do you – would you say they are increased? Or would you say there is just basically no change in that regard? Thank you.

Robert MacLeod: So Jean-Baptiste, thank you for the question. I’m delighted you’ve asked that question because I can give Anna the chance to answer. She’s desperate to answer it. So over to you, Anna.

Anna Manz: Thank you. Look, I would say that the risks in the new business model are reduced in that we have – effectively what we’ve done is we’ve worked really hard to reduce the amount of working capital we need to have in our system to deliver our products. And we’ve done that through how we contract, how we run our refineries, how we move better around the group. And the smaller amount of metal we have in our system, fundamentally, the lower the risk – the lower all of the risks actually associated with metal, the less price risk we’re exposed to on the balance sheet, the less risk we have of moving into the group. So fundamentally, actually, this is more efficient, and that’s basically in multiple ways and makes it much easier to run our business. So it’s been a real change. The lending of metal into the market is a bit of hurrying. That’s just how we fund metal, we either borrow or lend depending on our forecast versus what our view of those forecasts have been a year ago. And currently, we’re lending the surplus metal that we don’t need in our business into the market because COVID has reduced the demand and because our own efficiencies have reduced the demand of metal in our business.

Robert MacLeod: Did that answer your question, Jean-Baptiste?

Jean-Baptiste Rolland: Yes. It does. Thanks very much.

Robert MacLeod: Right. Thank you, any further questions?

Operator: We have no further questions. I’ll now hand the call back to Robert for his closing remarks.

Robert MacLeod: So thank you very much indeed, everybody, for your questions, and I hope you found it helpful and got what you needed. But of course, we’re going to do the road show shortly, so we’ll have a chance to talk to you again. But I need to sign off by also saying thank you and acknowledging that this is Anna’s last day at JM. As you all know, she’s made a fabulous impact across the company over the last four years. She’ll be missed by us. Our loss is LSEG’s gain. I don’t know how many of you analysts will see her again because I’m not sure the chemical analysts follow LSEG that closely, but maybe a number of the shareholders on the call will see Anna again. And I’m sure she will make a tremendous contribution at LSEG, too. But she has – her legacy at JM is multiple, but one in particular is the team that she’s left around her. And I’m really looking forward to be working with Karen over the next few months. And I’m sure some of you will get to see Karen shortly. And it’s not just the team that she’s made, Anna made a huge difference across the organization as a whole. So thank you very much, Anna. This is her last day at JM. She’s going to hand back her computer and everything like that. It’s all a bit emotional. And – but thank you, Anna, for everything you’ve done. I want to publicly say that on behalf of shareholders. And we’ll see how her again, I’m sure. But thank you very much, everybody. Take care. Stay safe, and we’ll see you soon, I hope, and see you next time.