Earnings Call: H1 2019

Nov 21, 2018

Everyone's coming along today to, our half year results presentation. This is gonna be live webcast as well. So I'd like to remind you to switch off mobile phones, devices, or put them on silent for the presentation. We will have a presentation from Robert and Anna as usual and then time for Q And A afterwards. And with that, I will hand over to Robert. Thank you. And, good morning, everybody. And welcome to Joltz and Matthew's first half results presentation. Today's presentation is in three sections. First, I'll take you through the highlights. I'll then hand over to Anna to review our financials. And after that, I'll give you an update on our strategy following which we'll be happy to take questions. We've had a good start to the year, and I'm pleased by our continued progress on executing our strategy of sustained growth and value creation We delivered double digit sales and underlying profit growth and we now expect full year operating performance towards Our Clean Air business continues to perform strongly and efficient and natural resources grew well. And in health and battery materials, we are making good progress as we position for breakout growth over the medium term. We increased the interim dividend by 7% and our return on capital was 16%. I'll talk through our strategy a bit more later on, but first let me hand over to Anna to talk you through the financials. Thanks Robert. Good morning, everyone. We've had a good first half as we expected. Both sales and underlying operating profit were up 10% at constant rates, and underlying EPS growth was up 9%. We've increased the interim dividend by 7%, reflecting the confidence that we've got in our current and medium term growth prospects. First, looking at sales for the group. Sales grew 10% with growth across all of our sectors, This was driven in particular by double digit growth in Clean Air in both light duty and heavy duty businesses. Despite volatility in the macro environment, such as Europe and China autos, we continue to deliver exactly as planned. And we expect this momentum to continue across the group as we continue into the second half. Operating profit also grew 10%. The underlying businesses overall grew strongly with clean air and efficient natural resources both performing particularly well. Health declined in line with our full year expectations, and new markets operating profit was also lower. We continue to drive further efficiencies throughout the group, and we're investing in the systems and processes to realize further future efficiencies. Some of these investments are reflected within the sector's operating profit, while others are in our corporate costs. So you're not yet seeing the full benefits of the current savings being delivered. Overall, a good operating performance from the group, with underlying businesses delivering strong growth and cost savings on top of that, whilst also continuing to build the platform that will position us to deliver on our strategy. Moving now to the sectors. Clean air had a very good first half. With sales growth of 11%. We delivered double digit growth in both light and heavy duty, well ahead of growth in global vehicle production. In light duty, the growth was driven by our European business. Our diesel catalyst sales grew 18% in a market that declined 6 as we've seen the share gains that we previously talked about ramping up. Our share in the light duty diesel European market increased from around 45% at the start of the year to around 60% by the end of the half. And to remind you, we expect to be at 65% at the end of the full year. Our gasoline business in Europe grew 4%. This was behind the market growth of 8% and largely due to a weaker performance by some of our customers. Our Asian light duty business grew ahead of market production with growth in all of our key businesses across the region, while our America's business slightly underperformed the market. In heavy duty, we outperformed the track market in Europe and Americas, and we were in line in Asia. Our double digit growth was driven by continued strong performance in the Americas where we grew 24%. Here we outperformed the US Class A truck market. Strong demand in this market remains, and we now expect high levels of production to the middle of the calendar year 2019. Our European heavy duty business grew 8% in a low growth market, driven by outperformance by our customers and a strong performance in non road. In Asia, our sales were flat. As anticipated, the China truck market was weaker in the period. Following the strong growth over the last couple of years, and our sales also reflected that. However, sales in India grew strongly. Clean Air's operating profit grew 15% with a slight increase in margin due to the volume leverage particularly in Europe and tight cost control. I'm pleased with the first half results, and we expect continued strong sales growth in the remainder the year as the rest of our share gains in European light duty diesel come through. Benefits from operational gearing in the second half will be offset by price downs and trade tariffs and some additional costs as our share gains ramp up further. Therefore, the margin for the full year will be in line with the prior full year margin. Looking now at efficient natural resources. Sales grew 3%, driven by growth in Catalyst Technologies And PGM Services. Catalyst Technologies grew 3%, delivering double digit growth in sales of refill catalysts and additives. This strong growth was partly offset by a significant decline First Mill catalysts are inherently lumpy and are driven by the timing and number of new plants being commissioned. As expected, after a number of years of decline, our licensing income was broadly stable. Activity around new plant builds, especially for the technologies we license, remains at low levels. That said, we are seeing signs of improved activity in certain markets such as methanol. And development and commercialization of new technologies is also grassing very well. We've won several new licenses in the period, but we won't see the benefit in the near term. As revenue is recognized over a number of years, depending on the length of the budget. In PGM Services, sales grew 2% benefiting from higher precious metal prices, partially offset by lower sales of industrial products. As we said in our AGM statement in July, We had unscheduled downtime in one of our PGM refineries in the half, and that's resulted in a significant increase in our precious metal working capital. The downtime did not have a direct impact on sales, although we have incurred additional costs, as our refineries are working at high utilization levels, and as we invest to improve their resilience. Moving to operating profit. This was up 26%. And margin improved 3.2 percentage points. The business benefited by 10,000,000 from the higher PGM prices, Additionally, we saw savings from restructuring and efficiency benefits from initiatives across a number of areas including operational excellence and procurement. Some of these benefits are ongoing, although around 5,000,000 will not repeat We also had higher operating costs in our PGM refineries as we continue to invest to improve their safety and resilience and this partially offsets some of the benefits. Looking to the full year, our outlook for efficient natural resources is unchanged. We expect slight sales growth and operating profit growth ahead of this because of the operating leverage and restructuring cost savings on top. If the current momentum continues, we could potentially exceed this. Health started the year in line with our expectations and remains on track for the full year. Although sales overall were flat, there were a number of moving parts. Our generics business declined slightly. Sales of APIs were down as expected with certain high margin contracts for APIs for ADHD treatments coming to an end. Non controlled APIs server continued to grow. Here, we saw increased volume across a number of products. This was partially offset by a decreased contribution from Defetalide, which is now being impacted by competition in the market. The Innovator business continued to grow well, with increasing sales from APIs where our customers are moving into late stage validation. As we expected, operating profit was down 31% and margin declined significantly. This was primarily driven by the change in product mix as our current portfolio moves through its natural life cycle. Additionally, we've been taking action to optimize our manufacturing footprint. In the period, we realized some cost savings from the closure of our Riverside plant in the US, but these were more than outweighed by transition costs. We continue to expect a small net benefit for the full year and over the medium term from this footprint optimization, which will over the medium term deliver significant benefits. The full year outlook is unchanged, and we expect broadly stable sales with operating profit to be down. In new markets, we saw strong sales growth driven by the alternative powertrain. This benefited from demand for battery systems for ebikes, and our fuel cells businesses also grew well. We continue to make good progress in the development and commercialization of ELN O. We incurred higher costs in battery materials as we invested in strategic customer relationships to support the commercialization of E. N. O. And so new markets operating profit declined. In the full year, operating profit is now expected to be Moving down the income statement. Finance charges increased in the period primarily due to the higher cost of funding metal across the group. This was a reflection of both higher lease rates continuing from the second half of last year, as well as higher volumes of leased metal following the PGM refinery downtime. The underlying tax rate decreased to 16.3% as expected, following the lowering of the U. S. Corporation tax rate, and this will be around 16% for the full year. Underlying EPS grew 9% at reported rates, slightly ahead of operating profit, benefiting from the lower tax charge partially offset by the higher finance cut charges. The interim dividend is 23.25%, a 7% increase. Free cash flow was an outflow of 206,000,000 due to a net working capital outflow of 391,000,000, primarily driven by PGM refinery downtime. This working capital outflow is disappointing. However, the business has strong cash generation characteristics. Metal working capital volatility can distort this in any particular period, but the business is and should be cash generative CapEx in the half was $104,000,000, with cash spend of $96,000,000, and Robert will comment on a number of our big projects. Crashure's metal working capital was significantly higher at theend of March, September, September, I think. This is mainly due to the downtime in one of our PGM refineries, which meant we had to go into the market to source metal that we were contracted to refine and return. We're working hard to reduce this working capital. And while we expect to have made significant progress by the end of the year, we will not yet be at normalized levels. You can see from the chart that our precious metal working capital does fluctuate. This is due to metal prices and volumes, and we have significant experience in managing this volatility. Looking now at non precious metalworkingcapital. Our continued focus on improving working capital and running the business as efficiently as possible every day has resulted in progress in the period. Working capital days, excluding precious metal, at the period end, was broadly similar to the end of the first half of last year at 65 days. Average working capital days, excluding precious metal, improved by 2 days when compared to the first half of last year. This takes us to an 8 day average reduction over the last 18 months and was despite a planned inventory build during the period ahead of the start throughout the year. There are, however, some specific factors this year which could distort our performance including the nature of the UK's withdrawal from the EU and the continued rollout of SAP across our business. Moving to the balance sheet. Our net debt has increased by 1,000,000 since the year end. Which reflects the increase in precious metal working capital. Our balance sheet remains strong with net debt to EBITDA of one 0.5 times. We target a net debt to EBITDA of 1.52 times, allowing us to invest in value enhancing opportunities to accelerate future growth in line with our disciplined capital allocation framework Now to give you a quick update on the progress related to my 3 focus areas: firstly, rigorous resource allocation. We're continuing to focus on ensuring our spend is targeted Our annualized return on invested capital was 16% compared to 16.4% at the full year. Primarily reflecting an increase in our net pension asset. Clearly this is not an operating asset So we're reviewing whether we have the right basis for calculating this to ensure that we give our shareholders the best measure of our true performance. Excluding the net pension asset, return on invested capital is 16.5%. In line with the full year 2017 18 on the same basis. Our target return on invested capital over the medium term is 20%. And despite the recent reduction, we disciplined management of working capital. To be between 50 60 days. My aspiration is for our average working capital days to also be in this range. Although as I mentioned, working capital this year could be distorted by factors such as the UK's planned withdrawal from the EU, for which we're building inventory in order to minimize supply chain disruption. Lastly increasing business wide efficiency. We can see tangible results in this area with further benefits to come in the medium term. This is an ongoing process and we're continually identifying opportunities to run our business more efficiently. Group restructuring program that we started last year is progressing well. We realized an additional cost saving benefit of 7,000,000 in the period, and we anticipate the annualized savings to be around 25,000,000 from this program. On procurement, we've continued to invest and expect to deliver 60,000,000 of savings over the next 3 years. Roughly three quarters will directly benefit the P and L. This initiative has started to deliver savings in the half, with benefits of 5,000,000 and is expected to deliver a total of 13,000,000 for the full with the implementation of SAP. We completed the first site implementation over the summer with the rollout across the remainder of the group over the next couple of years. So we continue to incur costs with regard to this, but we will drive future cost savings as we run our business more efficiently. Overall, I'm really pleased with the continued progress in this area. Turning now to the outlook. We're confident in the outlook for the full year and now expect the group to deliver operating profit performance towards the upper end of our previous guidance of mid to high single digit growth at constant rates. This will continue to be led by Clean Air, as share gains in light duty European diesel catalysts ramp up further. We currently expect a 2,000,000 benefit for the full year on underlying operating profit from foreign exchange translation. Working capital continues to be a focus targeting a further reduction in underlying average working capital days. And we expect CapEx to be up to $350,000,000 for the full year, with some spend now phased into next year. So a pleasing first half performance overall. I'll now hand back to Robert who'll take you through our strategic progress. Thank you, Anna. As I said earlier, now I'm going to talk about our strategic focus and progress, but first let me remind you of what J. M. Is all about. Johnson Mathew is a world class technology company. We provide solutions for cleaner air, improved health and the conservation of the world's natural resources. And at the heart of our business is World Class Science. We apply this cutting edge size to solve our customers' most challenging problems. We deliberately focus on complex issues. We don't do easy. We develop partnerships with our customers to solve the problems that others can't. And our competitive advantage is the combination of our fundamental understanding of science and technology with an ability to design and develop scalable solutions for our customers. There are 4 parts to our strategy. Through our science, customers, operations and people. We will deliver sustained growth and value creation over the medium term. We invest in our science and technology to deliver competitive advantage. We focus on serving our customers in high growth, high margin, technology driven markets. Our advanced technology supports our customers, and this enables us to develop and subsequently maintain leadership positions. We relentlessly focus on operational efficiency and are driving improvements across all aspects of how we manage our business so that we are more connected agile and efficient. And our strategy is of course delivered through attracting and retaining the best people. Those who are aligned with our vision and who embrace the opportunities that come from working both across JM and with our customers, in an increasingly complex and rapidly evolving world. We deliver our strategy through 4 sectors clean air, efficient natural resources, health and new markets. And over the medium term, each sector will contribute to the delivery of shareholder value, which we define as mid to high single digit earnings per share growth per annum, expansion of our return on invested capital to 20% and as a result, a progressive dividend. In Clean Air, we will deliver sustained growth over the next decade with share gains in Europe and tighter global legislation. In efficient natural resources, our focus on technology and higher growth segments will enable us to deliver market leading growth with efficiency gains driving profit growth ahead of sales growth. And in health and battery materials, we're positioning ourselves for breakout growth. In health, Our new generic product pipeline is expected to deliver an incremental 1,000,000 of operating profit by 2025, and in battery materials, we're progressing our plans to commercialize our next generation Eylenome materials. So that's our strategy, which we laid out at our Capital Markets Day last year. We are confident that this will enable us to deliver on the promises that we have made and indeed whilst the world is constantly changing around us, we have and will continue to deliver successfully. Over the last six months, we have seen increased concerns over global economic growth prospects and uncertainty in the outlook of China given weak economic data. However, rising oil prices provides us an opportunity for our efficient natural resources sector. Are a number of market factors, which continue to impact the automotive market, most of which will be well known to you. In Europe, the world harmonized light vehicle testing procedure or WLTP for short came into force this September And whilst this is proving challenging for some OEMs in the short term, it provides us an opportunity for more complex catalyst systems in the medium to long term. On the other hand, of course the diesel share of the market in Europe continues to decline, but this decline is in line with the forecast we made last year. Further developments in Automotive Powertrain over the next decade and beyond provide further opportunity as our technology leadership means we're well positioned for success in this dynamic landscape. And of course, the global political backdrop is quite uncertain too. Going forward, there will inevitably be noise around all of these and potentially other factors that we have successfully navigated change before and I'm very confident that we will be able to do so again effectively and deliver against the strategy that we've laid out. So now let me provide an update on our strategy by sector. 1st, Clean Air. I'm pleased to say we're on track to achieve our goal of sustained growth in this business. Our strategy is underpinned by our global leadership supporting our customers and meeting in in stringent legislation requirements with the best technology and an efficient manufacturing footprint. Our European light duty is growing strongly in the short term as we benefit from platform wins, which are driving share gains. And as Ana mentioned, We've seen continued share gains in our European light duty diesel business, and we are on track to achieve a market share of around 65% by March 20 seen. In gasoline whilst the profit impact is immaterial, if the market stays as it is currently, we may not achieve our previously anticipated 5% market share gains by 2021, 2021. Taking all these factors together, I'm still confident that following a strong period of growth over the next decade as diesel declines and battery electric vehicle penetration increases. As I've mentioned, Tiny legislation globally is a key driver of our growth in clean air. Our Asia business will transform led by tighter legislation in China across light and heavy duty. We'll also see growth from India and Southeast Asia as legislation is upgraded. On the light duty side in China, we're on track with platform wins for China 6 and we expect to maintain a constant share. And on the heavy duty side in China, we are planning to at least maintain a consistent share. The phasing of China 6 may be earlier than expected given the Chinese government's blue sky legislation, which requires early implementation across some provinces from early 2019. Although this doesn't alter our medium term strategy, the timing of our customer's platform launches may be earlier than expected. More broadly across the heavy duty side of our business, we've maintained leadership with good growth in heavy duty, particularly in North America due to Class 8 strength, but also in India, albeit from a lower base. To support and capacity in Europe and China. Construction on our plants in Poland and China is underway and we're likely to need further additional capacity in India to meet in our ability to deliver mid single digit sales growth over the 10 years with a broadly stable margin. In Efficient Natural Resources, we're making targeted investments in higher growth segments. We have categorized our portfolio based on the growth potential and we're aligning our CapEx and R&D investments to these opportunities. For example, we've redirected resource to high growth segments such as methanol, gas processing and areas of OXXO alcohols. Alongside our investments, we are taking steps to increase efficiency. Anna has given you the financial detail on this, but I wanted to add some context from a strategic perspective Firstly, our product portfolio review will continue to drive improvements across the business over the next couple of years. And secondly, we have instigated a program of increased investment in our PGM refineries to improve their safety and operating resilience. In an ever changing world, the security supply that these refineries provide a clean air is a key element of our strategy. We also continue to look at additional opportunities for long term growth that will benefit from our science and technology. And I've previously talked about our plans commercialized newly developed technologies. For example, we've won our first license for our recently developed mono ethylene glycol or MEG, technology, which enables the production of MEG from a variety of raw materials. And we've also recently commercialized our waste to aviation fuel technology. So to summarize, I'm really encouraged with our progress to date and we will continue to grow sales and drive efficiency across our operations. In Health, we us through identifying new sales opportunities and partners as well as improving our operational and manufacturing effectiveness. In the last six months, we have optimized our manufacturing footprint with the closure of our Riverside plant in the U. S, and we are ramping up on our UK site, Anna, which is expected to be fully operational by portfolio across both generics and innovators. Firstly, on generics, through investment in our generic pipeline, we will deliver an additional GBP 100,000,000 operating profit by 2025. We are still on track to deliver this pipeline and I'll cover this in more detail on the next slide. Secondly, on Innovators, although this business is only around 30% of our sales at the moment, we do see significant potential here. The innovator side typically involves more complicated drug design, and this complexity demands better capabilities in material characterization and particle technology. And this plays right into our sweet spot. Our innovative pipeline is also progressing well with 3 in late stage development and nearing commercial launch. All of this will deliver breakout growth, but so moving on though to the generic pipeline in more detail. On this slide we've given some additional detail on that pipeline. The top chart shows the potential operating profit by product per annum, and we've categorized the products by time to launch. Below this, we've given some additional detail on how the pipeline progressing. Our generic API products move from development to market through key stages, from the early stage to formulation development, to filing and retaining regulatory approval through to launch. And as you'll see from the chart, we currently have 20 products in early stage 19 in formulation development, 6 in regulatory and one product is launched this year. Throughout the process, we work closely with our customers. Timings, however, depend on our delivery, our customers' timeframes and the time it takes to get regulatory approval and subsequently to launch. You can see here our progress since April 2017 from the arrows on the bottom of the slide. As you can see, we've had one product launch, 5 have moved into the regulatory stage to bring this total to 6. Of course, this does not mean that all of these will launch in the next couple of years because some take much longer and are awaiting patent expiration. There has been a net loss of 1 from the formulation development stage, reflecting 5 products moving along the process and one dropout, which is to be expected. And a net increase of 6 in the early stage, reflecting 5 products moving into formulation development and additional products being added to the pipeline. This hopefully gives you a sense of the progress we're making and the size of the opportunity across various timeframes. We have a diverse portfolio. We're not reliant on any one drug and we now have 46 products in our pipeline of generic APIs. Moving on now to Battery Materials. With our ultra high energy density next generation ELNO materials. Over the last few years, we've been making working hard to develop our battery materials business. Our progress has been driven by our science and technology leadership that is what J. M. Does best. Given this is such an exciting opportunity for I'm going to spend some time on this topic over the next couple of slides. But let me start by saying that we've made tremendous progress accelerating our battery material strategy. We're adding resources to further develop ELNO and we now have around AT R and D scientists and engineers in our Battery Materials team which we scaled up significantly in the past year. And our total R and D investment in E L and O has increased by 60% in the period. Customer sampling is still progressing well and feedback remains excellent and our commercialization plans are on track. All of this will lead to breakout growth. As we've previously talked about, Illinois is a significant development. It offers a step change in energy density, lower cobalt and lower dollar per kilowatt hour per cycle compared to current and future cathode materials. ELNO's superior performance is attractive to our customers and will enable increased penetration of long range battery electric vehicles. This gives JM a sustainable competitive advantage. And today, I wanted to give you some insight into the battery material production process and where we play in that value chain. On this slide, we've shown a simplified version of the overall battery production process starting with raw materials the blue box at the top of the slide, which can be separated into the wet end where we make the precursor and the dry end where we make the final cathode material. We have chosen to operate across the entire production process from metal salts to ELNO because this allows us to differentiate and optimize Illinois through every step of the manufacturing process. This further enhances our ability to maintain our technology leadership and deliver market leading solutions for our customers. We're also assessing the opportunity within battery materials recycling, which utilizes our core competencies. It will be some time before sufficient batteries need to be recycled, but we are looking at all areas of battery activities across their life cycle. Our commercialization plans for ELN O are on track. We've come a long way and I'm excited about what we've achieved so far. On this slide, you'll see our progress to date in key milestones over the next 12 months. We've developed the best in class generation battery material, EL And O, and we continue to receive positive feedback from our customers. We've also progressed our scale up activities. The dry end of our pilot plant is operational and the wet end will be operational next year. Our full scale commercial plant, which will be built in mainland Europe, is also on track and and permitting. Over the next 12 months, what you expect from us is that we will continue to expand and invest in our R and D team to ensure that we maintain our competitive advantage. We will also continue ELLO customer qualification with our strategic partners. We've previously shown you the stages of qualification and their timelines and you can find this in the appendix. We expect to break ground on our first commercial plant in Europe. And of course, we're already thinking about increasing capacities above 10,000 tons. We are investing in our Customer Application Center in the UK, which will be operational next year. And to support future expansion, we will enhance our capital projects team to add further rigor in our investment strategy. In summary, We're on track and I'm really excited by the opportunity that lies ahead. There's a huge amount of activity in battery materials and I look forward to updating you on progress over the next years. So to summarize on the progress we've made in the last 6 months. Firstly, I'm very pleased with our good performance this half as we continue to successfully execute on our strategy to deliver sustained growth and value creation. Against an evolving market backdrop, we have delivered on our promises whilst at the same time being incredibly busy investing across the business to build our platform future growth. Our strategy remains strong and I'm extremely confident that our core technology strengths and ability to solve the increasingly complex challenges that the world and our customers are facing will enable us to drive attractive returns. So thank you very much for listening. That concludes our presentation for this morning. And with that, I'll pause and Anna and John will join me up on the lectern and we're happy to take any questions that you may have. I would like to go first. To start over there. If you could state your name and where you're from? Morgan Stanley. Maybe first one for John, just around HDD. I think last time you talked about Class 8, perhaps normalizing calendar year next year. Any change there? It seems like the orders look pretty good. So just thoughts around that. And then also on HTD, have you benefited at all from the retrofit with Cummins, and what they've set aside there. First question, second question, PGM benefit. So GBP 10,000,000 in the first half current market pricing, what do you expect for the second half? And then finally, you didn't touch on it, but the the license you signed for GMX or GE MX, however you pronounce it, what do you get with that? Are you the only guys licensing it? Who else, if, if any, others have licensed it, and what does that bring to you? Okay. Thanks very much. So, John, do you want to start off with the ACD question? All right. So class 8, I think we said in the announcement that We expect the Class A cycle to continue through the middle of next year. I don't think that's different than what we said at the end of the full year. So We expect that if it continues, great. We're ready for that as well, but we're not changing our guidance there. And on retrofit, yes, we have had some benefit from the retrofits in North America. Okay. Anna, do you want to answer the PGM question? Yeah, we had a $10,000,000 benefit in the first half. I'm not going to guide explicitly on the benefit the second half, but it's less significant. And of course, it will depend on what happens to metal prices, which one never knows And on the license that we announced today, that just gives us protection and protects our failure position or IP position, doesn't give us anything particularly other than the protection that we need to make sure that we can continue the development of the yellow node. Who else has it? We don't know. And that's, I guess, maybe other announcements may happen in the future. I don't know, but it's, that's not our issue. Is there any costs associated with it in the first half? No. No. Should we go to actually I think there was a lady behind who was first, sorry, Adam, we'll come back, but with the new order. Thank you. It's Nicola Tang from Exane BNP Paribas. I wanted to ask a question, on the outlook comments you made in ECT in Cleana, sorry, around tariffs and whether that was more a comment on indirect, impact or whether it was direct, for JMP. Staying with the macro, you also mentioned Brexit, Anna, in your comments on working cap, I was wondering whether you could, maybe expand on that a little bit or maybe talk about, you know, why it impacts beyond working cap and what you're doing ahead of Brexit. And finally, I was just trying to understand on Clean Air, the margins in H2 and why what was the reason behind the ramp up costs in the second half given I would have thought the volume, you given you've been seeing the market share gains, in diesel and the volume is going up. I was wondering why you weren't going to see more volume leverage in the second half on that. Well, so we keep going with the theme, John, do you want to answer some of the clean air questions? Okay. Well, tariffs, I guess, split into to 2 categories. It's what the vehicle makers are going to do. So whether the tariffs have any impact on where vehicles are made, we have some room to be flexible with that. But, you know, the other area where tariffs, North America have an impact is in, is in North America with some raw materials that we import from China. So we do have some impact on that. We've made good progress in the first half in mitigating, some of those tariffs, but some of those tariffs increase in January of 2019. So we'll continue to try and mitigate those tariffs but the challenge of mitigation is is getting bigger. But the C model is really good job in mitigating them and can't mitigate them overnight, it takes a bit of time to put in alternative supply chain options, but we are doing a really good job mitigating the team's doing well there. John, on the last, the second question I think on Clean Earth, you just keep going, was on margins and the question about the sort of new products. Do you want to So I guess there's a Brexit question as well. We'll do the 16 hours faster. Okay. So for cleaner margins in the first half, as reported, our margins were up 0.5%. We've got positives and negatives in there. As you pointed out, we've got strong volume growth leverage in the first half. And as we just talked about, we've been able to mitigate some of those tariff impacts. Anna talked about some of the procurement savings that we have So we've had a lot of those benefits flow through in the first half. In the second half of the year, our product mix becomes more challenging. We're starting to ramp up, some of our new facilities. So we're going to have additional costs to be able to start up some of those facilities and our product mix is getting more challenging because of the more complex products that the new legislation is delivering. So we're just forecasting more challenges in the second half and forecasting that will hold margin same as last year. I was just going to finish off a moment. If you recall the full year results, we talked about the fact that we've been able to maintain our margins for the year. And our guidance is absolutely to do that. We've done better in the first half, but as John said, there are some competing, sort of headwinds that will reduce the margins in the second But overall, it'll still be consistent margin compared to where it was last year. And finally, since the Brexit question was a sort of working capital question, and do you want to yeah, you know, I'm I'm not going to guide on the working capital impacts of Brexit. I mean, beyond saying We are working with each customer individually on Brexit plans across all possible, withdrawal mechanics from the EU. They those plans differ customized by customer and in some cases involve us building working capital ahead of time. We also have other plans in place. You know, we've we've already started recruiting some additional people to help us process things, So we feel we're well positioned to navigate whatever comes to pass. Okay. Is that alright? So, should we go to the question here. And then afterwards, we'll go over to Neil. Good morning. I had three questions. It's Adam Collins from Liberum. First one is to help us understand the China Catalysis exposure. You tell us what the Asia exposure is and it's 14% of HTD Revenues and 21% of LDV. But are you able to just give us a sense of the China a bit to the extent that some of us are concerned about the slowing market conditions there. That's the first one. The second one is on the process technology catalysts. Where you're talking about increased licenses. I wondered if you could talk a little bit about the specific areas where that has been booked and then improved activity besides methanol, what are the other areas where you're noting signs of progress? And then the third one, perhaps for Anna is on just clarifying where we're at now in terms of the global procurement savings plan. A couple of years ago, you you mentioned there was going to be 100,000,000, CapEx, 3 year program, roughly similar savings. And I think it was slightly delayed on your arrival as you reviewed it. Could you just give us an update on what the associated investment will be? What any extra depreciation associated with that will be? I understand it's accelerated and yeah, that would be helpful. Just to put that in context of what you've said historically. Okay. Thank you for those questions and give Alice some time on the last on the first 2, the first 2, sorry, we're not going to give the detail by, by country. We already give you a early detailed analysis by region and that's as far as we're going to go, I'm afraid. We do talk about the opportunity for China 6, both in light duty and heavy duty, which is tremendous and you know tripling our content in the heavy duty side and the doubling in the light duty side. And the fact that we've got Blue Sky which is potentially pulling forward some of that benefit could help us in not this fiscal year but maybe next fiscal year doesn't change the medium term outlook, but, it, it might help us in the short run. But we're not, I'm afraid, going to go down by country by country level. On the catalyst technology side, we've had a couple of like we've had a few license wins in the first half very little revenue associated with those in the first half because they get spread over the plant build. And so the revenue associated with those will come through into in the forthcoming few years as they as those plants get built. Couple of methanol licenses within that, but relatively small ones, not massive licensed wins. And the improved activity besides methanol, what I talked about the 2 actually, which are kind of non methanol ones. The monoethylene glycol, is a, is a good win. And the, the one with waste to aviation fuel, which obviously has huge sustainability benefits, but also is a nice licensing. It's a sort of kind of small pilot, not fighter pilot projects as a proper project, but the opportunity across the U. S. To roll that out is potentially quite exciting. And on well, it wasn't procurement, but I think you actually, it's the ERP systems as well. My favorite subject, SAP. So, you know, as we've said previously, we've invested over 100,000,000 in in an SAP system. That we will roll out across the globe. And this is moving, you know, our our many sites. We have over a 100 sites onto standard systems and processes, which will give a significant benefit going forward. Just on your financial question, depreciation in the year will be about 7,000,000, and yes, we are depreciating it. What savings does this give us? It underpins everything, actually. So in the first instance, we are now live in Royston. Royston is a Royston Cleaner, a big complex site, so we didn't start with a little site. We you know, we've gone with a big complex site. And we now have standard transparent processes there. I'm pleased to say that Royston Production is now, is consistently hitting very high levels, of output higher than we have previously. That's in part system driven, and it's in part driven by transparency, as to how those processes work. So as we roll out site by site, what we'll see is specific low level savings, small number of 1,000,000 associated with tidying up systems and processes, greater transparency and understanding of our process. The second layer of savings, which you don't get with the first rollout is that you can start to retire these 40 ERP systems that we're running and I can't tell you how many instances we've got of those 40 systems. And as you start to retire those legacy legacy systems, that's a material reduction in support costs, which will be the 2nd tier of saving. The 3rd tier of saving, about which I'm most excited, is clear visibility and data with which to run our business. So yes, we're making really good progress with procurement savings, But right now, we have to extract data from 40 ledgers around the globe to try and figure out what we're spending. And in every ledger, it's coded differently. So it makes getting at all of that quite hard to do, and we've got a standard set of data and processes we will be able to manage our pricing real time, understanding customer profitability, understanding product profitability real time in a way that we can't today. And that will materially underpin our ability to drive efficiency across the rest of the group. Now when we talk about operational efficiencies, as Anna said, the systems is a foundational basis to have to enable you to drive some of those operational efficiencies. So it's really important to get this in Just to follow-up slightly on the second, area, the progress in PT, did I hear you right that you said you're adding resource in methanol, oxal alcohols and oil processing. And if that's the case, are you also signaling you, therefore, that the other two areas, which you didn't touch on oil processing and oxo have got better? Well, I think I talked about oxo alcohols, methanol, and gas processing were areas of of sort of additional, I wouldn't say we're adding massive resource there. It's a resource allocation, putting more resources there and less resources in other perhaps lower growth areas. So it's really targeting the areas where we think of greater potential. You're not going to see massive cost savings. It's more of a resource allocation issue. Thank you. Good morning. Neil Tyler Redbo. Two questions, please. First, on Clean Air and then on E And R. John, on Clean Air, the sort of renewed octane ore, the additional optimism with regard to the China 6 timing. Can you perhaps shed some light on what has prompted that? Is that platform wins? Is that conversations with customers or just your own hunch? And the second question on ENR, the the first Phil catalysts, I was, wrongly, it seems under the impression that that that that was at a very minimal level, and and it seems every time we think that, you know, there's another there's another drop. Can you give us an indication of where that stands, perhaps, percentage terms now relative to its peak in revenue terms. Okay. Should we start with the first question, is it your optimism, John? Or This is the family's government going forward the legislation. So they pulled it forward effectively a year and a half, which brings with the challenges, the first part of that as we said, which will start in July of 2019. We're getting ready for that now. As Robert said, we have a new factory coming on. We'll be doing the validations of that new factory in the second half of the year. So as the volumes ramp up, we'll transition from some of the products being made in our existing factory. To the bulk of those new products being made in our new factory. And this is all about China government improving air quality. Hence, the reason why it's called the Blue Sky Initiative. They're bringing forward. I think you cited in 13 provinces, the larger provinces in China and they're pulling forward the legislation. Which is a which obviously for all sorts of reasons is a good thing. So there's no change in legislation. It's just the timing timing impact. And this is not about share gains or this is purely the Chinese government changing that? I guess my question is sort of at what point do you do would you anticipate the the wins in the platforms that are required or that will ensue from, you know, from the additional technology requirement. For the for the the the wins that we've had in our plan, we've we've, we've won more than 80% of those in that was in our plan already. So Thank you. And on the first fill catalyst, look, they're quite lumpy, of course, as new plants come on 3, and of course, as you go to a lower number of license wins, then you're going to have a lower number of of first fills and it becomes then lumpier. When you had multiple, license wins a year, then you, it would be slightly less lumpy. So it's probably down about 60% from where we were at the sort of peak or the higher level. And so I think we've talked already about the sort of licensing income, sorry, not licensing income, number of licenses sort of flattened out. It's kind of at low level still. But so hopefully that's where at the end of that sort of downturn, but it is inherently lumpy, unfortunately, with First Fills. The refill catalyst is much more predictable, and more, not quite an annuity, but it's a more predictable income stream. With another question. This is Sanjay Shah from Panmure Gordon. I have two questions on Elmo, if I may. You've talked about step change in energy density. Could you give us some idea of what is the specific due density you can get from your technology? And secondly, you've only talked about lower dollar per kilowatt, against current infusion materials. Is that a factor of the price of current the raw materials are using or is there something specific about the way you build the the battery cell that makes it sort of lower dollar per. Okay. So I'm going to ask Alan to answer, give a little bit more color in a second. So if you can get a mic to him, it's a, you know, we're not going to go into specifics about some of the details about energy density and give you an absolute number. I think we can give you more qualitative comment relative to competition. And on the dollar per kilowatt hour cycle, it's a range of things. But Alan, do you want to give a bit more color on that? Yeah. Of course. What we had, talked through a Capital Markets Day to put in relative terms is that ELNO, has between 5 and 10% higher energy density relative to NMC 811, and it's somewhere in the region of 20 to 25% higher energy density compared to NMC 622. But importantly, what where we're really making the difference around EL and O is also increasing cycle life or or overall lifetime of the materials as well as increasing the stability of those materials as well. And those are key aspects because in order to be successful in the long range EV marketplace. It's not only about high energy density. It's about having all of us other characteristics that'll enable widespread adoption as well. So the the it is possibly lower dollar per kilowatt hour, per cycle life is adding the per cycle life is important because you maintain the ability for the material to charge and discharge and charge and discharge for longer and longer. And gain its energy density because the stability of the material is really, really important. People talk about stability from a, from a, how does it work, you know, as a cash fire, that's one element of stability, but there's another element of stability and how long it can maintain that energy density without as you put the electrons in and out, there's quite a lot of stress on the material But lower dollar per kilowatt hour, clearly, one of the things that we have here as well is lower cobalt and that's a factor as well. So there's a range of as they go into the overarching Well, obviously you have to make quite a big investment if you think this is the way forward. Well, of course, of course. But given that there are lots of Chinese and other com, countries spending heavily in this kind of technology. I just wanted to know how sure one can be that they have the lowest or dollar per kilowatt given the various variables? Well, I think there's lots of variables here. It's not just one variable. And when you look at the overall cost of the material, the largest portion of the cost of material, of the absolute cathode material is the bill of materials themselves, the lithium, the nickel, the cobalt, etcetera, the raw materials that go in. The actual element to do with the sort of manufacturing costs and the labor costs relatively speaking in the overall, out of the overall cost is a low much, much lower element. So in reality, you can get you can have better material with better energy density, you can that can outweigh the benefits of maybe a lower capital cost or lower running costs. Question may be over here? Charles Burnley from Bernstein. So a couple of things, just on European LDV, gasoline. So, the first thing you highlighted, was the fact you've seen a lot more growth in larger vehicles rather than smaller. And the year over index to to smaller, smaller LDV engines. Is that, is there something structural there? Does that represent somewhat of an opportunity. So that would be the first part. And then secondly, you're talking about some of the delay to the 5% share gains. Is that something that is a threat? So there's an I understand that some of that might be reopening of platforms. So is there an opportunity that that might not be achieved. And then just on going back to the KAMEX license, can you just explain to me what specifically you need for that? Why do you need that for Ian? I don't know. What does that give you that you were lacking in terms of IP protection? And then just finally, in the in one of the slides, you said that in the next 12 months, you need to build projects team for possible further our capacities for ELNO. Is that something we could therefore expect in to kind of hear an announcement from in the next kind of 18 to 24 months? Thank you. Okay. So we start with the two questions like due to gasoline, John, if you want to. So on gasoline, the platforms that we're on today and the mix of our platforms was determined 3 or 4 years ago. So we are where we are in terms of being indexed to small vehicles or or large vehicles. I think that, you know, anecdotally with with some of the information that we have from governments making some statements. I think some of the people who are moving from big diesel you know, they wouldn't move to small gasoline vehicles. They'd probably move to big gasoline vehicles if they didn't want to buy a diesel. So I think, you know, that that that's the the issue there. And I think in terms of timing, I don't see this as any threat There are some things. We talked a little bit about WLTP, which has delayed, you know, some customers in getting some of their systems approved. So I think some people are still working on the architecture to be able to get through the WLTP testing, and that's just throwing up some uncertainty in the market but I don't see any long term threat there. We've talked before about reallocating, reorganizing our R and D activities. And concentrating on gasoline, that's all progressing very well. And we expect that we'll have a good share of the gasoline market in the future. Specific. I don't think there's anything structural here at all. It's just a nature of where the market is today where we were over indexed historically on the smaller cars and larger cars. And as we as those new platforms come through over the next few years, there's no structural issue here that puts us in a weaker position for larger gasoline cars versus smaller gasoline cars. On this sort of, I'll ask Alan to provide because he's probably being our CTO as well as running the new markets give you a little bit more color on the Camex license if you want. But the further capacity for ELNO, I was really talking about building up the sort of that there is building up the sort of capital capability of the organization in the ear and the battery materials business to drive to deliver the first plant itself. Let's not get ahead of ourselves about when the next new build will come. I know you maybe if you want to hear the next big thing. We are thinking about what that next big thing would be, what how we can enhance our capacity even longer than I talked about that. And we've said before, you know, we can't we can't do everything in series. We can't wait till the first plant the plants were built and running and then wait a year or 2 to see how it's done and then start building another one. There will be an element of overlap. But we're not ready to talk about the specifics of that at this stage. Alan, do you want to talk a little bit about the Canex license which we would like to talk about some chemistry? So look, I'll be I'll be very clear. EL and L is a proprietary JMP product. All of our products, including EL and O and all the products across all of our sectors, are enabled and supported by a detailed intellectual property strategy. That sits beneath them. And and we put those intellectual property strategies in place really for 2 key reasons. The first is to ensure that we have freedom to operate. All the way from raw materials to the composition, to the process, all the way through into the end markets, in which those products are used. The second, of course, is to create a long term sustainable competitive advantage for us. In other words, it's a blocker. It's a barrier to entry for others coming into the space. There are times when we pull these strategies together, and we periodically review them, that we identify an opportunity to acquire license background intellectual property. And that's specifically the case in ELNO. We don't get into the details as to why we license or acquire a particular particular intellectual property, only because that thought process and that analysis in and of itself gives us competitive advantage It's how we think about the unique aspects around our material. But suffice to say what what the KAMEX license is, what the GEMEX license is, what the 3 M NMC licenses and all the licenses that we have today, what they provide is an opportunity to improve and extend our intellectual property portfolio to give us a long term competitive advantage. Good. Okay. Any more for any more? Oh, Adam, you're allowed to come back for another question. Of course, you are. Just one just on your I wanted to ask John a question about WLTP rd testing and its implications. It's pretty obvious from what we've seen so far that the delays that have occurred have occurred mainly on gasoline. And this may be due to the fact there are more variance on the gasoline side, but one sort of theory is the OEMs are having difficulties in getting cars certified without particular filters. And I wondered whether you thought that this might harold an early implementation of particulate filters as well in Europe before the next stage, the Euro 60 final, that you might be more optimistic about the fitment rate there because of this. So, I kind of agree with everything that you said. I don't think that the ramp rate that we had anticipated before is gonna be affected by that. You know, we still believe that You know, gasoline particulate filters are coming in now. They're ramping up. You know, we had small volumes last year. Have bigger volumes this year over the next 2 years is when we're really going to see those volumes increase. But it could provide, as you say, an opportunity, as John said, as he agreed with you, but I think one of the issues is WLTP is clearly making it harder for OEMs to meet the regulatory requirements. And that is can only be a good thing for Johnson Matthew because it requires more complex catalyst systems. So the it is it is a good it's good news that this legislation comes in place for all sorts of reasons because this enhances their quality as well, of course, but it's an opportunity for us. Any more questions at all? Look, thanks very much indeed for coming, and very nice to see you all. And we look forward to seeing you again next time. Thank you.