Welcome to the Johnson Matthey Sector Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Martin Dunwoodie, Director of Investor Relations. Please go ahead, sir.
Thank you, Daniel. Good afternoon. As Daniel said, I'm Martin Dunwoodie, Director of Investor Relations at Johnson Matthey, and I'd like to welcome you to our call today. This is the latest call in our series to give you more detail on our sectors and our strategy to deliver sustained growth and value creation. As such, we will not be giving a trading update as part of this call. I'm pleased to be able to welcome John Walker, Chief Executive for our Clean Air sector today, which will be the subject of the call. We have about an hour. With that, I will hand over to John.
Thank you, Martin. Good afternoon. I'm John Walker, Chief Executive for our Clean Air sector. Our Clean Air sector represents around 60% of the group sales and underlying operating profit. In this business, we use our world-class science and technology to develop complex products and solutions for our customers. Our catalyst formulations and systems help to substantially reduce emissions from vehicles and improve air quality around the world. We're a global leader in this space, and we have strong relationships with almost every major car and truck manufacturer across the world. Today, I'm going to talk about the exciting opportunities we have for sustained growth in the sector over the next decade. I'm going to briefly recap the main growth drivers we have, and then go into additional detail on the share gains we've made in Europe and the efficiencies we're driving across the sector to maintain margin.
I'll open up to Q&A. On the slide deck, I'll point you to slide two, which is our cautionary statement, that this presentation contains forward-looking statements. I'll just have you read that and then move on to slide three. Our business saw strong growth in 2017/18. Our light-duty to heavy-duty split is around 65%-35%, and this will stay broadly similar over the next 10 years. Looking at geography, Europe is currently around 50% of our business, the Americas are 30%, and Asia is 20%. Our return on invested capital is strong at 31%. The investments we've approved in Poland and China will be highly flexible and efficient plants to help enable us to deliver growth and maintain a high return on invested capital over the medium term.
The latest trends we're seeing are in line with the development of the market we outlined at the Capital Markets Day. In Europe, since the emissions scandal in 2015, consumers want the cars they buy to have the lowest emissions. Consumer behavior surrounding car purchases is changing because of this. This means that our customers, the auto OEMs, are finding it harder to forecast how well individual platforms will perform on a month-by-month basis. The Worldwide Harmonized Light Vehicles Test Procedure, or WLTP, coming into force this September in Europe, continues this uncertainty in the market around production schedules. However, we do not expect to see a dramatic effect on our business. It creates opportunities in the medium to longer term as it drives increased catalyst value per vehicle.
Therefore, our agility and flexibility is key to enabling us to continue to meet customer requirements and win business in this market. We're seeing a change in the diesel to gasoline mix in Europe, and developments here are in line with our thinking. A number of OEMs have announced smaller engine diesel variants will be discontinued in favor of gasoline. OEMs are also adding more selective catalytic reduction and ammonia slip catalyst products to meet Euro 6d Final requirements. This is another opportunity for us to win business. Despite these market changes, the fact that many OEMs are starting Euro 7 diesel programs confirms our view that this technology is attractive in the long term, particularly for larger vehicles and especially for the light commercial segment.
There's no change to the guidance we gave at our Capital Markets Day last year. We currently assume diesel will be 20% of new passenger car sales in Western Europe by 2025. That is 25% of the overall light-duty sales, which includes commercial vehicles. As a reminder, on a gross profit level, a percentage point change in the mix between diesel and gasoline will impact us by just GBP 4 million. That is before we do any mitigation. To give some context, GBP 4 million represents only 1% of Clean Air's operating profit. Conversely, in the U.S., we continue to see increasing penetration of diesel in the light-duty market, which supports our growth. The U.S. heavy-duty market is currently in an upcycle, which we expect to continue for the rest of this calendar year. These trends are all aligned with our medium to longer term guidance.
Looking now at the longer term on slide four. We have clear visibility for sustained growth in Clean Air over the next 10 years, driven by a number of things, including share gains in Europe; tighter legislation around the world, particularly in Europe, China, and India; and continued internal combustion engine production growth despite the evolving powertrain mix. The share gains in Europe come from our technology leadership and our ability and willingness to work closely with customers and adapt quickly to their changing needs. In light-duty diesel, we expect to gain around 20 percentage points of share over the next year to reach around a 65% share by the end of the 2018-2019 financial year. All the platforms that these share gains are based on are now in production.
In light-duty gasoline, we expect to gain around 5 percentage points of share as the adoption of Euro 6c and d ramps up. The business we have won gives me confidence that we will deliver these gains, so they come through over time by 2020-2021. I'll go into more detail on how we won this share shortly. Tightening legislation in Europe provides us with growth potential in addition to the share gains, with tighter rules for both gasoline and diesel increasing the value per vehicle. For gasoline, Euro 6c is now in force with new models of gasoline direct injection vehicles. This requires a coated filter to be fitted to certain vehicles to control the number of particles emitted and doubles the value to JM of these vehicles.
The fitment rate will increase over time, from a low level this year, gradually reaching around 90% of gasoline direct injection by 2025. For diesel, Euro 6d adds up to 50% to the value per vehicle from tighter NOx control systems. A large number of vehicles will require a more advanced filter system and, in some cases, additional catalyst content. Of course, this is just Euro 6. If Euro 7 is introduced, that could drive further value from the middle of the next decade. Tighter legislation is not just a European story. Both China and India are jumping to European-type standards from 2020. China introduces China 6a for light-duty vehicles from July 2020, and this will require some cars to have a coated filter, which, like Europe, doubles the value for us.
The fitment rate will increase over time, particularly as China 6b comes in from July of 2023. In heavy duty, the introduction of China 6 is now mandated nationwide from July of 2021, but allows cities the opportunity to implement earlier, with the earliest date being July of 2019. This will roughly triple the value per truck for us. In India, the move from BS VI from April 2020 will also give us a great opportunity. The value uplift will be mainly on heavy duty, with catalyst value roughly tripling. Light duty will see some benefit, but we do not currently expect filters to be added to many gasoline cars. As well as these specific growth drivers, our Clean Air business will continue to benefit from the growing number of vehicles overall across light and heavy duty.
We continue to expect consistent growth in light-duty Americas and heavy-duty Europe and Americas. This is despite the gradual move to electric powertrains across the world. Remember, of course, that any form of hybrid still has a combustion engine, and therefore requires emission control. A hybrid is neutral to slightly positive in terms of value for us. All of this delivers mid-single-digit compound annual growth rate over the next 10 years. During this period, we aim to broadly maintain our margin, and I'm pleased that the work we've done on efficiency will enable us to keep margins broadly stable this year, ahead of our previous expectations. I'm now going to cover in more detail how we achieve the European share gains and the work we are doing to improve efficiency. I'll now move on to slide five.
Our share gains in Europe were driven by a few key factors. Essentially, it was through working closely with our customers. Our agility and technical leadership enabled us to move quickly to serve our customers at a key point in time when the market was going through large changes following the diesel scandal towards the end of 2015. This created an environment where OEMs wanted to move further and faster than the legislation. We were well-positioned to be able to help them through this key phase with the ability to scale up to meet future demands. Our technology leadership in diesel enabled us to develop solutions for OEMs to meet post-2023 standards now, more than five years early.
We focus our investment on technology according to the future end market value for that technology with the diesel light and heavy duty market being a high-value market that we've invested in over many years. Our diesel technology offered better results across the board, including excellent low-temperature NOx conversion and outstanding thermal durability. It is all about having a full offering of best-in-class products to meet the differing customer needs, and this is particularly important as the number of products per vehicles increases. This leadership, coupled with strong customer relationships, working rapidly to provide new solutions tailored to different OEMs and our flexible manufacturing base, enabled us to win share in diesel. In gasoline, we've been increasing our R&D investment in the last few years, reallocating this away from our light-duty diesel in line with the development of gasoline legislation in Europe and China.
This has yielded results with the new wins in European gasoline platforms to provide coated filters for Euro 6c. Designing gasoline particulate filters is all about getting the balance right between filtration efficiency to enable the regulations to be met, and back pressure, which we need to keep low to enable minimum impact on engine power output while optimizing catalyst performance. We have class-leading technology on particulate filters to ensure that our OEM partners can meet tightening emission standards with downsized engines and still deliver performance. Additionally, our agility and strong customer relationships give us the ability to respond in a fast-changing environment. That explains how we've won share in Europe, and we aim to maintain this share and see some opportunities to gain share into other areas of the world.
For example, heavy duty in China, as tighter legislation puts more pressure on our customers and requires more sophisticated solutions. Moving on to slide six. We're making better than expected progress on margin across the sector. We previously expected margin to be down up to 100 basis points this year, but now expect to broadly maintain margin, with improvements running ahead of expectations and offsetting the pressures from serving such a large share gain so rapidly. The improvements are down to many reasons, but principally, we can group them into increasing capacity of our existing plants, new plants to deliver additional capacity with state-of-the-art efficiency, reducing process losses, and procurement benefits. If I take a look at these in turn, starting with improving current capacity, we've been enhancing best practice across the sites, including standardizing equipment, our operating model and organizational structure across the plants.
This provides us with greater agility in how we use our manufacturing assets to serve customers, allowing us to more easily shift production between facilities according to demand. Running our most efficient lines 24 hours a day, seven days a week. Decreasing downtime on our lines. For example, we've reduced the time to change one line over from one product to another, and we're also de-bottlenecking our processes continuously. We're reducing process losses by improving the efficiency of new product launches, helped by re-engineering our product introduction process. The whole product life cycle process is audited by a coordinated sector-level quality management team now, and we have implemented global launch teams. The new plants we're building in Poland and China will deliver further benefits. As they come on stream, they improve the flexibility of our overall manufacturing footprint and reduce our underlying cost of production.
They will use the latest equipment to be fully flexible between light and heavy duty, gasoline and diesel, helping us to optimize the return from our manufacturing assets and giving us more agility to serve customer demand. Support the consistent implementation of manufacturing best practices, leading to improved yields, and to be materially more efficient, offering significantly faster production times due to improvements, including a longer continuous line and the latest coating technology. We're also benefiting from the group procurement program, which delivers significant savings. One example of this is renegotiating supply contracts with service providers and leveraging scale across sites to obtain significant price reductions. This is a business where we have a strong track record of continuously improving efficiency and driving strong top-line growth at the same time, which we will continue to do.
Finally, to conclude on the last slide, our Clean Air sector will continue to drive significant growth based on our strong technology and leadership positions. We have a clear view of this business and a great deal of visibility as to its growth drivers. We have big share gains in Europe light duty coming through this year, China and India will see significant growth in the medium term, driven by legislation. We are driving efficiency in the business, and our investment in additional capacity enhances our agility, improves our flexibility, and reduces our costs. For at least the next decade, we will deliver mid-single-digit compound annual growth rates with margins broadly stable. The internal combustion engine will be around for many years to come, particularly in heavy duty, and we remain very well positioned within this space to deliver sustained value creation.
I'm now happy to take any questions that you have.
Thank you. If you would like to ask a question at this time, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please ensure that your mute function is turned off to allow your signal to reach our equipment. Again, please press star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. We can now take our first question. It comes from Neil Tayler at Redburn. Your line is open. Please go ahead.
Good morning, John, Martin. I'll start with a couple, please. Point of clarification on the direct injection penetration assumptions. You mentioned that you assume in Europe a fitment of fitment rates of 90% of GDI engines. Can you overlay that What your assumption is on what proportion of the gasoline market is GDI, including hybrids? Same question for China. Then the second part of the question, or second question is, your long-term growth assumptions are mid-single digit. Can you clarify whether or not the share gains that you perceive as potentially on offer in China are part of that growth forecast? Thank you.
Okay. On the direct injection question, our assumption, I think, hasn't changed. We say that 80% of the gasoline engines will be direct injection by 2025, and we expect a 90% fitment rate on those direct injection gasoline engines by 2025.
That 80% includes the combustion units within the hybrid portion of the market as well?
Yes.
Yeah. Okay. Thank you.
Okay. For your mid-single-digit growth, are those additional share gains in China included in that? The answer to that is no. We've assumed we maintain our existing share in China in our current base assumptions.
Great. Thank you. That's helpful.
Thank you. We can now move along to our next question. It comes from Andrew Stott of UBS. Your line is open. Please go ahead.
Thanks a lot. Thanks for the presentation, John, and good afternoon, Martin, as well. I've got a couple. The first thing is, I just want to check the truck leverage you have in China. You mentioned the threefold uplift. I think you said from earliest mid-2019. I just wanted to just check that, first of all, that comment. Secondly, the threefold increase. Is that your economic profit or is that a revenue number that includes some substrate? I just want to make sure I'm right on the modeling there. The second one was just a shorter-term question around WLTP. You raised that, John, as a sort of issue maybe around volatility, if nothing else. Are there any other concerns you have? One thing we're picking up is this concept of overproduction in Q2 and Q3 ahead of WLTP.
Okay. You got a few diverse questions there. In terms of your uplift in China, what we're saying is that the legislation, which was just gazetted, actually, compared to our previous guidance, is coming in six months later. What they've also said is that they're allowing cities to actually pull forward legislation, and we've been working with a lot of our customers on that pull forward for quite some time, and we do expect some of them to pull forward ahead of this 2021 date. We don't expect to see much change in our guidance from what we said before in our China heavy duty sales.
Okay.
The point on I didn't quite get your economic profit.
Yeah. Well, the three times uplift, sometimes we've seen in the past there's some substrate content in that revenue number, which is zero margin to JMAT. I just wondered if that's the case or not. Is it threefold?
Okay. On your three times compared to.
Yeah.
In that question, yep, that three times uplift does include substrate.
Okay, I shouldn't assume a three times increase in your EBIT, in effect, per vehicle.
No, it'll be less than that.
Any rough pointer on that?
No, we haven't discussed any of the
Okay
the margins in any detail on that. In your WLTP comment, the WLTP is effectively impacting gasoline vehicles more than diesel vehicles. Part of that is just due to the fact that there's a lot more gasoline platforms that are being certified. Secondly, when you have the particulate issues on the real-world driving part of the WLTP, there's two parts to that. Some people are struggling to get their systems to pass on the new test. I think the second part of that is that when you look at some of the people who are manufacturing some of the gasoline filters, they're trying to separate the functionality of the catalyst activity from the filtration. They want to try and keep those two functions separate, and they're trying to maintain that configuration. I think a lot of this stuff will eventually get across the line.
There may be some delays in gasoline sales, if you look at our plans for this year, most of our growth in this financial year that we're in right now is all diesel. We do not expect much of this WLTP impact to affect us.
Okay, perfect. Thank you very much.
Thank you. We can now move along to our next question. It comes from Ranulf Orr of Redburn. Your line is open. Please go ahead.
Hi. Thanks for taking the question. It's just on your margin guidance. I think you said you expect the growth to come at a fairly constant margin going forward. I was wondering what gives you the confidence you can do this, given the higher costs, the cost pressures the OEMs are facing with electrification and various other things. Then just to follow up to the previous question, I think you said that the EBIT growth will be slower than the revenue growth, kind of implying the growth will come at lower margin. Can you just help me square that up? Thank you.
Okay. On the margins, I guess our point about the margins is that we're saying that we're maintaining our margins at the current levels. The reason that we're saying that is there's kind of a, on the positive side of the ledger, we have all of our continuous improvement activities, which are looking at standardization built into the factories, a standard plan operating model with the structure of management built into that, downtime reduction, cycle time improvements, quick changeovers. We have a new procurement organization, which we've talked about, in our past presentations, and some of those procurement benefits are starting to come through. All of those things are on the positive side of the kind of margin ledger. On the negative side, we continue to expect to see pressure.
We're in a very competitive business, we continue to expect to see pressure from our customers on productivity demands. As we go out there, what we're also seeing is the increase of a lot of filters in our product mix. Those filters have a large substrate content. You have positives offset by negatives, and that's why, the balance of that is why we're forecasting neutral margins over time. The EBIT question, I think it's just, we say that our sales is going to increase three times. There's a portion of that sale that's substrate. I think it's very clear that that doesn't just flow through to profit because there's the portion of substrate doesn't have a profit element to it.
Yes. Okay. That's offset by the continuous improvement?
That's offset by the continuous improvement, right.
Great. Thank you.
procurement savings as well.
Thanks.
Thank you. We can now move along to our next question. It comes from Sebastian Bray of Berenberg Bank. Your line is open. Please go ahead.
Good afternoon. Thank you for the presentation and taking my questions. I would have three, please. The first is on the maintenance CapEx of these facilities. Could you give us an idea, as a proportion of sales, if these facilities one day do go ex growth, obviously that would be over a decade away. What is the proportion of sales you'd have to spend on these facilities for maintenance annually? That's my first one, please. My second one is one on the value uplift for the Chinese vehicles once you have China 6 legislation. Would I be right in saying that in the 300%, or pardon me, the tripling of the value content, you would have, let's say, vehicles going from zero platinum group metal content to something like 3 to 6 grams? Just as an idea so we can back out the actual value uplifts for JMAT.
The third one is on the actual timing of Euro 6c and Euro 6d. Apologies, I may have missed this earlier, but in what years exactly does Johnson Matthey expect the primary uplift from the Euro 6c legislation and Euro 6d legislation to occur? Thank you.
Starting with maintenance CapEx. Maintenance CapEx, we've never really talked about that, but in terms of percentages, as a percentage of sales, it's a relatively low number going forward. We can maintain our facilities with a relatively low level of CapEx as a percentage of sales. I'm not going to give you any specific numbers on that. As far as value uplift in China, with regards to precious metal loadings, I think what we might be able to point you to is some of the precious metal market guidance from the Johnson Matthey Group, where they go into some detail of metal loadings per part as the legislation is rolling up. I don't have those figures to hand with me right now, but I think that we've talked about that in the latest update, which happened in Platinum Week a couple of months ago.
I think you can find those figures in the precious metal marketing information. Finally on timings for 6c and 6d. For 6c, what we're seeing a little bit of complication in the roll-up rate of 6c that has some implications with WLTP. I think as I talked about earlier, you have several car companies who have complex product mixes that just the time to get some of those things certified is slower than I think they had anticipated. The new rules are kind of tighter on weight limits. In the past, you were sort of able to certify multiple, like a whole platform with one certification. Now that these weight limits and the new regulations are out there, you basically have to certify every single application individually.
Because of that, just the architecture of the exhaust systems, you have car companies trying to hold on to the architecture that they designed. If they can't get it across the line, they're going to have to change the architecture. Some of the people who have uncoated filters may have to add coated filters. Because of that, I think the roll-up of the gasoline particulate filters for Euro 6c is going to be ramping up. We had some sales last year. We're ramping up this year, and that will continue over the next three years. We'll have a continuation of increased gasoline particulate filter sales over the next three years.
For Euro 6d, I think this is another bit of a complicated story because some OEMs, when they had the kind of naming and shaming that happened after the 2015 diesel crisis, some people were able to switch quickly to very advanced emissions control systems on some of these diesel vehicles. Actually, some of those already met Euro 6d ahead of time. Whereas some of the other people who have systems that haven't quite been able to make the legislation, that will extend, and you'll see that out through the end of 2020, where some of those Euro 6d final systems will start to come in.
That's helpful. Thank you. You couldn't give me a figure for, as, or a rough guess for how much of Euro 6d has already been implemented by the OEMs?
It's difficult to put a number on it.
All right. That is good. Thank you very much.
Thank you. We can now move along to our next question. It comes from Charlie Webb at Citi. Your line is open. Please go ahead.
Hi, Martin, John. Thanks for the presentation. Just one question. On the U.S. heavy-duty cycle, I was just wondering if you had any thoughts on when you guys were modeling that turning the other way, and if perhaps this cycle might be different from others, given what we're seeing in freight rates at the moment, or any thoughts around that would be very interesting.
On U.S. heavy duty, I think we've said that we expect the current cycle to continue through the end of this calendar year. There's some possibility that it could extend through the end of our financial year. We expect to see slowing in the 2019 calendar year. This cycle, I think when you go back over the last kind of 10, 20 years on the heavy-duty cycle in the U.S., I don't think any one cycle has been the same. It's a little hard, looking backwards, to kind of predict what we think is going to happen in this particular cycle. I think where there was clear peaks in some of the previous cycles, it kind of feels like this cycle is lasting at a relatively higher level for longer than some of the previous cycles. Eventually the cycle will-
Eventually it will turn, but let's say it went on for another year. That wouldn't be something that you've currently accounted for in your guidance?
No.
Right. Brilliant.
Our guidance is through the end of the calendar year, this calendar year.
Perfect. Thank you.
Anything longer than that would be upside to our guidance.
Thank you. We can now move along to our next question. It comes from Chetan Udeshi of JP Morgan. Your line is open. Please go ahead.
Yeah. Hi, Chetan from J.P. Morgan. First question was just on your comments around rising catalyst values, with standards getting tougher on emissions. How do you think OEMs are coping with that in terms of both for traditional ICE cars, where their compliance cost seems to be rising with EVs, they have to spend a lot more money. What are they doing to offset these pressures on costs, in your view?
What are the OEMs doing? I mean, the OEMs are putting pressure on the supply base to reduce prices. I think when you're looking at some of the flow on technology that, I think there's a carryover of technology when you're looking at some of the applications that are coming into China and India. From a technology development standpoint, there's a commonization of some of the technology that's used in some of those markets that allows some savings in terms of technology development. I mean, clearly, as car companies are adjusting and starting to reallocate some of their resource to alternate powertrains the pressure on costs will continue. We've been in a competitive business for the 34 years that I've worked here, so I don't ever expect that to change.
I'm not saying it's business as usual, but we continue to do what we can to hopefully offer some win-win solutions to our customers. That's what we've done in the past, and that's what we'll continue to try and do.
Understood. The other question I had was more maybe a clarification. In your full year results, you guys said the diesel volume or production of diesel car in Europe in that whole fiscal year was flat. I'm just trying to understand why was it flat when the diesel share came down so much? It is just a timing issue, do you think? OEMs were sort of building inventory ahead of this WLTP rollout or were there some other factors? Thank you.
On our results in 2017-2018, the flat part of that curve was just before the ramp-up rates of some of the share gains that we built into this financial year. We're seeing those diesel sales come through now. I think when we report our next results, you'll see results that are in line with the guidance that we gave at the results presentation.
My question was more around the diesel production overall in the market. The car production, not your volumes necessarily. I think the point that was made during the results was that you think overall diesel car production in Europe in your last fiscal year was flat, despite the declining shares. Just wanted to check what were the reasons for that we did not see a decline in European diesel production? Is it more like some of the production is for exports, which is actually manufactured in Europe but sold for cars outside Europe? Could that be the explanation?
I think when we look at the mix of the whole market, on the diesel side of things, the thing that is holding up diesel sales are larger passenger cars and light commercial vehicles. When you look at just pure passenger car diesel sales, those are the figures that are published, where you're seeing a big drop in some of those diesel figures. When you add back the light commercial vehicles, we don't see anywhere near the drop. For our sales in gasoline, as that's only 20% of our sales, what we said at the results presentation was that our sales are heavily influenced by our customer mix and our product mix and which models we're on, and whether they're high-value models or less high-value models. That had a big impact on the big growth of gasoline sales that we talked about at the results presentation.
Understood. If I can maybe ask one more on the GBP 4 million gross profit sensitivity to 1% change in diesel share, is that just based on the value of the catalyst, or is inherently diesel gross margin also higher than, say, gasoline?
Yes. Gross margin on diesel and gasoline are about the same. It's all based on sales.
Okay. Thank you very much.
Thank you. We can now move on to our next question. It comes from Georgia Harris of Bank of America. Your line is open. Please go ahead.
Hi. Thanks for taking my questions. Just firstly, coming back to HDD in China, can you discuss the ramp-up that you're expecting from China 6? When do you think we can get to sort of 100% fitment rate for that new legislation? Secondly, on India light duty, can you explain a bit more why you don't see many filters being added to gasoline cars? Finally, if you have an answer, on the potential impact of trade war in autos, have you looked into this, and are there any actions you can take to mitigate any potential impact here? Thanks.
Your first question was on heavy duty in China?
On the China HDD. Yeah.
Just repeat your question again.
On the ramp-up of the legislation. You say value triples, but how quickly can we expect that to happen? Do you have an idea of when we get to that triple value?
I think the cycle would be similar to Europe. You're kind of 2-2.5 years to be able to get the full fitment, and we expect something similar to happen in China. Just remember that the China legislation is split similarly but differently to the European legislation, where you have 6a and 6b. 2.5 years after you do 6a, saying that you'll have some early adopters that'll start in 2020 on the heavy duty side, you're at 2022.5, and then the next round of legislation on real world driving comes in in 2023. Again, there'll be another cycle that'll probably be a shorter cycle of probably 1.5 years for the 6b to complete. That's probably the way that that's going to phase in.
In India, I think on filters, the legislation in India is a little bit different and less stringent on particulate number than the China legislation is. That's why there's less of a need to be able to meet legislation, to be able to put filters on gasoline cars in India. With regards to the trade wars or however you described that, if we take a look at the things that are within our control, as far as the materials that we use to manufacture catalyst and things like that, we do have multiple suppliers of some of our key strategic raw materials. We would have, depending on how many countries were impacted, but if things stay as they are, and China is one of the targeted countries, we would have options to source materials from other countries.
That wouldn't be a 100% mitigation, but that would be some help to be able to offset that. As far as other trade wars go, most of our facilities are local to the actual supply of the catalyst. We don't have that much of our production base that actually exports catalyst around the world. Our customers may be impacted on exporting vehicles from the U.S. to China, for example. For the things that are in our control, we have some mitigation impacts. As I said, I think that because we locally manufacture a large majority of our catalyst, we're less impacted by manufacturing catalysts in one country and exporting them to another.
Okay. Very helpful. Thank you.
Thank you. We can now move along to our next question. It comes from Martin Evans at HSBC. Your line is open. Please go ahead.
Yeah, thanks very much. John, just on these efficiencies that you referred to again, which we've heard of before in terms of helping to sort of maintain the margin. I suppose it begs the question, if you're now talking about sort of procurement benefits, reducing process losses and so on, changes in the shift pattern. Given your sort of 34 years or so within the company, what was going wrong before? How sustainable are these efficiencies in the long term, if you've only essentially recently discovered them, what's the change in the mentality or the psychology being within the division, Clean Air, I guess it used to be called ECT, such that you can now extract these quite meaningful new efficiencies? Thanks.
It's an evolution. It's something that we've been working on for quite some time. I think I've talked about this before, but some of our older manufacturing assets were very limited in their flexibility to be able to manufacture different kinds of products and things like that. We've been, over the last quite a number of years now, working towards a system of moving towards copy exact and globally. As we've been globalizing our organization, we've been globalizing our manufacturing footprint, we've been optimizing the key manufacturing plants that matter, and have really taken some of our more flexible assets and really leveraged them to be able to get some of that operating leverage out of them. Now, you also will have heard something about some of the systems that are being put in.
As our continuous improvement culture has been able to deliver some of these benefits, sort of on a manual basis, if you will. These are now being followed up with systems being overlaid over the top to make sure that we maintain some of these benefits that were built in from our continuous improvement activities and then have a system to be able to more easily manage those gains. It's a combination of a number of things, and it's a combination of things that Anna has talked about in terms of some of the systems work that we're working on. It's not all just an ERP system. We're also working on other efficiencies in a lot of other areas as well.
Okay. Thanks very much.
Thank you. As a reminder at this time, it's star one to ask a question today. We can move along to our next question. It comes from Neil Tyler of Redburn. Your line is open. Please go ahead.
Yeah. Hello again. A couple more from me, just clarifying two more points. Firstly, back to the HDD market and the market value as you perceive it. Can you give us a ballpark figure for how much of your revenues, for instance, or of the broader market, is comprised by vehicles that might be threatened by legislation over the long term? I'm thinking smaller short-haul delivery trucks and the like. I know the vast majority is not that, but if you can help us in any way understand what proportion it is, that would be great. A bit of a left field one, John. The divisional presentations going back some years used to quite frequently include a slide on the opportunity for emissions control systems in things like the shipping market. With the IMO 2020 regulation coming in, I wonder if that
opportunity is reviving at all, or whether you don't see that as particularly material. Thank you.
I think on the heavy-duty market, as you say, we're more heavily weighted on the larger trucks. I think of our heavy-duty sales in North America, I think we're around 75% of our U.S. sales are heavy duty. We're heavily weighted there. I think in Europe, we're also more heavily weighted into the larger truck sizes. We don't see a large impact to if, as you're saying, electrification or fleets would be impacted by some of the short-haul impacts to our business. On marine, interestingly, the marine business is in what we call our stationary emission control business. I do know that ships do move. Actually, that, as you see in our sales, we do participate in that marketplace. Those sales in that business are a couple of percent of the total sales.
While we can see some opportunities in the marine space, we don't see that as being material to the whole sector. We do participate.
From that, I can infer that you haven't received any sort of meaningful step-up in inquiries from customers worried about this legislation coming in.
No, I think there is definitely interface with customers on this. In the big scheme of things.
Right
it's still going to be a relatively small part of our business.
Yeah. Sounds good. Okay. Thank you.
Thank you. Our next question comes from Chetan Udeshi of J.P. Morgan. Your line is open. Please go ahead.
Yeah. Hi. Thanks. Just a follow-up question on how do you see the adoption of mild hybrid to 48-volt hybrid in Europe? That's what my colleague who covers autos here thinks that is a way that OEMs might look to meet the CO2 targets. How does the content change for mild hybrid versus, say, Euro 6d, Euro 6c, and future standards? Thank you.
We definitely see a large adoption of 48 volt coming into Europe. As far as hybrids go on plug-in hybrids and on mild hybrids, we do see some additional content. We see that as relatively modest content because there's different criteria that you need for a catalyst that has to depend on what the status of the battery is in terms of the battery charge. We do see more being required from catalyst on some of those hybrid vehicles. We don't see that as that significant over standard gasoline vehicles. I think one of our competitors has a little bit more aggressive stance on that. We do see directionally more content, but not quite to the level that they were talking about.
Understood. Thank you.
We can now move on to our next question. It comes from Sebastian Bray at Berenberg Bank. Please go ahead.
Thank you for taking my follow-ups. I would have two, please. My first is more of a cross-selling opportunity. How much are your marketing guys in autocatalysts in touch with the guys developing batteries in new markets? Do you find yourselves attempting to cross-sell pool resources to be able to push for technology and battery tech or somehow be able to take advantage of existing marketing contacts? My second one is on the breakdown of variable costs. I think it's been mentioned in the past that about 80% of the cost in autocatalysts are variable. Are there any particularly large items in this that we should be aware of when modeling? Thank you.
On the battery question, I think on the commercial side, we are becoming more active in helping to cross-sell and in supporting the battery materials business with expanding their base to more and more OEMs on the battery materials side. That is going very well, and we're having some pretty positive meetings there. I think, yes, we are absolutely participating in there. I guess on the variable cost side, I guess we'd say that we're probably closer to 75% variable cost. I'm not sure that I have any detail that I can give you to help with your models.
Thank you.
Thank you. As we have no further questions, I will now hand the call back to the speakers for any additional or concluding remarks. Thank you.
Okay.
Right. It's Martin Dunwoodie here again. Thank you very much, everyone, for joining the call today. We'll wrap up here. Thank you to John for joining us and providing answers to the questions. If you have any other questions following this, please come back to any of us in the IR team, and we will speak to you soon. Thank you.
That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.