Status Update

Jul 13, 2018

Slides

And welcome to the Johnson Mathew Sector Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Martin Dunwoody, Director of Investor Relations. And Mathew, 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 getting 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. And with that, I will hand over to John. Thank you, Martin. Good afternoon. So I'm John Walker, Chief Executive for our Clean percent 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 helped 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. So in the slide deck, I'll point you to slide 2, which is our cautionary statement, that this presentation contains forward looking statements. I'm just have you read that and then move on to Slide 3. So our business saw strong growth in 2017, 2018. Our light duty to heavy duty split is around 65% to 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 was 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 In Europe, since the emission scandal in 2015, consumers want the cars they buy to have the lowest emissions. And consumer behavior surrounding car purchases is changing because of this. This means that our customers, the auto OEMs and finding it harder to forecast how well individual platforms will perform on a month by month basis. The world harmonized light vehicle testing 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 wind 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 60 final requirements. This is another opportunity for us to win business. Despite these market changes, the fact that many OEMs are starting Euro7 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. So there is no change to the guidance we gave at our Capital Markets Day last year. And we currently assume diesel will be 20 percent of new passenger car sales in Western Europe by 2025. And 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 £4,000,000, pounds represents only 1% of Clean Air's operating profit. Conversely, in the United States, we continue to see increasing penetration of diesel in the light duty market which supports our growth and 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. So now looking now at the longer term, on Slide 4, 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 title 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. 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 to share as the adoption of Euro 6 C 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. Titening 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, Euro6D 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. And of course, this is just Euro 6. If Euro 7 is introduced, that could drive further value from Both China and India are jumping to European type standards from 2020. China introduces China 6A 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. And 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 In India, the move from BS VI from April 2020 will also give us a great opportunity. The value uplifts 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 our Cleanera business will continue to benefit from the growing number of vehicles overall across light and heavy duty. So we continue to expect consistent growth in light duty Americas and heavy duty Europe in 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. And a hybrid is neutral to slightly positive in terms of value for us. So all of this delivers mid single digit compound annual growth rate over the next ten 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're doing to improve efficiency. I'll now move on to Slide 5. So 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 Our technology leadership in diesel enabled us to develop solutions for OEMs to meet post 2023 standards now more than 5 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 particularly important as the number of products per vehicles increases. Working rapidly to provide new solutions tailored to different OEMs and our flexible manufacturing base and enabled us to win share in diesel. In gasoline, we've been increasing our R and 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 6 C. 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 particular 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. So that explains how we 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. Now moving on to Slide 6. 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 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 the improved 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 facilities according to demand. Running our most efficient lines 24 hours a day, 7 days a week, decreasing downtime on our lines. So for example, we've reduced the time to change one line over from one product to another. And we're also debottlenecking 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 lifecycle process is ordered by a coordinated sector level quality management team now, 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. So they will use the latest equipment to be fully helping us to optimize the return from 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 strong track record of continuously improving efficiency and driving strong top line growth at the same time, which we will continue to do. And then 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, and then 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. So 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. So now happy to take any questions that you have. Know about that. We can now take our first question. This comes from Neil Taylor 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, 90% or a fitment of that rate 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. And then the second part of the question second question is your long term growth assumptions, the mid single digit. Can you clarify whether or not the share gains that you perceive as potentially an 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 inject by 2025. And we expect a 90% fitment rate, on those direct injection gasoline engines by 2025. And that 80% includes the combustion units within the hybrid portion of the market as well. Yes. Yes. Okay. Thank you. Okay. And then for your growth, mid single digit growth, are those additional share gains in, China included in that? And 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. Our next question comes from Andrew Stott of UBS. Your line is open. Please go ahead. Thanks a lot. Thanks for the presentation. John, good afternoon, Martin as well. I've got a couple. So first thing is, I just want to check the truck leverage you have in China. You mentioned the threefold uplift. And I think you said from earliest mid-twenty 19. So I just wanted to just check that first of all that comment. And then secondly, the threefold increase, is that your economic profit or is that a revenue number that includes some sub I just want to make sure I'm right on the modeling there. And then the second one was a sort of shorter term question around WLTP. You raised that, John, as a sort of issue maybe around volatility, if nothing else. But, are there any other concerns you have? I mean, one thing we're picking up is this concept of overproduction in Q2 and Q3 ahead of WLTP. Okay. So you've 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 6 months later. But what they've also said is that they're allowing cities 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. So we don't expect to see much change in our guidance from what we said before in our China heavy duty sales. And then the point on I didn't quite get your economic profit. 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 JM. I just wondered if that's the case or not. Is it twofold? Oh, okay. On your three times compared to, okay. And that question, you have that three times uplift does include substrate. Okay. So I shouldn't assume a 3x increase in your EBIT in effect per vehicle? No, it'll be less than that. Any rough points from it? No, we haven't discussed any of the. Okay. The margins in any detail on that. And then in your WLTP comment, the WLTP WLTP is effectively impacting gasoline vehicles more than diesel vehicles. Part of that's just due to the fact that there's a lot more gasoline platforms that are being certified. And secondly, when you have the, particulate issues on the real world driving part of the WLTP, some people are there's 2 parts to that. Some people are struggling to get their systems to pass on the new test. And 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. So they want to try and keep those 2 functions separate and they're trying to maintain that configuration. So I think a lot of this stuff will eventually get across the line. There may be some delays in gasoline sales. But if you look at our plans for this year, most of our growth And this financial year they're in right now is all diesel. So we do not expect much of this WLTP impact to affect us. Thank you. We can now move along to our next question. It comes from Ronald 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 fairly constant margin, going forward. I was wondering what gives you the confidence you can do this given the higher costs, the cost pressures that OEMs are facing, with electrification and various other things. And then just a 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 with that up? Thank you. Okay. So 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. And 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 reductions, 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. So all of those things are on the positive side of the kind of margin ledger. And on the negative side, We continue to expect to see pressure and we're in a very competitive business and we continue to expect to see pressure from our customers on productivity demands And as we go out there, what we're also seeing is the increase of a lot of filters in our product mix. And those filters have a large substrate content. So you have positive is offset by negatives. And that's why the balance of that is why we're forecasting neutral margins. Over time. And then 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 substrate. So I think it's very clear that that doesn't just flow through the profit because there's a there's the portion of substrate has a doesn't have a profit element to it. Yes, okay. And that's all offset by the continuous improvement? And that's offset by the continuous improvement, right. Great. Thank you. And procurement savings as well. 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 for taking my questions. I would have 3 please. The first is on the maintenance CapEx of East Vasil So could you give us an idea as a proportion of sales if these facilities 1 day do go ex growth? Obviously, that will be over a decade away. What is the proportion of sales you'd have to spend on these facilities for maintenance early? That's my first one, please. My second one is one on the value plift for the Chinese vehicles once you have China 6 legislation. Am I right in saying, would I be right in saying that in the 3 percent or pardon me, the tripling of the value content, you would have, let's say, vehicles going from 0 platinum group metal content to something like 3 to 6 grams. So just an idea so we can back out the actual value uplift for JMAT. And the third one is on the actual timing of Euro see in Euro 60. Apologies I may have missed this earlier, but in what years exactly does Johnson Matty expect the primary uplift from the Euro 6C legislation and Euro 6CD legislation to occur? Okay. So starting with maintenance CapEx, I mean maintenance CapEx, we've never really talked about that, but it's a in terms of percentages as a percentage of sales, it's a relatively low number going forward. So 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 Matthew 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, couple of months ago. So I think you can find those figures in the precious metal marketing information. And then finally on timings for 6 C and 6 D, for 6 C, what we're seeing, we're seeing a little bit of, complication in the roll up rate of 6 C that has some implications with WLTP. So 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. So in the past, you were sort of able to certify multiple, like a whole platform with 1 certification. And now that these late wait limits and the new regulations, are out there. You basically have to certify every single application individually. So because of that, the just the architecture of the exhaust systems, you have car companies trying to hold on to the architecture that they designed. But if they can't get it across the line, they're going to have to change the architecture and some of the people who have uncoated filters may have to add coated filters. So because of that, I think the roll up of the gasoline particulate filters for Euro 6 C is going to be ramping up. We had some sales last year, we're ramping up this year, and then that will continue over the next 3 years. So we'll have a continuation of increased gasoline, particularly at filter sales, over the next 3 years. And then for Euro 6 D, I think this is another bit of a complicated story because some OEMs when they had the 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 and actually some of those already met Euro6D ahead of time. And 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 60 final systems will start to come in. That's helpful. Thank you. And you couldn't give me a figure for as a rough guess for how much of 6 D has already been, implemented by the OEMs? It's a difficult difficult to put a number on it. Right. That is good. Thank you very much. Thank you. We can now move along to our question. It comes from Charley Greg at Citi. Your line is open. Please go ahead. Hi, Martin, John, thanks for presentation. Just one question, on the U. S. Heavy duty cycle. I was just wondering if you had any thoughts on when you when that when you guys were modeling that turning, turning the other way? And if perhaps the dislike 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. So 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. And then we expect to see slowing in the 2019 calendar year. But is 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. So it's a little hard to looking backwards to kind of predict what we think is going to happen in this particular cycle. But, 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. But eventually, the cycle will work. You eventually 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, no. So 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. It comes from Chetan Udeshi of JP Morgan. Your line is open. Please go ahead. Yes. Hi, Chetan from JPMorgan. First question was just on your comments around rising catalyst values with, with, you know, standards getting tougher on emissions. How are, how do you think OEMs are coping with that? In terms of, you know, both for traditional ICE cars, their costs compliance costs seems to be rising with EVs. They have to spend a lot of more money. So What are they doing to offset these pressures on costs in your view? What are the OEMs? I mean, the OEMs are putting pressure on the supply base to reduce prices, but I think the 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. So 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 the resource to alter the power trains. The pressure on costs will continue, but 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. And 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. And that's what we've done in the past, and that's what we'll continue to try and do. Understood. And then 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, was flat. I'm just trying to understand why was it flat when the diesel share came down so much. Is this just a timing issue? Do you think? You know, OEMs who are sort of building inventory ahead of this WLTP rollout or were there some other factors? Thank you. So on our results in 2017, 2018, it's just the flat part of that curve was just before the ramp up rates of some of the share gains that we build into this financial year. So we're seeing those diesel sales come through now. And I think when we report our next results, you'll see results that are line in line with the guidance that we gave at the results presentation. My question was more around the diesel production overall in the market. So the car production, not your volumes necessarily. But so I think the point that made during the results was that you think overall diesel car production in Europe in your last fiscal year was flat despite the declining share. So, just wanted to check what are the reasons for that that we did not see a decline in European diesel production. Is it more like some of the productions for exports, which is actually manufactured in Europe, but sold for cars outside Europe, would 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. So when you look at just pure passenger car diesel sales, those are the figures that are published where you're seeing a a pretty a big drop in some of those diesel figures. But when you add back the light commercial vehicles, we don't see anywhere near the drop. And 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 or less high value models. And that had a big impact on the big growth of gasoline sales that we talked about at the results presentation. Understood. And if I can maybe ask one more on the 4,000,000 gross profit sensitivity, to 1% change in diesel share. Is that just based on the value of the catalyst or is inherently diesel in gross margin also higher than say gasoline? Yes. So gross margin on diesel gasoline are about the same. So it's all based on sales. 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. And just firstly, coming back to HDD in China, can you discuss the ramp up that you're expecting from China 6. So when do you think we can get to sort of 100% fitment rate for that new legislation? And then secondly, on India light duty, can you explain a bit more why you don't see many filters being added to gasoline cars? And then finally, I mean, if you have an answer, but 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 Yes. And just repeat your question again. So on the ramp up of the legislation, so 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? Yes. I think the cycle would be similar to Europe So you're kind of 2 to 2.5 years to be able to get the full footprint. And we expect something similar to happen in China. And just remember that the China legislation is split, similarly, but differently to the European legislation. Where you have 6A and 6 B. So two and a half 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 20 22.5 and then the next round of legislation on real world driving comes in in 2023. And again, there'll be another cycle that'll probably be shorter cycle probably a year and a half for the 6 B to complete. So that's probably the way that that's going to phase in. In India, I I think on on filters, the legislation in India is a little bit different and less stringent on particular number. Than the China legislation is. And that's why there's less of a need to be able to meet legislation to be able to put filters on gas link cars in India. And then 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. And 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 other countries. That wouldn't be a 100% mitigation, but that would that would be some help to be able to offset that And as far as other trade wars go, most of our facilities are local to the actual supply of the catalyst. So we don't have that much of our production base that actually exports catalyst around the world. So our customers may be impacted on exporting vehicles from the U. S. To China, for example, But for the things that are in our control, we have some mitigation impacts. And as I said, I think that, because we locally manufacture a large majority of our catalysts were less impacted by manufacturing catalysts in one country and exporting them to another. 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. Yes, thanks very much. John, just on these efficiencies that you referred to again and 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 or how sustainable are these efficiencies in the long term? If you've only essentially recently discovered them. What's the change in the mentality of psychology being within the division, clean air, I guess it used to be called e such that you can now extract these, quite meaningful new efficiencies. So it's an evolution. It's something that we've been working on for quite some time. Some of our 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. And we've been over the last quite a number of years now working towards a system of moving towards, organization, we've been globalizing our manufacturing footprint and we've been optimizing the key manufacturing plants that matter. And have really taken some of our more flexible assets and really leverage them to be able to get some of that operating leverage out of them. Now you also will have heard some thing about some of the systems that are being put in. So 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 over it over the top to make sure that we maintain some of these benefits that we're building from our continuous improvement activities. And then have a system to be able to more easily manage those gains. So 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 and a lot of other areas as well. Thank you. From Neil Tyler of Redburn. Your line is open. Please go ahead. Yes, hello again. A couple more from me. Just clarifying 2 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 electrification over the long term. So sort of I'm thinking smaller short haul delivery trucks and the like. I know it's that the vast majority is not that, but if you can help us in any way understand what proportion is, that would be great. And then a bit of a less field 1, 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. And with the IMO 2020 regulation coming in, I wonder if that opportunity is is reviving at all or whether you don't see that as particularly material? So I think on the heavy duty market, I think in our as you say, we're more heavily weighted the larger trucks. And I think of our heavy duty sales in North America, I think we're around 75% of our U. S. Sales are heavy duty. So we're heavily weighted there. And I think, in Europe, We're also more heavily weighted into the larger truck sizes. So 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 Michigan Control business, So I do know that ships do move, but actually that, as you see in ourselves, We do participate in that marketplace. And those sales in that business are a couple of percent of the total sales So while we can see some opportunities in the marine space, we don't see that as being material to the whole to the whole sector. So from that, I can infer that you haven't received sort of 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 that. But, in the big scheme of things, it's still going to be a relatively small part of our business. Thank you. Our next question comes from a Chaitan Udeshi of JP 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 because that's what my colleague who covers auto sales things. That is a way that OEMs might look to meet the CO2 targets and how does the content change for mild hybrid versus say 60, 60 and future standards? Thank you. So we definitely see a large adoption of 48 volt coming into, into Europe. And as far as hybrids go, on plug in hybrids and on mild hybrids, Yes, we do see some additional content. We see that as relatively modest content because the catalyst kind of has to 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. So, so we do see more being required from catalyst on some of those hybrid vehicles, but 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, but 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 as Berenberg Bank. Please go ahead. Thank you for taking my follow ups. I would have 2 please. My first is, more of a cross selling opportunity. How much are your marketing guys and auto catalysts in touch with the guys developing batteries in new markets? Do you find yourselves attempting to cross sell wood pool resources to be able to push for technology in battery tech or somehow be able to take advantage of existing marketing contacts? And my second one is on the down of variable costs. I think it's been mentioned in the past. At about 80% of the cost of the catalysts are variable. Are there any particularly large items in this that we should be aware of when modeling? 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. So that is going very well and we're having some pretty positive meetings there. So I think yes, we are absolutely participating in there. And I guess on the variable cost side, I guess we'd say that we're probably closer to 75% variable cost. But 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. It's Martin Dunn with you 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, then please come back to any of us in the IR team. And we will speak to your soon. Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.