Good day, welcome to the Johnson Matthey Efficient Natural Resources 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. Good afternoon, everyone. I'm Martin Dunwoodie, the Director of Investor Relations here at Johnson Matthey. I'd like to welcome you to our call today. This is the second 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 today to be able to welcome Jane Toogood, Chief Executive for our Efficient Natural Resources sector, which will be the subject of the call. With that, I'll hand over to Jane.
Thank you, Martin. Good afternoon. Thanks for joining the call today. I'm excited to talk to you today about our Efficient Natural Resources sector. I'll give a brief introduction. Then provide an overview of our activities before talking through our strategy that will deliver outperformance in targeted growth segments. Hopefully, you can see all the slides on the webcast. You can navigate through these yourselves as I talk. At the end, I'll open to Q&A. If you'd like to move to slide two. From here, you can see the cautionary statement. Now moving through to slide three. For those of you I haven't met or spoken to before, I just wanted to take a moment to introduce myself and give you my background. I joined JM in February 2016.
I've had about 30 years of experience in the chemicals industry, working my way across lots of different roles and running businesses in a broad variety of sectors, ranging from automotive paints, fine chemicals, pharmaceutical excipients, and polymers. I've covered many different value chains, from specialty to more bulk materials. Many of my roles have been based outside the U.K., including eight years at Borealis, based in Austria, before I joined Johnson Matthey. I'm also currently a non-executive director at Victrex. As a former chemist who's passionate about the impact science can have, I chose to move to JM because it's a company where science and technology are at the core of the business, giving competitive advantage and leadership and making a significant impact in B2B markets and ultimately, of course, for consumers. Furthermore, JM has a great reputation with customers.
I joined JM as the Divisional Director of the Precious Metal Products Division and additionally took over the Process Technologies business from April last year when we created our Efficient Natural Resources sector. If you move to slide four. Here you can see that the sector accounts for around a quarter of the group sales. It also accounts for around a third of the group's operating profit. This sector helps customers make more efficient use of scarce natural resources across a range of industries. We're helping customers solve complex problems as they transform critical resources ranging from oil, gas, to biomass, and of course, platinum group metals. The move to a combined sector has allowed us to view the market at a wider sector level and given us a greater understanding of where our core competencies may open up new potential areas of sustainable growth for the business.
It's also enabled us to run our business more effectively. Importantly, whilst we see exciting opportunities for growth in Efficient Natural Resources, our technical expertise and competencies support growth across the rest of the group. This is not just in sourcing metal, but for example, because of our knowledge of materials and chemistry, we provide a starting point for many new technologies with that expertise transferred across the group. Our skills in project engineering also enable us to support scaleup of various processes, be it in clean air, health, or new markets. If you move to slide five, this shows the breakdown of our business. We currently operate in three subsectors: Catalyst Technologies, which comprises chemicals and oil and gas, Advanced Glass Technologies, and PGM Services. Our Catalyst Technologies business makes up 63% of sector sales and addresses both the chemicals and oil and gas markets.
40% of the sector sales come from serving chemicals markets. We sell our catalysts and license our technology to help customers process natural resources. For example, we sell both process licensing and catalysts to make methanol from coal, gas, or biofeedstocks. Methanol is a key chemical feedstock made from coal or gas, and we license both the technology and sell the catalyst to turn it into formaldehyde. 70% of formaldehyde is used to make resins, which are used in the wood industry to make adhesives for chipboard and plywood. When we license technology, we work with customers to design a specific plant for them, integrated into their facilities, and also provide services to help them start the plant up once built. We get paid for our engineering work as it's done.
With licenses, we're typically paid in stages as we begin our work and then finally when the plant starts up. When we sell catalysts, we work closely with our customers in choosing the right product and in optimizing its use in service. This can be the first fill of catalysts in a new plant or refill catalysts for existing plants, which typically occur every 3-5 years. 23% of sector sales come from the oil and gas market. Here, our two main activities are firstly, the supply of catalysts for the production of hydrogen, which is primarily used by our customers for the desulfurization of other process streams. Secondly, we supply additives that improve the yield and reduce emissions from the FCC unit in a refinery, which is used in processing crude oil into downstream products.
For example, our range of INTERCAT FCC additives and additional systems are used in more refineries globally than any other FCC additive products. Our additives also reduce SOx, NOx, and CO emissions from the FCC unit, making the refining process cleaner. Across Catalyst Technologies, we provide a range of products and services. As a result, different parts of our business move at different paces. Refill catalysts and additives are linked to ongoing plant activity. However, licensing and first-fill catalysts are linked to new plant builds. In the medium term, we see little by way of new builds in the major areas that we serve, such as oxo alcohol and butanediol. Consequently, licensing income is at the trough with a limited contribution currently. Whilst we don't assume it's coming back near term, we're well positioned for recovery in this market.
Our Advanced Glass Technologies business makes up 10% of sector sales and makes advanced glass materials and conductive inks mainly for automotive use. For example, we supply the black obscuration enamel that's used in the edge of car windscreens. This is an attractive business with a leadership position and shared underlying technology across the group, such as material characterization, testing, design, and some engineering. Our PGM Services business makes up 27% of sector sales. This business is core to JM and exists primarily to support the PGM requirements of other JM businesses. We manage platinum group metals through their life cycle of refining, purification, product manufacture, and recycling, and are the largest secondary refiner of these metals globally. Now can we move on to slide six? Here you can see we have strong market positions. We operate in markets which are highly fragmented, where success requires technology excellence.
Our leadership is based on our expertise in materials characterization, PGM chemistry, material design, and surface chemistry. We hold number one or number two positions in the vast majority of our markets, accounting for over 90% of sector sales. We have number one positions in many, including methanol, hydrogen, gas processing, FCC additives, PGM Services, and Advanced Glass Technologies. Moving on to slide seven. Our strategy to deliver consistent market outperformance. There are four elements to our long-term strategy, as shown on this slide, and I'm going to take you through each of these in turn. Let's move to slide eight. Maximizing growth through deep understanding by segment and region. Here we have the first pillar of the strategy. There's a range of different growth rates for the markets we serve.
The chart on slide eight shows the split of sector sales by these different market growth rates over 10 years. Over the medium term, we expect the average medium-term growth rate in JM's market segments to grow between 2%-3% in Catalyst Technologies and Advanced Glass Technologies, and low single-digit growth in PGM. We're selectively targeting our investments towards higher growth sub-sectors to enable us to grow our top line 1% faster than the average across our markets. For example, there's a shift in some geographies towards clean advantaged feedstock, such as natural gas, where we have a niche but relatively fast-growing position. We'll invest to reinforce this position and to add to our offer so we can leverage our growth in this attractive segment. A further example would be growth in methanol in China, and we're ensuring that we're well-positioned to benefit from this in time.
On to slide nine now. Focused investment in R&D to maintain and extend technology leadership. Technology and chemistry is core to our success, and continued investment in R&D is key to our future growth. We've analyzed our strategy by market segment, which included a review of our product pipeline. This review led to us stopping over 30 projects where the products were not aligned with our strategic growth. We've transferred these additional resources onto projects developing step change opportunities that align with our growth strategy. For example, we're putting more resource into zeolites, a technology platform that underpins not only our sector but also other areas in JM, such as Clean Air. We were also able to help support the development of JM's battery materials with our expertise in nickel chemistry.
Of course, our R&D spend is subject to our capital allocation strategy and returns-driven criteria that JM has across the group. We're in a great position with our leading technology. We've many areas to explore here. Moving on to slide 10. Deliver additional value by focus on efficiency. Whilst we're excited about the medium-term growth opportunities, we've also got a great opportunity to drive efficiency across the sector. We've identified a range of initiatives which can be characterized into three areas, as shown on this slide. Operational improvements, complexity reduction, and organizational efficiencies. Operational improvements first. We continue to invest in improving our manufacturing and supply chain operations. We've detailed cost-saving programs in execution, which are already yielding results. For example, in procurement, a single change of a specified quality in a required material used in catalyst R&D has led to sizable savings.
We have programs of work looking at the performance of the PGM refineries. These address not only efficiency, but also the tightening regulatory landscape consistent with JM's commitment as a responsible supplier. This is important in running a global refining network with refineries in the U.S., U.K., and China. Secondly, complexity reduction. A detailed analysis of our product and customer portfolio is now complete. Based on this, we've produced a detailed roadmap to deliver a materially simplified product portfolio over the next 24 months that we believe will meet our key customer needs better than today, helping drive growth as well as improving efficiency. For example, in Catalyst Technologies, we've identified opportunities to reduce the numbers of small, slow turn products. This, of course, also allows us to review stock levels and destock across areas, helping us reduce non-precious metal working capital. Another example is in gas reforming.
New technology in catalyst manufacture has allowed us to meet customer needs that previously required 16 products with a portfolio of only four. Next, moving to organizational efficiencies. We've reduced headcount by looking at spans and layers in the organization, and this is part of the cost savings we're already delivering this year. This has also enabled faster decision-making through a simpler and flatter organization, which has also increased our focus on our customers and R&D. Of course, as we set out before, we expect cost savings around GBP 5 million in the second half of this year related to our restructuring program, which will give an annualized benefit of GBP 12 million. Summing all of this up, our focus on efficiency across the sector will help us deliver margin expansion over the medium term, growing operating profit 1% ahead of sales growth each year.
If you move now on to slide 11, exploring long-term growth opportunities by extending our capabilities into adjacent markets, geographies, and technologies. The beauty of the creation of Efficient Natural Resources is it opens up these wider opportunities for growth by looking at the nature and the value of what we're bringing to customers and markets. Our core competencies should enable us to expand our activities into adjacent markets, geographies, and technologies. We win now because of our understanding of where the depths of our core science and technology in those areas, such as materials characterization and design, PGM chemistry, metallurgy, and industrial engineering, gives us a differentiated capability. Our ability to translate that capability into value for our customers and attractive market segment leadership positions for ourselves. These are the reasons why I'm confident we'll be successful in the future.
We have a list of opportunity areas that we're systematically working through and matching our fit to. Some of these are shown here on slide 11, which I presented at the Capital Markets Day last year. This process, of course, will take us some time. Having a good candidate list of opportunities, however, gives me confidence in the longer-term growth trajectory. Moving to slide 12. To summarize then on what this means for you, what we'll deliver. Over the medium term, our strategy will deliver outperformance to our markets, specifically sales increasing 1% above growth in the markets in which we operate, with the exception of PGMS, which we will grow at low single digits over the medium term. In addition to this, we'll grow operating profit one percentage point ahead of sales growth, driven by our focus on efficiency, as I set out earlier.
We would expect to start delivering this medium-term outlook from the next financial year. Longer term, there are some very exciting opportunities for us to capture, and I look forward to discussing this in the future with you all. To wrap up, thank you for listening today, and I'm now happy to take any questions.
Thank you. Ladies and gentlemen, if you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal. We'll take our first question from Mr. Adam Collins from Liberum. Please go ahead, sir.
Hello, Jane. Thank you for the presentation. I had a couple of questions, please. At the 2015 Investor Day, JM talked about the commercialization of new technologies in Process Tech, They mentioned VCM and MEG technologies. I just wonder if you could give us an update of what became of those. Also, you've been talking recently on the PGM Services side, PGM recycling, about a new plant in China in due course for the processing of spent auto catalysts. I wondered if you could update us on that.
Okay, Adam. Let me start a little bit with the plant in China. That new plant in China has now started up, we've been commissioning that, of course, over time. The volumes of material that are being processed in that refinery, it's in a place called Zhangjiagang, have been increasing as that phase start-up's completed. If you look at the market itself, the sort of secondary PGM recycling market in China is really very early stages. I would describe it as a nascent market. It'll be some time before that refinery is planned to make a significant contribution to earnings. Of course, it's a very important part of supporting the whole JM Group with metal supply in China. I'm just coming back to your second question there, just wanting to talk about those technologies.
Both of those are in this is in commercialization now, These new technologies take time, of course, first in customer wins take time. I think that's probably all I want to say about that now, if that's okay. Quite commercially sensitive information, as you would understand.
Okay. Thank you very much. Just on the first one, on the China recycling plant. Is it processing jewelry scrap at this stage, or is its principal target end-of-life auto catalyst and primary?
This is targeted really as an industrial refinery. Okay?
Right. Yeah.
More than that, probably wouldn't comment, but it's really targeted as an industrial refinery.
Right. That includes chemical catalysts.
Anything that's really industrial, but I don't think we're thinking of that in the industrial space really, in total. Anything that would be industrial.
Right. Okay. Thank you.
If you find that your question has been answered, you may remove yourself from the queue by pressing star 2. We'll now take our next question from Alexandra Thrum from Morgan Stanley. Please go ahead.
Hi, Jane, and hi, Martin. Thanks for taking my questions. Just the first one is on the Catalyst Technologies. Are there any Catalyst Technologies that you are not present in that you'd like to grow in, either organically or inorganically? The second question is, a number of energy companies have pointed to increasing CapEx in the chemicals and refining space. Have you seen any evidence of this, and do you expect JMAT to benefit from this?
Okay. Good question. Thanks, Ally. Growth, or are there areas where we are not where we might want to grow? Well, we aren't operating in every sub-segment across the whole of the Catalyst Technologies space. Maybe there are some areas where we'd like to grow more, and of course, one can do that through many ways. I think, we have very good positions in the segments that we're in. I'm going to lead on to your next question there. When people have talked about CapEx, we have great positions, but in some of those segments at the moment, if you look at CapEx spend, some of those are currently oversupplied. We don't expect the CapEx spend in those particular sub-segments.
I think, don't know if that answers both of those questions at once, but we don't expect huge CapEx in some of those segments where strong like oxo alcohol, butanediol, for example. If you look at across that whole Catalyst Technologies space, I think we're very pleased with the leadership positions we've got. As I said, we're looking generally at growth opportunities where we can build adjacent technologies and build on our competencies. We'll be looking at any opportunity that does that.
Thanks. Just one more question, if I can. Has the refill cycle normalized in China? If not, should we expect a pickup in refill activity this year or next?
I think if you look at the Chinese markets, again, if you look at specific, some of the specific sub-segments are quite oversupplied at the moment. You might expect there, when a market's very oversupplied, there's a lot of capacity there's not so much pressure on the catalyst performance. As the demand picks up, then there's more pressure on the catalyst performance, and they tend to refill slightly more frequent rate. Now, if I look at what we're saying about what's going on with the markets, we're not yet expecting a substantially bigger trend of growth at the moment in refill catalysts. They did grow quite well in the first half overall, but I don't think there's anything fundamental in terms of particular uptick in the market.
Thanks, Jane.
Our next question comes from Neil Tyler from Redburn. Please go ahead.
Yeah. Hi, Jane. Quick one from me. Firstly, on the operating leverage you expect in the business. I understand that the falling away of the license income made a big difference, but when we look back, particularly on what was Process Technologies, as sales declined sort of mid to high single digit, the operating profit fell more like 30% on a constant currency basis. Given your outlook to grow operating profit of 1% faster than sales, I just wondered if you could expand on why there isn't more operating leverage in the business on the way back up. More specifically, within Catalyst Technologies, it's my understanding that there's sort of potentially major regulation on the horizon in the fuel oil industry and removing sulfur from fuel oil, IMO 2020.
I wonder if you're able to scope or scale that as an opportunity for the Catalyst Technologies business, be it either directly via sale of catalysts or into FCCs or indirectly into the hydrogen industry. If you can talk a little bit around that and what, if anything, is included in your medium-term growth projections around that regulation. Thank you.
Okay, Neil. Just in terms of what we've talked about and the strategy going forward. First thing to say, of course, the licensing business is flat in the trough at the moment, as I said before. What we've got here is a set of very structured, robust plans that will improve our efficiency over the next couple of years, will lead to that operating profit increase. I think it's important to know that those are structured, planned, and will be brought through in a non-disruptive way to our customers. Our aim is to keep serving our customers in the best possible way as we do today. Your comment on the regulation changes. I won't say specifically about any specific regulation change and what it might do to our business.
What I can say is, in the Catalyst Technologies area, what we're really good at is using our competence, actually, to design catalysts that solve problems. Environmental regulations or regulatory changes are things where we often have solutions that can help customers by pulling on different bits of expertise. I'm not going to comment on this particular piece of regulation, generally speaking, I think it would be fair to say that environmental regulation is something that, actually, one should welcome anyway for the world in general. It's actually a good thing for a business like ours, which relies on science and expertise to solve problems. Where there are problems that might be being posed for customers who have to meet those, then we can often help. I hope that's answered your question. Is that clear enough?
Yeah. It helps, obviously. Perhaps I can ask, in terms of the catalysts that you actually sell that help, you refer on your website to the ability to help with desulfurization. Is that referring specifically to the sales of catalysts into the hydrogen industry, or is that talking about the SOx reduction that you mentioned in your introductory comments, i.e., do you sell catalysts that remove sulfur actually within the FCC?
Oh, yes. We can help with sulfur removal in various different processes in both of those. Yes.
Okay. That's helpful. Thank you.
Our next question comes from Andrew Stott from UBS. Please go ahead, sir.
Yeah, good afternoon, Jane and Martin. Thanks for the presentation. There's a couple of things I wanted to come back to. Slide 11, I think it was a slide you also put up in September. It's the comment around new natural resource landscape and specifically the tagline "exploring new market spaces." Can you just sort of dive into that in a bit more detail? I'm trying to understand whether that means organic or M&A or perhaps either. Any flavor of perhaps things you're looking at, you may or may not want to reveal. The second question was sort of more looking at the current trading environment. I just wonder if you'd shed any light on why platinum has done so well, considering what diesel data looks like. Thank you.
Okay. Thanks, Andrew. I think I'm not going to surprise you actually by not giving you too much detail on the bits and places where we're looking. I think we've got lots of opportunities of places we can look at in that natural resource landscape to take our various competencies to other places. For example, at the Capital Markets Day, we gave one of the examples, which was looking at waste to liquids, effectively. A particular piece of technology where we recently won a prize, actually, the Institution of Chemical Engineers. We worked jointly with BP on this, and it's a technology taking away some of the waste to liquid. It's a brilliant piece of technology. This is one way of using a new, now you could say, is that a natural resource?
I would argue that that's a resource that could be extremely useful for the world if it were used properly. That's an example of something that we have been looking at, which is in the public domain. There is quite a long list of things where we could apply our technology to do more, I don't really feel able to talk about those at the moment, which I'm sure you'll understand. It's also true to say that whilst we've got lots of things we can do in terms of the existing business and areas to look for growth there, of course, we will continue to assess M&A opportunities, and we consider those against the usual capital allocation and returns criteria. Those sorts of M&A would probably be bolt-on type of things.
I hope that's enough color for that without being able to say too much detail because of commercial sensitivity.
No, that's useful. Thanks.
You come to platinum trends. I'm just wondering what trends specifically you're wanting.
I suppose the observation that pricing has held up very well, more than held up, it's done very well, and yet we've already seen a pretty much 800, 900 basis point drop in diesel market share. Just wondering what you were seeing on the ground on the platinum market.
Okay. Platinum prices remain pretty flat, actually. Palladium prices have increased a lot. I'm sure you'll know, we publish a piece of market research regularly. I think we last published in February. We do give some external information about what we see here in terms of trends. I think the thing about it is, platinum and palladium, they're used in the industrial context, and they're not a bulk material. Clearly, they're used in very small quantities in catalytic converters and in other processes. If you look at the sort of supply-demand story, there are some very fundamental supply-demand dynamics that are going on there that mean the prices are where they are. I think there's quite a good piece of information on that on the website in this February review, if you have a little look at that. Okay.
I think you can't take a gross look at this. They are very precious materials, in fact, and they need to be treated as such, and therefore it's a very different supply-demand picture for those materials to the overall diesel picture. There's been quite limited investment in new primary PGM production in the last few years, recycled PGMs will become increasingly important, I think, as a raw material source. I don't know about comments particularly on the past, but I think that's what the dynamics are. You can't translate that growth dynamic over to a material like platinum.
Okay. Thank you.
We'll take our next question from Chetan Udeshi from JPMorgan. Please go ahead.
Yeah, hi. Thanks for the presentation. A couple of questions. First one is, you mentioned that you don't see sort of an immediate recovery in some of your segments that you operate in. Would you say on a more broader sense there is some sort of recovery in the market? Because a few of your catalyst competitors or peers, like Clariant, W. R. Grace seem to be seeing some sort of inflection in demand from second half of last year. Is that something consistent with what you guys see in your order book or in terms of discussion with customers as well? Second, it could be useful to just remind us the whole dynamic around why the licensing income had a sort of a tail off over the last few years and where do we go from here?
Is the business model more to sell direct catalyst versus licensing, or that can change in the future? Thank you.
Thanks, Chetan Udeshi. Right. Let's start with the beginning of that, where you ask about uptick in the market and so on. You were talking about comparisons, talking about some other market peers. Actually, if you look at the markets, they're quite fragmented. If you go into the subsegments, it's quite fragmented, and we don't operate in the same subsegments as the people that you mentioned there. It's quite difficult to compare. Remember, some of our peers also don't have a licensing business. Obviously, we are maintaining our leadership positions in all the markets which we operate. We don't expect, at the moment, an uptick in the medium term in our licensing business. That's really because of the areas that we're operating in where there is a large overcapacity. That was being built over the previous few years.
Until that capacity is used up, we won't expect there to be new plants built. I think that really deals with that. Basically that's why we're saying, if you look at our overall demand projection, we're saying 2%-3% over the medium term. That's what's behind that. Yeah, it was particularly if you look at that overhang of capacity, again, it was particularly oxo alcohols, butanediol area. That overcapacity is actually historically high levels. If you look back over the past, it's historically high levels. It will take some time to work through that. Does that help?
Yes. On licensing, is the business model changing, or is this a reflection of, as you said, overcapacity in some of your segments, which is resulting in a lower licensing income? Are you proactively moving away from licensing as a business model, just structurally speaking, into the mid to long term?
Yeah, no, there's no change there. Actually, really, when you look at our total portfolio in the sector, licensing is really only a very small part of the portfolio. In terms of impact there, it's not massive, if you look at the overall sector performance. As I said, there's no change in the way we're going about the business in that sense. We continue to offer those same services, technology insights to our customers. Fundamentally, it's actually really a relatively small part of the portfolio.
Understood. Maybe a separate question around, if I remember correctly, you had almost GBP 150 million of working capital increase in your PGM business, I think in first half of the current fiscal year. None of your peers seem to have seen that level of increase. Can you just maybe, I don't know whether it was related primarily to PGM or was that increase associated with some of the auto cat side as well, but just in terms of understanding the reasoning behind that working capital and how competitively, in terms of competitive dynamics, how does it help you, if at all? Thank you.
Okay. Let me try and explain that. When you look at the precious metal inventory, it can vary significantly because it's a function really of the whole dynamics of the precious metal market, our customers' choices, and the demand from the JM businesses. Okay. We offer our customers a unique set of services. Included in that is sourcing metal, storing metal, as well as refining the metal. When metal prices are higher, and if the market gets tight with a lower liquidity, basically, we carry more inventory, and we have to carry more inventory so we can service our customers effectively and also the JM group effectively. As we are the world's largest refiner of PGM, so platinum group metals, this will affect us more acutely than some of the other players around. Hopefully that answers that question.
Thank you.
As a reminder, ladies and gentlemen, star 1 to ask a question. We'll take a question from Sebastian Bray from Berenberg. Please go ahead.
Good afternoon. Thank you for taking my questions. I would have three, please. The first is on the longer-term commercial terms and margins that can be made in platinum refineries. Have you seen any potential pressure on margins from, in particular, in more readily available areas, jewelry, scrap, and also end-of-life auto catalysts? How do you see this developing in the long term? The second question is if you could give perhaps a bit more granularity on what exactly the faster areas of growth are, and in particular, what areas are going to enable you to grow operating profit faster than sales. I think if I look at the structure of the catalyst sector as a whole, generally speaking, the W. R. Graces of those exposed to the refining sector tend to make the highest margins. Is this an area that you're looking to get into?
Maybe make refinery catalysts as well as additives. My third question is on the best lead indicators for potentially looking at the top-line development of this segment. When I think of this, I think methanol, then there's a bit of a gap. I was wondering if you could perhaps indicate any other key chemicals which we could follow to track top-line development. Thank you.
Okay. Right. Let's try and take those off one by one. I hope I've got them down properly. Longer-term commercial terms and margins in the refinery. I can talk a bit about where I see the demand for platinum palladium going in the future, which may give a little bit of a clue. I think palladium is going to continue as an area of strong demand and probably no end in sight to that deficit of supply compared to demand. Our market research is showing that. Again, I would refer you back to the website for that. Platinum, probably a little bit less buoyant, although still rising demand from the HDD sector, which should compensate for the fall in demand from LDD. That gives you maybe a little bit of backdrop and market context to what might go on there.
I can't give details, of course, on the specific margins that we take in our business because we don't publish those. You asked about areas that have faster growth than other areas. Of course, some of those areas are in early stage, so I don't want to share those thoughts. I could give you one example. I referred a little bit earlier to bringing different feedstock to chemical solutions to the market, and we've got some growth areas there. I think this example of waste to liquids is quite interesting, using a different feedstock, targeting different products. In that situation, we're looking at technology and the catalyst. In fact, we have developed with BP this technology and the catalyst. That would be a good example of that. FCC additives have been growing very well, that's quite clear.
I can't really say other higher growth targets that were areas that we're targeting because I think you understand that is quite commercially sensitive. In terms of best lead indicators to give to yourselves, I really can't think of anything I could give to you there. I may have to reflect a little bit further. You could look at what's going on, obviously, methanol would be one. You can look at what's going on in hydrogen, ammonia markets, formaldehyde markets, if you want to stand about JM. I don't know if that's giving you necessarily what you might want in terms of an overall chemicals piece, if that's what you're asking. Of course, there is also plenty of market research, and there are some great market research houses that will give you an overview of the total market. I hope that answers the question.
I hope I've understood it properly.
That's helpful. Thank you. If I could just ask a quick follow-up on Advanced Glass Technologies. Who are JMAT's competitors in this segment?
In that area, the competitor would be people like Ferro.
Sorry, how do you spell it? F-E-R-R-O, or did I hear that correctly?
Yes.
Thank you very much.
I'll now take a question from Adam Collins from Liberum. Please go ahead, sir.
Jane, hi. I had just three sort of quick follow-ups in relation to cash flow and working capital. Could you tell us what the midterm R&D to sales and CapEx to sales is likely to be in this area. I think in the past you said R&D around 5%, but we're not sure on CapEx. Second one was on cash flow generation, given that you're saying that licensing is likely to remain subdued. Historically, that's been a source of cash because of advanced payment. Wondered if you could just comment on that. The third thing is, you are in the midst, I think, of a sort of global SAP rollout, a new enterprise system. I think in the past, there had been a sort of expectation in the group that that could provide some potential around the PGM activities.
Now, I know they've been split into two divisions now, I wondered if that offers some potential around the manufacturing side of your business looking forward.
The R&D percentage. You're absolutely right, we've talked before about 5% of sales to R&D spend, that's indeed the sort of level we'd expect to spend. I think what I was trying to explain a little bit in the presentation is that we've been taking a really good hard look at the portfolio and making sure we're really investing in areas of step change growth there, and making sure it meets with our strategy. I mean, the beauty is we're not short of ideas to do there, we've been making some quite careful investment decisions about where we're putting that. We follow a very structured NPI process as well. We have a whole bunch of stage gates that things need to pass through before they move to the next stage and get the next tranche of funding.
That's the way we deal with the R&D. I think for the CapEx ratio, we don't normally publish that, what I can say is, of course, we do have a set of criteria that we need to fulfill for any CapEx spend. There, naturally, the group will look at the best places to place capital across JM for the best returns for investors. I don't think that would surprise you, the answer, that's what we do with the CapEx. We don't have an allocated percentage in that sense. It's about best investment that we can make for the group. The global SAP rollout. It's an SAP rollout that will come. In terms of efficiencies for the manufacturing. Actually, the efficiencies in our manufacturing comes a lot from our science, to be honest.
What we are doing in our manufacturing space, it's quite complicated chemistry. Particularly in that whole refinery area, we're doing some quite complicated chemistry in there. An SAP system isn't something that really helps you with the complicated chemistry. Lots of that efficiency comes from deep science and deep understanding of how the different processes can interact with each other, and how you might want to flow materials through. The SAP system isn't really a way to get to the chemistry in that sense. I think the last question you asked there was, I may have lost one of those questions there. I've got two.
Yeah. The cash flow issues given that licensing has generated cash through advanced payments historically. Should we remain cautious around the cash flow generation of the division because of that?
I think we can't comment really about. All I would say is cash remains a focus for the whole group. I think that's really what we do, and I can't give any further indication that might amount to a trading update. I think we'll talk a bit more about that at the year-end, probably.
Okay. Thank you.
We'll now take a question from Andrew Stott from UBS. Please go ahead.
Sorry, just a follow-up to actually back to Neil's question on operating leverage. I'm just still not clear why we wouldn't get a bit more or whether it's just conservative guidance. I think you said, Jane, GBP 12 million of cost savings. First of all, I wanted to check on the chronology of that, please. I missed when that will be completed by. If you bear in mind, you're going to have volume growth 3%-4% as per your September comments. You've got those GBP 12 million in cost savings plus the efficiencies you're doing across your three refineries, as you mentioned earlier. Sort of thinking you can do a lot better than 1% above your volumes. Is it fair to say you're naturally being conservative? Not that that's a bad thing.
Let's go through it. Firstly, the licensing we're not projecting to come back. All right. The cost savings-
Sorry, just interrupting. You're not expecting to get worse either, are you? Or are you?
No. As I say, it feels like it's pretty much in the trough.
Okay.
Not expecting it to come back midterm. In terms of cost savings, basically, cost savings is one way of putting it. We've got a whole efficiency program here going on. This is something that you do. One thing we don't want to do is to disrupt our customers and to have any impact on the way that we do business in the markets. With these sorts of leadership positions, you need to take good care of your customers. That means we've got a very planned, very structured approach, and we've got a couple of years of cost saving program work going on. It's not something where you push a button and bingo, out comes the money.
Sure.
Life's not that easy, I'm afraid. In terms of chronology, if you like, the sort of cost savings programs and efficiency programs we've got will last over a couple of years. What we also have to make sure that we're doing, is we have to make sure we then invest as well for our future, and invest in growth, and also invest in sustaining our position to make sure that we're meeting ourselves, all the new regulatory things that will come up, as they indeed will. There's also an element of reinvestment back into the business. I think that's important to take into account when you look at the whole perspective, and that's what most of the guidance is.
It's based on a very structured plan, taking into account the needs of the business, the needs of our customers, and making sure we can do this in a way that is not disruptive, but is indeed very positive and builds a strong, sustainable business.
Okay, thanks.
We'll take a question from Charles Greig from Citi. Please go ahead.
Hi, Jane. Just one quick question. In the past, coal to chemicals was trumpeted as a source of growth, obviously, we've seen a downturn in expansion in that segment. Last year we saw some resumption in activity. We were just wondering if you still had exposure or positive exposure to growth and capacity there. Specifically Chinese coal to chemicals.
Yeah. As you know, we do have leading technology in that coal to chemical space, we are therefore positioned in that. It's one part of the total business in the whole portfolio of things, it's not something that's going to make a massive difference on the scale of the whole business. Yes, we have leading technology in that area, coal remains an important feedstock in China.
Brilliant. Thanks.
Again, star one to ask a question. We will have a brief pause while we allow people an opportunity to signal. It appears there are no further questions at this time. Toogood, I'd like to turn the conference back to you for any additional or closing remarks.
Okay. Well, in that case then, I guess that will bring us to the end of the call. If you've got any further questions that we haven't had time to cover, please do get in touch with the investor relations team, with Martin and the team. A transcript of the call will be available to download from the website at some point tomorrow. With that, I thank you all for your time and look forward to speaking to many of you in the future. Thank you.
Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.