Johnson Matthey's first quarter sales were down materially, primarily driven by lower consumer demand in Clean Air. Aggregate sales in other areas were flat.
The group is not providing full year guidance but expects operating performance to be weighted towards the second half largely due to a weaker performance in Clean Air over the first half.
The shares fell 1.4% in early trading.
The coronavirus outbreak led to the shutdown of huge swathes of the global automotive industry. As the leading manufacturer of catalytic converters - the clever bits in car exhausts that strip out the worst emissions - that has inevitable consequences for Johnson Matthey (JMAT).
Clean Air, the division which includes auto-catalysts, accounted for 54.7% of operating profit last year. Fortunately the high price of inputs like platinum mean a large chunk of the catalyst businesses costs are variable, so lower production automatically means lower costs. That still leaves some £580m of annual fixed costs though.
In the short term coronavirus disruption means JMAT will be leaning heavily on its balance sheet to keep the wheels turning. The drive to preserve cash has already seen the full year dividend trimmed and the commitment to return to pre-Covid levels could come under pressure of conditions worsen.
There are early signs that car manufacturers are getting going again, and plans to consolidate manufacturing facilities to cut costs. Both will help soften the blow. However, JMAT has other strings to its bow, strings where the coronavirus impact hasn't been the same.
The natural resources and health businesses take JMAT's chemical knowhow and applies it elsewhere. Health in particular is expected to deliver 'break out' growth over the next decade and has weathered the current storm well - although it will remain small compared to the catalysts business.
Battery Materials is also interesting, although it doesn't yet generate significant sales.
Global automotive manufacturers are planning a $300 billion surge in spending on electric technology over the next 5-10 years. Since electric cars don't have exhausts that would potentially eliminate the need for catalysts. JMAT's answer is to re-engineer itself as a leading supplier of materials for batteries. The problem is that both the pace and direction of electric car development remains unclear.
A rapid shift to fully electric vehicles would be bad news. But increasingly stringent regulation and widespread uptake of hybrid vehicles would be fantastic - catalytic converters would still be required, but there would be opportunities to sell into the battery supply chain as well.
The other potential pitfall is technological.
The group's foray into lithium nickel alternatives seems to be getting some good results. The eLNO product has had a warm reception from potential customers and a trial plant is up and running. Commercial production of eLNO is still years away, with the first plant expected to open in 2021/22. However, in a rapidly changing industry there's no guarantee JMAT's picked a winning formula and development is expensive.
Overall JMAT feels a bit in limbo at the moment.
Auto-catalysts are theoretically in the driving seat, but coronavirus has slammed the brakes. And the long term shift towards electric vehicles probably gives the division a limited life. The other divisions are too small to really move the dial, and we wouldn't be surprised to see some sold off over the years to come.
Whether JMAT will ultimately become a dominant player in the battery market is an open question, but we struggle to find its position compelling at present.
Johnson Matthey key facts
- Forward Price/Earnings Ratio: 13.8
- 10 year average forward Price/Earnings ratio: 14.1
- Prospective yield: 2.7%
Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
Clean Air sales were down 50% in the quarter, after a 75% fall in April, a 60% fall in March and a 20% fall in May. All of the group's plants are now in operation. Demand is recovering in several key regions, including Europe, the Americas and especially in China.
Management expects sales to be down around 20% in July and to improve through the second quarter, but acknowledges the uncertainty in these forecasts. The Clean Air cost base is flexible and around 75% of costs are variable before any mitigating actions are taken.
In Efficient Natural Resources sales were down slightly as some Catalyst Technologies customers began delaying orders and demand in some end markets fell. PGM Services saw growth thanks to strong prices for precious metals.
Management expects first half operating profit to be down due to weaker performances in Catalyst Technologies as above, Advanced Glass Technologies due to lower automotive production and Diagnostic Services due to a lower oil price. PGM services is expected to be flat.
Sales have grown in Health thanks to new customer acquisitions and orders previously delayed due to COVID-19 now coming through. First half operating profit is expected to be flat as the benefits from new generic opioids contracts are offset by a cancelled innovation project.
The group's New Markets division is continuing to commercialise its eNLO battery technology and anticipates having five customers soon. The first commercial plan in Poland is expected to be in production by 2024. Fuel cells grew strongly and the group intends to double production by the end of 2020/21.
Management expects to deliver £30m in efficiency savings this year, and £225m in annualised savings by the end of 2022/23. Capital spending is expected to be £400m this year. Johnson Matthey has access to around £1.3bn in liquidity and, although debt has risen and cash profits are likely to fall, does not expect to breach any agreements with its lenders.
Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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