27 January 2025
Johnson Matthey Plc
(the Company)
Delivering against strategic
objectives to drive value
The Board has reviewed the letter
issued by Standard Investments on 16 December 2024 and has engaged
with a number of the Group's shareholders since its publication,
including Standard Investments. The Board is publishing this
announcement for the benefit of all shareholders.
Introduction
Johnson Matthey is built upon strong
and longstanding foundations including world-class technologies,
cutting edge R&D and exceptionally talented people. These
capabilities have delivered leading market positions, unique
competitive advantages and a clear ability to win across all the
businesses which the Group operates.
When Liam Condon joined as Group CEO
in March 2022, Johnson Matthey set out a transformation strategy to
drive value, including cost reduction, capital discipline,
portfolio rationalisation and growth. This strategy is being
implemented against a backdrop of challenging and dynamic end
markets, and has therefore been adjusted over time. As summarised
in this announcement, this strategy is delivering clear results.
However, the Board recognises that there remains more work to do
and further progress is required at pace.
Alongside the continued
transformation of Johnson Matthey, the Board is resolute in its
focus on driving a step change in cash generation and higher
returns on capital. The Board has implemented plans to
significantly increase the cash efficiency of the Group, and
expects cash conversion1 levels to increase from around
20-30% in FY2024/25 (including the delivery of positive free cash
flow in FY2024/25, in line with guidance), to at least 50% in
FY2025/26, and above 80% in FY2026/27 and beyond, following the
completion of the refinery upgrade in FY2026/27 and assuming stable
metal prices. In turn, this is expected to deliver attractive
returns to shareholders.
The Board's confidence is further
underpinned by additional actions being announced today as part of
this focus on cash and efficiency:
- No
further growth capex being deployed in Hydrogen Technologies, and
capex in this business will be reduced to maintenance levels of no
more than £5m per annum from FY2025/26. This business remains on
track to achieve operating profit break-even by the end of
FY2025/26. In addition, the Group is pursuing options to further
de-risk this business.
- The
formation of an Investment Committee of the Board to be chaired by
the Group's Senior Independent Director, Barbara Jeremiah, to
reinforce both cash generation, and disciplined and measured
deployment of capital.
- Reviewing the Group's executive remuneration schemes to
increase the weighting on cash generation targets.
The Board is confident in the value
that Johnson Matthey's transformation strategy will create for all
shareholders, and remains open-minded to, and regularly assesses,
alternative strategic options for value maximisation in the
ordinary course of business.
A
transformation strategy that is delivering under challenging market
conditions
Key achievements under the Group's
transformation strategy since 2022 include:
- Cost reduction:
£155m in cumulative savings achieved by September
2024, and on track to deliver £200m of cumulative cost savings by
FY2024/25, which annualises at over £250m savings in FY2025/26.
This exceeds the target of £150m annualised cost savings set in May
2022.
- Capital
discipline: Capex has been reduced
to a maximum of £0.9bn for the three-year period to FY2026/27 (vs
£1.1bn over the preceding three-year period), including the benefit
of reduced capex in Hydrogen Technologies.
- Portfolio
rationalisation: Completed the sale
of all Value Businesses realising net proceeds of over £500m (vs.
£300m target set in May 2022), enabling £250m in excess shareholder
returns.
- Growth
initiatives: Secured growth
opportunities across the portfolio, including contracts worth more
than £350m in sales in Catalyst Technologies over 5
years2.
- Operating
model: Transformational changes
including the introduction of Global Business Services across
Finance, IT, HR and Procurement, and the creation of Centres of
Excellence, notably in Capital Projects, driving greater
effectiveness and efficiency.
These initiatives have delivered
strong underlying profit growth during the period (+11% in
FY2023/243, with at
least mid-single digit growth expected for
FY2024/254). This
is against a challenging market backdrop with automotive production
remaining well below pre-COVID levels5, unprecedented peak-to-trough
falls in precious group metal prices6, and macro-economic and energy
transition headwinds.
Market conditions have impacted the
total shareholder returns generated by the Group, its wider peer
group and the chemicals sector. Although Johnson Matthey's total
shareholder return has outperformed both catalyst peers and an
index of broader European chemicals companies7 since Liam Condon became CEO on 1
March 2022, the Board fully recognises the need to improve the
absolute share price and to deliver increased returns for
shareholders.
Execution progress in each business
The Group's transformation strategy
is being executed in a disciplined manner in each business to
optimise value for shareholders.
Clean Air: strong cash generation and meaningful increase in
margins
Since FY2021/22, Clean Air has
closed 4 out of 16 production sites and delivered annualised
savings from transformation of £65m. Ongoing actions include
manufacturing footprint and procurement efficiencies, and cost
reduction actions in commercial, R&D and operations. These
actions have resulted in operating margins increasing from 8.7% in
FY2022/23 to 10.6% in FY2023/24 and underpin the Board's confidence
in delivering mid-teens operating margins by FY2025/26, with
further margin growth expected beyond that.
The Board expects increasing cash
conversion in Clean Air from reducing capex to maintenance levels
and ongoing implementation of working capital optimisation
initiatives. As announced at the half year results for FY2024/25 in
November 2024, Clean Air is pursuing a number of initiatives to
further optimise its manufacturing footprint and cost base, and
drive higher margins. The Group intends to provide further details
ahead of the preliminary results in May 2025.
Catalyst Technologies: a high-quality business delivering
attractive profitable growth
Since April 2022, Catalyst
Technologies has delivered significant commercial wins and
partnerships, including 15 new projects worth more than £350m in
sales over 5 years2, and a pipeline of more than 140
projects in its sustainable technologies portfolio. This business
provides the Group with exposure to attractive growth markets with
supportive regulatory frameworks, such as sustainable aviation
fuels and low carbon hydrogen, and leverages leading positions in
syngas globally and a strong portfolio of sustainable
technologies.
The Board is confident in delivering
profitable growth in this business: high single digit sales growth
in the short term and accelerating to mid-teens growth over the
medium- to long term and targeting high-teens operating margins by
the end of FY2027/28 (from 13.0% in FY2023/24), with continued
margin growth thereafter given the business mix shift towards
licensing.
Platinum Group Metal Services (PGMS): driving cash conversion
as a major investment programme concludes and metal prices
normalise
PGMS is the world's largest
secondary refiner of platinum group metals (PGMs) globally with
deep expertise and industry leading capabilities in both refining
of PGMs and their use in high value applications. The Board is
focused on optimising the value PGMS delivers for shareholders with
investment programmes enhancing the efficiency of the refining
business and delivering a step change in cash generation, further
details of which are set out below.
Hydrogen Technologies: significant reduction in capital
needs
Hydrogen is expected to be core to
the longer-term energy transition and Hydrogen Technologies is
well-positioned given Johnson Matthey's long 25+ year history in
hydrogen technologies, especially fuel cells, where it enjoys
strong capabilities alongside its expertise in catalysis and PGMs.
The sharp acceleration and then deceleration of the hydrogen sector
has posed an industry-wide challenge. In 2024, the Board adapted
its strategy for this business to reflect the market slowdown, and
has undertaken significant actions to reduce cash costs, while
maintaining its technology advantage to capture the opportunity in
the longer term.
In May 2024, the Group revised its
capex guidance for Hydrogen Technologies to no more than £90m over
the three-year period to FY2026/27, out of a maximum of £900m for
the Group. The Board has further reduced its investment in this
business, with no additional growth investment planned.
Accordingly, capex in this business will be reduced to maintenance
levels of no more than £5m per annum from FY2025/26. The business
remains on track to achieve operating profit break-even by the end
of FY2025/26. In addition, the Board is pursuing options to further
de-risk the Hydrogen Technologies business.
Significant increase in free cash flow and ROCE
expected
Non-recurring headwinds to historical cash
flow
The Board recognises the need to
drive a step change in cash generation and higher returns on
capital.
As set out at the PGMS seminar in
June 2024, a significant portion of the historical cash generation
under-performance was due to the increase in PGMS working capital
over the three-year period to FY2023/24. First, refining backlogs
increased by c.£300m as a result of PGMS' ageing refinery. Second,
to optimise the cost of financing metal requirements, the Group
reduced external metal leases by £240m, which led to a one-time
step-up in working capital by the same amount. Third, lower metal
prices increased the value of working capital in PGMS by
approximately £500m, offsetting the significant working capital
benefit seen in Clean Air. In aggregate, these represent over £1bn
of non-recurring headwinds to free cash flow in PGMS.
In addition, PGMS is undergoing a
major, once in a generation, capex programme to replace an ageing
and inefficient refinery that acts as a drag on margin and working
capital. The total capex for this refinery is expected to be £350m,
of which c.£250m is to be spent over the three-year period to the
end of FY2026/27. The increase in refining backlogs in PGMS will
unwind as the refinery upgrade is completed in FY2026/27,
supporting the release of working capital.
Step change in cash conversion
The Board is implementing plans to
significantly increase the cash efficiency of the Group. For
FY2024/25, the Group expects positive free cash flow, primarily
driven by the benefits of the transformation strategy and a
stronger performance from PGMS given an expected improvement in
volumes. Going forward, the Board expects cash conversion levels
(defined as free cash flow8 as a percentage of underlying
operating profit) to significantly increase from around 20-30% in
FY2024/25, to at least 50% in FY2025/26 and above 80% in FY2026/27
and beyond.
The key drivers of this increase in
cash conversion include at least £2.5bn of Clean Air cash
generation (between FY2024/25 and FY2030/31); PGMS delivering cash
conversion approaching 100% of underlying operating profit;
Hydrogen Technologies reaching operating profit break-even by the
end of FY2025/26 and being cash flow9 positive in FY2026/27; and
continued growth in the Group's capital-light Catalyst Technologies
business.
A key priority of the new Investment
Committee of the Board is to review cash generation and the
initiatives in place to drive cash delivery. This will also be one
of the key focus areas for the Group's new Chief Financial Officer,
whose appointment is expected to be announced shortly. Further
details on the Group's initiatives to drive cash conversion and
outlook for free cash flow will be issued to the market no later
than the preliminary results for FY2024/25 in May 2025.
Finally, given the increased focus
on cash generation, the Group's executive remuneration schemes are
being reviewed to increase the weighting towards cash generation
targets.
Delivering enhanced return on capital employed
(ROCE)
The Board recognises the need to
drive a robust improvement in the Group's ROCE10. As part of the ongoing
transformation strategy, this is being addressed through improved
operational efficiency, reduced capital intensity, and a growing
share of high-margin, capital-light businesses such as the
licensing business in Catalyst Technologies. The Board is applying
further focus and scrutiny on the Group's capital requirements and
returns through the new Investment Committee of the
Board.
Given the importance of improving
ROCE, the Remuneration Committee last year introduced a ROCE
component to the long-term Performance Share Plan awards,
representing 25% of the award. For FY2024/25, the ROCE hurdle is
12% for threshold (25%) vesting rising to 16% for maximum (100%).
This will be reviewed again as part of the FY2025/26 remuneration
planning process, alongside the planned introduction of a cash
generation target under the Group's annual incentive
plan.
Johnson Matthey has a strong and experienced Board and has
established a new Board Investment Committee
The Board has a strong mix of skills
and expertise to provide both appropriate support and challenge to
the management team. This Board has experience across specialty
chemicals, a broad range of end markets (including automotive),
finance, M&A and portfolio management.
The Board has also been refreshed
regularly with 3 new non-executive directors having joined the
Board in the past ~3 years (out of a current non-executive Board of
seven directors), with all of them bringing extensive expertise and
skills:
- Sinead
Lynch, who joined the Board on 1 January 2025, was previously the
Senior Vice President of Low Carbon Fuels at Shell. Sinead brings
deep expertise to the Board on investments to capitalise on energy
transition trends, emerging markets and regulatory trends and
enhance shareholder value.
- Barbara Jeremiah, is the Senior Independent Director and
joined the Board in July 2023. Barbara spent over 30 years at
Alcoa, most recently as Executive Vice President for Corporate
Development, where she was instrumental in strategic decisions that
enhanced financial performance, operating efficiency and
shareholder value. She is Chair of Weir Group plc where she has
driven strategic decisions to enhance operational efficiency,
market positioning and sustainable growth. She is also a
non-executive director at Senior plc.
- Rita
Forst joined the Board in October 2021. She brings deep experience
in the automotive industry having spent 35 years at the Opel
European division of General Motors holding various leadership
positions including Vice President of Engineering. Her management
contributed to the company's ability to navigate market challenges,
innovate and capitalise on growth opportunities, and drive
financial performance.
- In
addition, the Board is in the final stages of appointing a new
CFO.
The Nominations Committee regularly
considers opportunities to augment the Board with new directors in
the ordinary course and, as demonstrated above, regular Board
refresh is a feature of Johnson Matthey.
In order to further leverage the
Board's capabilities to enhance performance, the Board has formed a
new Investment Committee that is chaired by Barbara Jeremiah. As
set out in further detail in the separate announcement issued
today, this Investment Committee will regularly review initiatives
to optimise cash conversion across each business in the Group, the
capital allocation framework by Group and division, return
requirements on investments, ongoing monitoring of capital
investment programmes against market conditions and business unit
and corporate strategies in the context of the overall portfolio
strategy.
The
Board's commitment to delivering shareholder
returns
Johnson Matthey welcomes dialogue
with all shareholders with a view to driving sustainable value,
carefully considering the views of shareholders at all times,
including over recent weeks.
The transformation strategy is being
delivered at pace while navigating the challenging external
environment. The Group is currently executing a comprehensive
programme of initiatives across each of its businesses to realise
the benefits of this strategy, including the additional actions
that the Group has announced today. Beyond
this, consistent with the Board's statutory and fiduciary duties,
the Board also remains open-minded and regularly assesses whether
alternative strategic and restructuring options may maximise
value.
The Board is confident that the
Group's strategy, alongside the additional actions announced today,
will deliver attractive and sustainable value for all shareholders
and looks forward to regularly updating the market on its continued
progress.
ENDS
Enquiries
Investor Relations
Martin
Dunwoodie Director of Investor Relations
& Treasury +44 20 7269 8241
Louise Curran
Head of Investor Relations
+44
20 7269 8235
Media
Sinead Keller
Group
External Relations Director
+44 7833 285585
Harry Cameron
Teneo
+44 7799 152148
Johnson Matthey Plc is listed on the
London Stock Exchange (JMAT)
Registered
in England & Wales number:
00033774
Legal Entity Identifier number:
2138001AVBSD1HSC6Z10
Notes to the announcement
-
Defined as free cash flow8 as a percentage of underlying
operating profit.
-
Revenue over 5 years relating to project wins in Catalyst
Technologies' sustainable technologies portfolio from 1 April 2022
to date, subject to project reaching completion.
-
At constant FX and adjusting for £85m impact from precious metal
prices.
-
For 2024/25, excluding Value Businesses, we continue to expect at
least mid-single digit growth in underlying operating performance
at constant precious metal prices and constant currency.
-
For example, based on S&P Global Mobility data, from 2018 to
2023, light duty internal combustion engine has decreased by more
than 7 million units and production levels of heavy-duty trucks did
not return to pre-COVID levels as expected.
-
Weighted index of platinum group metal prices increased by >150%
between FY2018/19 and FY2021/22 and then fell by 50% between
FY2021/22 and FY2023/24.
-
Catalyst peers comprise Albemarle, Clariant and Ecovyst. European
chemicals indices comprise UK specialty peers (Croda, Elementis,
Victrex), European specialty peers (Akzo Nobel, DSM-Firmenich,
EMS-Chemie, Symrise, Sika, Umicore) and European diversified peers
(Arkema, BASF, Clariant, Evonik, Lanxess). From 1 March 2022 to 24
January 2025, Johnson Matthey had a total shareholder return of
(14)% vs. catalyst peers of (37)%, UK specialty peers of (22)%,
European specialty peers of (26)% and European diversified peers of
(21)% based on a mean of equal weighted performance for peer
groups.
-
Defined as net cash flow from operating activities after net
interest paid, net purchases of non-current assets and investments,
dividends received from joint ventures and associates and the
principal elements of lease payments.
-
Defined as underlying operating profit plus depreciation (EBITDA),
less capital expenditure and net working capital movements.
-
Defined as underlying operating profit / capital employed, where
capital employed is calculated as book value of equity + net
debt.
