Johnson Matthey PLC

LSE:JMAT

Earnings Call Analysis

Earnings Call Transcript 2023-Q4

[Martin Dunwoodie, Head, IR]

Good morning, everyone, and thank you for coming along today and for those of you joining on the webcast. For those of you who don't know me, I'm Martin Dunwoodie, Head of Investor Relations at Johnson Matthey. And a little bit of admin before we start, could everyone turn mobile devices either to silent or off for the duration of the presentation. So I'm very pleased today to welcome Liam Condon, our CEO; and Stephen Oxley, our CFO. We'll have a presentation as usual and then plenty of time for Q&A afterwards, and we'll take questions from the room and also from the webcast. [Audio Gap] ahead of the presentation. And with that, I'll hand over to Liam.

[Liam Condon, CEO]

So thanks a lot, Martin, and warm welcome, everybody, from my side to everybody here in the London Stock Exchange. And of course, to everybody who's joining us online, we really appreciate your interest in our full year results presentation, and of course, our outlook today. Now I have to say, 1 year ago when I stood here, I was really excited because it was my first time standing in front of you for Johnson Matthey. And I've been asked a lot, so how is it now after a year. And I have to honestly say I'm even more excited this year, and I'm going to explain why as we go through the presentation.

Now what you're going to hear today in different parts and the way we're going to set it up, our results are in line with expectations. This is what Stephen is going to talk about when we go through the financial year. So Stephen is going to present the financial results in a couple of minutes. And our results in summary, are in line with market expectations. We're delivering on our commitments. I'm going to show this to you in 1 or 2 slides. And we're making good progress against the strategic milestones that we set out. And we're transforming JM to drive growth. And this is the part that I will come back to after Stephen has finished and explain what we're doing to drive JM forward and to catalyze the net-zero transition. And you can see at the bottom, net zero transition driving growth, this is actually the reason why I'm so super excited about the future of JM because the world has changed significantly in the past 12 months. The net zero transition is really ramping up due to regulation, due to incentivization and we have great businesses that can capitalize on that. So we're going to talk a lot about that today.

But first, let's look at how we're doing as a company and very brief summary form based on the scorecard that we gave you last year, and I hope you remember this one. The idea behind this was to say, look, we've got certain financial targets, which you know, but how do you know that we're actually making progress beyond the financial targets that we only report every half year, so what we wanted to do was to give you some milestones, some guide posts and this is the scorecard we set ourselves. We said that we're going to try and tick these boxes over the next couple of years and show that we're delivering on our commitments.

Now when we set this out, [indiscernible] all of us, I'd say, very honestly, because there's a lot of transparency involved here, but it's very helpful for us internally tracking our progress. And hopefully, it's helpful for you externally as well to be able to see how we're doing as a company. And I did not know how this would look after 12 months, we're only a year in. We've still got a long way to go, but what you can see after the first year is basically a lot of green. There's only 1 red traffic light in here. And we are fully on track with all of the milestones that we've set out so far. And I think this is -- it's hard to underestimate how much progress has actually been achieved within the space of 12 months. This is really quite phenomenal for JM to see this amount of progress happening in only 12 months. There is 1 red traffic light on here, and it's related to our target around employee engagement.

I have to say, very honestly, what we're doing, the amount of change we're driving within the company, this is tough stuff. This is hard on people. We're asking people to really go the extra mile, so it's tough. So we haven't been able to turn that to green yet, but I've been super impressed with the positive attitude of all of our employees, and I'm 100% confident that we will change this 1 to green as well. Now all of these elements I am going to go into them later on in my presentation after Stephen's part, so we'll talk about them.

But I just want to give you a snapshot upfront versus the scorecard we set ourselves. We're making good progress. We know we've got a lot more to do, but we're on track, and we're delivering on the commitments that we made to you 12 months ago.

So with that, I'll leave that by way of a summary introduction and then hand over to Stephen to talk us through the financials, and then I'll come back to explain how we're driving each of the individual businesses forward. Over to you, Stephen.

[Stephen Oxley, CFO]

Thank you, Liam, and good morning, everyone. I'll start this morning with the headlines. In a challenging market environment, our overall operating performance was in line with market expectations. On an underlying basis, sales were up 6%, operating profit declined 21% and earnings per share were 179p compared to 213p last year. Sales growth was supported by pricing, as we acted to mitigate inflation, and this was partly offset by lower metal prices. Operating profit was impacted by lower PGM prices, reduced volumes in Clean Air and PGM services as well as cost inflation.

The second half of the year was stronger as we recovered more cost inflation. We also started to see the benefits of our transformation program that we'll build this year towards our target of at least ₤150 million. We've got a strong balance sheet. Net debt came in at ₤1 billion, and our net debt-to-EBITDA ratio was 1.6x, at the lower end of our target range of 1.5x to 2X. We are proposing a total dividend of 77p, in line with last year and our commitment to at least maintain our dividend.

Now let's turn to our performance in more detail. On a continuing basis, sales grew 6% at constant currency to ₤4.2 billion. There were strong gains in our growth businesses both Catalyst Technologies and Hydrogen Technologies. This was partly offset by a decline in PGM services due to lower metal prices and refining volumes. Clean Air sales grew 2% as increased pricing more than offset a decline in volumes. And our value businesses delivered strong sales growth. We recently announced the sale of Diagnostic Services, and together with the sale of Piezo products last November, this supports our strategic milestone of delivering at least ₤300 million in net proceeds by March 2024.

So turning to profit. Group underlying profit decreased 21% to ₤465 million. I said the recovery of inflation would improve in the second half. And over the year, we recovered ₤96 million of around ₤150 million of cost inflation. We also delivered ₤45 million of transformation savings. In addition, we experienced currency translation benefits of around ₤38 million. However, there was an adverse impact of ₤55 million from lower metal prices. And we also saw lower auto-related volumes in both Clean Air and PGMS, and I'll talk more about the individual businesses in a moment.

But looking first at the rest of the income statement on an underlying basis. Despite rising interest rates, our finance charge remains broadly flat at ₤61 million. And as a reminder, almost 70% of our debt is fixed with an average maturity of 4.5 years. The underlying effective tax rate of 19% was slightly higher than the prior year. And we expect our tax rate this year to be around 20% given the higher rate of U.K. corporation tax. Underlying earnings per share decreased 16% to 179p. Our reported results were impacted by one-offs totaling ₤59 million. We recognized a gain of ₤12 million on the sale of Piezo products and Battery Materials and we incurred a charge of ₤41 million, largely as a result of implementing our transformation initiatives and the consolidation of our Clean Air manufacturing footprint. We also closed a legal claim in Clean Air, with a ₤25 million settlement of a long-standing customer dispute. Resolving this puts all of our auto legacy claims behind us.

Turning to free cash flow. We generated ₤74 million. Precious metal working capital was slightly higher, reflecting a temporary increase in refinery backlogs of around ₤250 million, which was offset by cash generation in Clean Air. Non-precious metal working capital also increased as a result of lower VAT payables. CapEx was ₤301 million, in line with previous guidance. This includes the ongoing renewal of our refining assets and increasing Hydrogen Technologies manufacturing capacity. And after dividend payments and completion of our share buyback, we ended the year with net debt of ₤1 billion.

So turning now to the individual businesses. Clean Air sales grew 2% as we increased prices to mitigate cost inflation. This offset a decline in volumes with supply chain disruption impacting vehicle production, particularly in China as a result of COVID. In light-duty diesel, sales were up 4% outperforming a declining market. So looking at light-duty diesel by region. In Europe, our growth was driven by strong platform performance. In the Americas, we slightly outperformed a growing market, driven by the ramp-up of a new platform and further strong platform performance. We were in line with a declining market in Asia, impacted by China, with lockdowns, a weak commercial vehicle market and increased electric vehicle penetration. Light duty gasoline sales decreased 1%, underperforming the market. In Europe and Asia, previous platform losses resulted in lower sales, but we continue to invest in our light-duty gasoline business with some early signs of success as we win new customers.

Heavy-duty diesel was up 3%, significantly outperforming the market. In Europe, we delivered sales growth ahead of the market due to higher revenue per vehicle and good performance in off-road platforms. In the Americas, our heavy-duty sales mix benefited from the Class 8 truck cycle and improved mix. And in Asia, sales decreased as lockdowns in China significantly impacted vehicle production. There was a progressive improvement in Clean Air's performance with the majority of inflation recovery taking place in the second half. We also delivered the initial benefits from our transformation program. However, cost inflation, product mix, lower volumes and exchange rates impacted underlying operating profit, which decreased 28% to ₤230 million as well as margins, which were 8.7%. We are on track to generate at least ₤4 billion worth of cash by 2031. We delivered around ₤600 million of cash in '22, '23 or ₤400 million, excluding the reduction in metal prices. This brings the total to ₤1.4 billion over the last 2 years or ₤1 billion, excluding metal prices.

In PGMS, sales decreased 8% to ₤570 million against a strong prior year. This was driven by lower average metal prices and reduced refinery intakes with less auto scrap due to a buoyant secondhand car market. In a volatile market, our metals trading service performed well. And with lower metal prices and volumes, operating profit reduced from ₤308 million to ₤257 million, and higher cost inflation was offset by pricing and operational efficiencies.

In Catalyst Technologies, sales grew 17% to ₤560 million, largely driven by strong growth in licensing and refills and improved pricing. We had a great year in licensing, winning 11 new licenses. Growth in first fills and refills also reflected higher pricing and a positive mix, and we're unlocking new growth in our new markets and sustainable technologies. So for example, our new license wins this year included 5 in low carbon hydrogen and sustainable fuels. Higher pricing, greater licensing in the benefits of our transformation program offset significant cost inflation and the profit impact of around ₤10 million from the loss of our business in Russia. Underlying operating profit of ₤51 million was in line with the prior year, and margin recovered from 7.6% in the first half to 10.5% in the second.

In Hydrogen Technologies, revenues more than doubled to ₤55 million with higher sales, mainly from fuel cells as we increased manufacturing output. The business reported an operating loss of ₤45 million, reflecting scaled up investment, and we expect the business to break even in '25, '26. And as you heard from Liam, in January, we agreed the long-term strategic partnership with Plug Power in the U.S., that's one of the leading players in the hydrogen economy. And we recently secured our second strategic partnership, this being with Hystar, the leading European electrolyzer company. These help underpin our 2025 target of at least ₤200 million in sales from Hydrogen Technologies.

Moving on to costs. We've made good progress on our cost transformation program and delivered ₤45 million towards our '24, '25 savings target of at least ₤150 million. As examples, we've generated around ₤20 million in procurement savings as a result of improved pricing and raw material substitution with more to come. We're delayering the organization, and this generated ₤10 million in savings. In IT, we've created a global service hub and generated benefits from colocation and process standardization, which has delivered savings of around ₤10 million to date. We've improved and automated our HR processes with a further saving of ₤5 million. And in addition, we're rationalizing our real estate. We're driving benefits from our new finance-shared service center, and we're accelerating the consolidation of Clean Air's manufacturing footprint.

We've also made much improved progress recovering inflation. Raw materials represent 40% of total costs and prices here have increased 6% year-on-year. This excludes substrates in Clean Air, which are a pass-through cost. Labor, which represents 30% of our cost base rose 3%. We've made one-off payments rather than higher salary increases. And energy cost constitute a relatively small proportion of our cost base, but these increased by more than 80% in the year. So in total, we incurred cost inflation of ₤150 million and recovered around 65% with a strong acceleration in the second half.

Our investment decisions are based on a prudent disciplined approach to capital allocation. This year, CapEx was ₤301 million, down from ₤422 million in the prior year, which, of course, included Battery Materials. Last May, I guided to total CapEx of ₤1 billion over the 3 years to '24, '25 . We now expect cumulative CapEx of ₤1.1 billion, largely reflecting an acceleration of Hydrogen Technologies. And as a reminder, our capital deployment is modular and dependent on achieving clear milestones, making sure that we do not overcommit to any particular project.

In Hydrogen Technologies, we're scaling up investment to meet committed customer demand. In Catalyst Technologies, we anticipate modest investment in the short term to support growth. In Clean Air, we will reduce our CapEx to ₤50 million in '24 to '25 as we complete our investment in new plants. And in PGMS, our refineries need substantial replacement CapEx to maintain our leading position.

So finally, turning to the outlook for '23, '24. We expect at least mid-single-digit growth in operating performance, assuming constant precious metal prices and currency. This is underpinned by efficiency benefits of ₤55 million, which we expect to more than offset cost inflation. In Clean Air, we expect strong growth in operating performance. External data suggests that limited growth in vehicle production this year, so our margin expansion will be driven by further pricing and efficiency benefits. PGM Services will be driven largely by precious metal prices, with recycling volumes expected to remain subdued.

In Catalyst Technologies, we also expect strong growth in operating performance with increased licensing revenue and a margin uplift from improved pricing and efficiencies. In Hydrogen Technologies, we expect strong sales growth and an operating loss similar to last year. Metal prices continue to be volatile, and it's difficult to predict how they may develop. Rhodium in particular has seen an unusual selloff in a highly illiquid market, pushing prices lower despite the market being in balance. And therefore, the rhodium price is significantly lower than we expected. So to illustrate the potential impact, if prices were to remain at their current level for the rest of the year, the adverse impact would be around ₤50 million, but we are, of course, working hard to mitigate this risk. You may have seen in today's announcement that we've updated our rule of thumb to help you with your modeling, and at current FX rates, underlying operating profit would be around ₤10 million lower.

So in summary, our overall operating performance was in line with market expectations. We are making good progress with our transformation program and are on track to deliver savings of at least ₤150 million by '24, '25. We've recovered the majority of cost inflation through pricing. We continue to build our commercial muscle and remain committed to delivering further efficiencies. Finally, we're investing behind growth, and we're encouraged by the progress on customer wins in our growth businesses.

And with that, I'll hand back to you, Liam.

[Liam Condon, CEO]

Great. Thanks a lot, Stephen. So just a quick reminder of our Play to Win strategy. These are the 4 businesses that we identified last year, and said these are the businesses where JM can be a global leader and drive value creation. And what's not on this slide, parts of our portfolio that we have today that are not related to these businesses, we are in the process of divesting, and we will have completed that within the next 12 months.

Now specifically, what we said last year is what we expected to drive growth would really be the Catalyst Technologies and Hydrogen Technologies business. These are the businesses driving the net zero transition. And they're, of course, enabled by the Platinum Group Metals business. What we didn't know what would happen is, of course, an energy crisis and a huge focus from multiple countries around the world, realizing that energy security is national security but also realizing if you're going to ensure your national security through energy security, you can use the opportunity to drive the net zero transition at the same time.

And this is exactly what has happened around the world, and it's been largely driven initially by the U.S. with the Inflation Reduction Act, which at the end of the day, is the world's biggest incentivization package for clean energy. But it goes back to the core of the U.S. understanding that energy security is national security. And if they're going to drive that, they should use the opportunity to do it in a clean manner's way. This is a fundamental game changer in the U.S., and it's driving investment and demand. You've seen a reaction from Europe with repower and other initiatives. And in other geographies around the world, whether it's India, China, basically, everybody is using the opportunity to either increase incentives for a clean energy transition or to increase regulatory pressure, for example, through a carbon tax. So the environment has fundamentally changed in the past 12 months. Again, it's hard to underestimate how much has actually happened in the past 12 months that has a profound impact on JM and the future of JM, the future of our portfolio.

Now I'm going to try and illustrate this, and please bear with me for a moment because this is an illustration. It's not going to be a new set of targets to 2030, '31. But it's -- I'm going to try and explain to you what impact this new environment has on our portfolio as we move forward as JM. And what you will see here is our various businesses, the underlying profitability and how they -- how the portfolio shifts and transitions over time, and you can see some pretty fundamental pieces in here. One thing to note, of course, are Clean Air and Platinum Group Metals, and we'll talk to this a bit later. We expect these to be -- continue to be quite stable businesses from an overall profitability point of view going forward, and I'll explain why that is in the relative parts of these presentations, but the growth is really driven by Catalyst Technologies and by Hydrogen Technologies.

And here, Catalyst Technologies, a lot of this is related to low carbon hydrogen and sustainable fuels. These are massive new markets that are opening up for us. And again, if you think of a chemical plant or an energy plant, with the incentives and the regulatory pressure that's available now or that's existing now today, everybody is in essence of your chemical plant, you are trying to decarbonize your production, you have to because of the sustainability commitments you've made but also because of carbon taxes and because of consumer pressure, you want to produce green chemicals or green products. And here's where JM comes in because we have the process technology to enable that to happen. And this is the magic of what JM does in the Catalyst Technology space, same thing on the sustainable fuels. You take the example of sustainable aviation fuel, a massive, massive market. There is hardly any sustainable aviation fuel available today. Regulatory requirements will mean that over time, the market will need to shift towards sustainable aviation fuel. We have process technology that will use almost any feedstock. But right now, we're using, for example, waste or biomass and turning that into sustainable aviation fuel, a huge market where JM today already has a leading position, so really, really exciting stuff going on here.

And Hydrogen Technologies, this is specifically fuel cells and electrolyzers for us with our focus on catalyst-coated membranes. So I think tremendous opportunity for JM driven by the net zero transition and because of the fact that we are in the right markets and have identified, I believe, the right growth opportunities.

Now I'm going to focus first on Catalyst Technologies because you will have seen that's actually in the outlook, we've just shown there. It's the biggest driver of growth, and a few data points around this, and what I will highlight is this is all a very short presentation. We think there's a lot to unpack here. So we're going to offer towards the end of June, a teach-in or an additional session on Catalyst Technologies to explain the full breadth of the portfolio to explain why we're winning the contracts that we're winning and to show how we think the market will evolve, so this is just a very quick synopsis, but a lot more to come towards the end of June, so just a small teaser for that.

What you can see here is -- and I think this is the key thing, I mean, why are we in such a good position. Well, in syngas, which is essential if you want to take a sustainable feedstock and you want to produce a green chemical or you want to produce renewable energy, we today have a leading market position. So we have proven technology and if you're a big chemical company or a big energy company and you want to transform your existing plants, you want to work with somebody that you trust. We've been working with our partners for decades, typically and our technology is proven. If you've got a multibillion dollar a pound plant you don't want to be taking risks with unproven technology. We have proven award-winning technology. That's why we're winning the contracts that we're winning already now. And we have outlined that in November as well. We have a fantastic pipeline, over 100 projects now in the space of sustainable technologies with a focus on low carbon hydrogen and sustainable fuels.

Now beyond the growth opportunities, we also see great opportunities to increase our margin of our base business, the Base Catalyst business. So we have a Base Catalyst business and a Process Technology business, which kind of go hand in hand, but the growth is going to be driven by the Process Technology business, but that drives growth also for the Catalyst business. And here, we see great opportunities to improve profitability, and we will be driving the margins of this business going forward.

Now, how do we drive the margin in the short term? I spoke to you last May about the need for JM to improve our commercial capabilities. We talk about building commercial and muscle. I spoke about the need to improve our manufacturing and engineering capabilities. And you can see here the examples that we are already started to see some fruits in the second half of this year of some of the initiatives that we've taken, whether it's around pricing, whether it's around the manufacturing, whether it's around procurement. Based on what we've seen so far, we're very confident that we can get our margins back to mid-teens within 2 years. So from where we are today, you're going to see a substantial uptick already this year and a further uptick the following year, and this is based on initiatives that we have already started implementing.

A typical example here in procurement, just to give you 1 example, reducing the number of suppliers. JM has 12,000, 13,000 employees. We have over 20,000 suppliers. We're not sure what exactly the right number of suppliers is, but it's not 20,000. It's a lot less. And just by consolidating the supplier base, of course, we're going to get much better deals from a procurement point of view, and we're going to increase supply resilience. And the lady who is driving this in Catalyst Technologies has done such a good job on the procurement side. We've promoted her to run procurement for all of JM, and she is driving a lot of the progress for us now. But this is an example of our opportunity not only to drive growth, but also to drive margin.

On the growth side, and I think this is pretty fundamental. The projects that we have been winning in the past 12 months, these are almost game-changing products. These are first-of-a-kind pioneering projects in the low-carbon hydrogen space and the sustainable fuel space. It takes something like strategic biofuels. You got to think about this producing carbon negative renewable diesel. I mean it's in a world that's trying to reduce emissions, this is carbon negative, it's pretty phenomenal. And again, some of our sustainable aviation fuel projects turning in essence, rubbish into sustainable aviation fuel is -- I mean it's pretty impressive from a technological point of view. But if you think about it from a market opportunity and ability to reduce emissions point of view is really quite phenomenal.

These 5 projects have been won so far. We had announced 4 during the year, another one now just 1 earlier in July, so a fifth one already. Again, these are typically first-of-a-kind type projects. To give you a sense of value, this is ballpark, we'd say, ₤120 million in sales for the 5 projects. And to help you model this going forward, we've put in how the income streams are typically kind of play out. And typically, what we have is a licensing component, which can be, of course, this varies for every project. They're always dependent on the specific project, but ballpark, ₤10 million as a licensing fee. First fill catalysts that ballpark between ₤10 million, ₤20 million, so take ₤15 million, plus ₤10 million, ₤25-ish million as an average over the first 5 years. And then you have the refill catalyst typically after 3, 4 years, you're going to be refilling. And if you're the incumbent in that business, then there's a good probability that you're going to continue to get that refill business as well.

So this is the income stream that can be modeled. And as we said, we have over 100 projects today. That number will grow. These are projects where we have visibility today, but as the market grows, we will, of course, grow that pipeline further. So just to give you a sense of why we're so excited about the Catalyst Technology business. And again, this is only a teaser for end of June, and there will be a lot more information and detail on that then.

If we move on to Hydrogen Technologies. I think here, the reasons to believe that JM is going to be a winner in this space, they really played out by our customers' demands towards us. And if you give the example of Plug Power as a leading player in the hydrogen space, why did Plug Power decide to enter a strategic partnership, a very long-term strategic partnership with JM with a joint development agreement, the long-term supply agreement up to 2030 plus and this is a big commitment. It's not just because we have great technology. They love the technology, said it's leading technology, but that wasn't enough. What they really wanted as well was our ability to manage precious metals, our ability to ensure security of access to precious metals, our ability to recycle and our ability to develop a closed loop model because we already have a circularity component with our Platinum Group Metals business in effect today.

And you put all of that together, that becomes a pretty impressive mode, combined with our existing manufacturing capabilities. That's a pretty impressive competitive package. And that's why partners are choosing to work with us. We -- as Stephen just mentioned, we signed a second deal with Hystar. Hystar is very interesting because they have a new technology on the membrane side, a thinner membrane, which is proven at industrial scale could be very interesting for the future of electrolyzers and they're working together with Yara and Equinor who in tandem are in essence, addressing the topics of food security and energy security. So working here with the company based in Europe addressing these topics with our technology, this is, again, I think, a good sign of progress.

And I can tell you there is much more to come here. We're not going to put out now a new target for numbers of partnerships because what we realized is when we put a deadline on it, some of the partners try and use that deadline against you. So we're going to be very relaxed to make sure we do the right deals and not just deals because we have a certain time line out there. But there's a lot more to come here.

Really important, we're investing in a scale up. This is an industry that is crying out for industrialization. We don't have industrialization yet, JM is ahead of the curve here. We've already got 2 gigawatts of capacity by '24, '25 or next year, we'll have another 3 gigawatts based on our Royston plant in the U.K. We're currently in the process now of starting or we will be announcing soon our buildup of a facility in the U.S., co-investment with Plug, which will give us another 10 gigawatts ultimately over time. So we're scaling pretty quickly here, and this is really important because that allows us to get down the cost curve quickly. And as we continue to advance technology, this will help ensure that we retain our competitive edge, so really hot space, really exciting space here as well. And everything we're doing is again, Stephen mentioned it, underpinning our current sales targets. Our current sales targets are not limited by demand. They're limited by ability to supply. So the faster we can ramp up production, the more we can sell. That's the clearly the objective here.

Moving on to Platinum Group Services. We're the #1 recycler in the world, at least 2x bigger than any other companies. This is a pretty phenomenal position that we have in here. And the Platinum Group Metals have been specifically now defined by Europe and the U.S. as critical minerals, critical for the energy transition. So I think everybody has kind of woken up to the fact that you're going to need Platinum Group Metals for the energy transition, and there will be more new use cases that have not yet come to the market. but you can expect a lot more to happen in this space than just the current reliance on automotive. So I think really important development here.

Second important development is, over time, we expect the primary supply, so mined product to reduce over time from a volume point of view, and we expect the secondary supply, so where we have a leading position and the demand there will continue to grow, and it will continue to grow because, of course, as we move towards a world that once a net zero transition once circularity, if you're using a recycled product, it makes imminently more sense than overlying only on mine products, if you just think of the carbon footprint, the relative cost of extraction. So we think we've got great opportunities here.

Traditionally, this business has been run as a volume-type business, so a big part of the business or the biggest part is refining, recycling and we take a percentage fee based on current metal pricing. What we've seen from our customers is what they really want is for us to help them develop closed-loop solutions. So we are thinking in a very different business model going forward of not only volume based, but really moving towards a value-based business model where we are offering an added value to our customers because we're ensuring security of supply of Platinum Group Metals, we can ensure the recycling component and then we can price accordingly. So it's based on value as opposed to volume, so this is something that is just starting to take off now also as we increase our commercial muscle as a company. I think an exciting development for the Platinum Group Metal business overall.

We've made investments to make sure that we stay ahead of the pack with Platinum Group Metals and maintain our leading position. Specifically, and I'm very happy to see this. Our fuel cell catalyst expansion is fully on track. It's important it's on budget. It's on time. So again, a proof point that we have been able to improve our manufacturing and engineering capabilities. And this is really important for the Hydrogen Technology business, and we need to have an adequate amount of fuel cell catalysts. So this is an important expansion. And in China, we have just completed our refining -- our new refining capability or facility with a new smelter. And we now have end-to-end refining capabilities in China, one of the fastest-growing markets as well. So if you think about fuel cells, specifically but also electrolyzers going forward. So here as well, really important that we continue to expand, continue to invest. And what I'm most happy about is that these investments are on track, on budget, no surprises, and they will serve us a very strong foundation for continued growth in the future.

And finally, from a business point of view, Clean Air, as Stephen said, we're on track for the ₤4 billion cash flow by 2030, '31. And we will benefit from tighter emissions legislation, whether it's Euro 7, EBA 27, others around the world, and we have been winning significant business globally. So in the past year, I've really been impressed with the win rate. It's always important to differentiate between current sales in the market, which is based on contracts that have been won or lost years ago versus what we're winning as contracts, for example, in the past 12 months is related to future sales. And the sales that very significant sales that contracts that we have been winning completely underpin the ₤4 billion plus cash flow target, so that's why we're very confident in that target.

And beyond the sales contracts that we have been winning both in light-duty diesel, heavy-duty diesel, but also in gasoline. Beyond that, we have significant possibility to improve margin. And same as in essence, Catalyst Technologies, you see similar emphasis on driving cost out of the business where necessary, where required. So 3 examples here, optimizing our footprint, our production footprint. We have 16 facilities around the world. We're -- now we've announced a closure of 4, and we shift production to our highest, let's say, most efficient plants, which, of course, has a significant cost impact for the business.

Streamlining SG&A, fixed overheads and the same emphasis in procurement here. A lot of opportunity, Clean Air is ultimately biggest -- if we're making progress from a procurement point of view, Clean Air is probably 50% of our total procurement spend in the entire company. So professionalizing procurement further driving synergies there means that Clean Air is going to be a big beneficiary. And beyond that, of course, we will be reducing CapEx over time. We'll be reducing R&D over time, so there's plenty of levers in the Clean Air business to ensure that this is a very profitable business going forward.

Second last piece, transforming JM. I mentioned this. This is heavy lifting that we're doing right now. And when we talk about it internally, there's always a question like what are we really trying to achieve beyond the numbers, beyond the financials. Like why do you -- what kind of a company do we want to have at JM. And what we've been talking a lot about is the need for people growth, meaning development of our people is crucial. We've had a situation that we've been -- I would say almost neglecting development of our people. We've almost defaulted to hiring externally from many higher level positions. We need to grow the talent from internally, that means we need to be investing in people growth. And we've had some great examples of that in recent months that we've been taking bets on great people, and we have fantastic people at JM. We're now basically investing in the development and making sure that they will be the future leaders of JM going forward. So really important that we get this piece right.

Customer focus is the ANO for a company like ours. And again, I've spoken a lot about our need and our commitment to improving commercial capability, manufacturing, engineering. We've seen many examples of that happening already now in the last -- particularly the last 6 months. It takes a while to start the engine moving, but when it moves and starts gathering speed, then you really start to see the benefits. And that's why we're confident going forward that there's going to be a lot more benefits. And simplification really important for our company. It's a big company, but it's not overly big, so we got to make sure that it's rightsized, but it's easy to do business within JM and it's easy for our customers to do business for us, and that we're not overburdening for example, engineers with administrative tasks. They should be focusing on engineering. We've got to free them up from any kind of administrative burden. So a lot of focus on getting the process better streamlined, clear accountabilities and just making sure it's easy for us to move faster, to be a more agile company and to tap into -- be able to tap into all the opportunities we have.

Final point, sustainability. For a company that is aspiring to catalyze the net zero transition, really important that what we're doing is guided by all the principles of sustainability, so we've got to produce in a sustainable manner, and we've got to help our customers reduce their emissions as well. I've honestly been impressed with the progress so far in the past 12 months. We're on track with all of our commitments, and we had ambitious commitments. But based on the progress we've made so far, we've actually raised the bar again. So specifically for the Scope 1, 2 and now the Scope 3 emissions, we have increased the ambition to 42% reduction in emissions by 2030. And this means we're fully in line with the 1.5-degree target, so this is the science-based targets initiative. This is an audited process, but it puts us amongst the relatively few. There's not that many companies that have this ambitious targets, and again, good to see that we're so far on track, and that's recognized externally, whether it's MSCI or Ecovadis with a platinum rating. So I think good external recognition.

So in essence, to summarize again back to where we started, the results were in line with expectations as Stephen outlined. I hope you got a sense both from the scorecard and the short presentation that we are delivering on our commitments and that we're transforming JM to drive growth, and I hope you got a sense that we are truly excited about the future for JM.

And we're also a bit excited to have a nice Q&A with you here today. So thank you very much and looking forward to the Q&A. Thank you.

[Martin Dunwoodie, Head, IR]

Thank you very much, Liam, Stephen, for the presentation. We'll move to the Q&A, and we'll have questions from the room and also on the webcast. [Operator Instructions] And we have first one. Charlie Bentley.

[Charlie Bentley, Jefferies]

Charlie Bentley, Jefferies. Just a couple. So if I think about the guide for next year, underlying, you've got something like maybe 30 expectations or something like ₤30 million of higher incremental operating profit. And then there's kind of ₤55 million of cost savings. You're doing better on the kind of pricing versus cost recovery. On the cost side, I mean, energy was maybe 50% of the overall inflation this year. So maybe it could be -- I don't know how that will trend, but I guess there's a lot of tailwinds there, and I'm just not sure what the kind of offsetting headwind is.

And the second point is just on the kind of the cash generation from Clean Air, ₤600 million this year. And then if I look at, obviously, free cash flow being something like ₤75 million, CapEx as part of that. There's a lot of working capital outflow. But like how does that -- how do we kind of see the proper realization of that coming through? And how should we think about that over the next few years?

[Stephen Oxley, CFO]

Yes, brilliant. Thank you, Charlie. So let me talk about the overall progression of the operating profit and the ₤55 million that you talked about. So look, inflation is still high. Hopefully, it will come off, but we're still in a high inflationary environment. And we're not recovering 100%. I think we've done a really, really good job, and hopefully, you've seen that in the second half. But we're going to get some leakage, okay? We're also assuming that volumes are going to remain soft, and that's both on the Clean Air side, but also in PGMS because of the refining auto scrap and volumes.

So look, if they come back faster, there's some upside there. But what we're really doing is relying on the cost savings and the transformation programs. In other words, things that are within our control to drive the margin of the business on an underlying basis, okay?

So just going to Clean Air. So look, yes, it's really good. We've said at least ₤4 billion to 2031, that's at least, and then the business is going to carry on a long, long way after that. So I think we've made a good start against our commitments. So it's ₤1.4 billion thus far. That's a lot of cash. So where is that going? We've spent -- sorry, we've returned ₤0.5 billion to shareholders in 2 years. And don't forget we've had CapEx of about ₤700 million, so you can kind of see the puts and takes. What we've said is that on average, it will be ₤400 million. It's going to be lumpy. So good start. Look, if we get some volumes back and some growth into the business, it's not going to be another ₤600 million next year, so let's see.

[Geoff Haire, UBS]

Geoff Haire from UBS. Just 2 quick questions. Stephen, you mentioned when you talked about metal price, particularly rhodium that there was some start to offset the impact. Could you just sort of give a bit of an explanation of what you can actually do on that? And then secondly, on the Clean Air target to increase the margins, you had 3 buckets of sort of actions you're taking. Could you sort of break down which of those are the biggest? Or is it all equal across each of the 3 buckets?

[Stephen Oxley, CFO]

Let me pick up metal price, Geoff. So look, metal prices are all over the place. They're hugely volatile. We have platinum week last week, and that was obviously the discussion. Rhodium particularly has moved massively. Now the market is in sort of balance, as I said. What's happened is the 1 or 2 Chinese customers that have offloaded an awful lot of rhodium it's a highly, highly illiquid market. So it's kind of taken the price down. We don't -- and we won't predict price forecasts, but it is certainly lower than we were expecting. Let me sort of say that.

So look, what are we doing? Well, don't forget volatility helps our business. So prices could be volatile, that benefits our trading business, which is good news. And then look, if the price is low, we're going to work really hard to mitigate that. So we'll push harder on volumes, we'll push harder on pricing, we'll push even harder on the cost takeout. So that we'll work even harder to offset that risk. But who knows prices, prices may go back up.

[Liam Condon, CEO]

Yes. And I'd briefly add on the 3 components. So primarily pricing, overall cost, particularly fixed overheads and SG&A and procurement ball park, they're roughly equal. And it's based on the progress that we've seen, particularly in the second half of the year because, of course, a lot of our initiatives really only started kicking in, in the second half, but that's what kind of gives us confidence that these are all achievable.

[Charlie Webb, Morgan Stanley]

Charlie Webb from Morgan Stanley. Maybe just a couple from my side. So first on CT. And I don't want to jump the gun because obviously, you've got something coming up not too distant future. But in terms of your wins to date, can you give us any sense on success rate? Because obviously, as you say, you're a very leading player in syngases. I'm particularly thinking on the hydrogen side, what are the win rates because we are hearing a lot of blue hydrogen projects in North America. So I'd be keen to kind of understand that.

And then second, on that piece, engineering capacity. You kind of alluded to it, get engineers out there doing their jobs. When you look at the North American and the IRA opportunity, both in terms of your capacity, but also potentially your customers' capacity, how do you see the engineering given the tight labor market in the U.S.? So just you have 100 projects that in reality, how many of them can actually happen? Or you talk about growth in that? Is that realistic?

And then just lastly on the value businesses, Liam, you kind of alluded to the fact that it might not be part of the business in 12 months' time. So just any thoughts and updates on those businesses? Where do we stand today, where you are in that process when you are streamlining the portfolio?

[Liam Condon, CEO]

Sure. Thanks a lot. So I'm actually going to ask Jane for the first 2 on win rates and engineers. We were just actually discussing this yesterday and there. These are 2 topics that Jane is very passionate about as you can explain much more articulately than me. So Jane, the Head of our Catalyst Technology business, she'll address the first 2. And I'll briefly address the third and maybe you chime in, Stephen, on the third 1 as well. Jane?

[Jane Toogood, Chief Executive, Catalyst Technologies]

So can you hear me okay? Yes. So first one about the win rate. Let's explain a little bit about what's going on with the market here. These are early days, okay, in this whole part net zero. And what you've got at the moment of these massive incentives, as you know, in the U.S., hence, what you're hearing about the blue hydrogen projects, et cetera. And what's very important is to actually deliver these first-of-a-kind projects, which is why these wins are very significant because what you're doing is proving that, that technology works, you're taking away risk for the investors, so you make the projects more bankable, okay? So these are very significant wins that we're making, and that gives security about future wins and gives our customers, our clients, more security about using our technologies in what, at the end of the day, as Liam explained, are extremely large investments that they're needing to make. So very important.

If we look at our pipeline of over 100 projects, we're seeing all the projects that are out there. And if you look at the future, what you're also going to see are many more projects coming on as the various regulatory pressures come on to companies to actually provide sustainable fuels or use sustainable fuels or to decarbonize using hydrogen. And so I think what you're going to see is a growing pipeline and you're also going to see many more projects over the next, well, 20, 30 years.

So if we come on to then the whole piece about engineers and skills, which is a topic I spend a lot of time on, of course. Skills shortage across that whole decarbonization space is a very big topic. And engineers, of course, are very important for us. We've been working very hard to make sure we increase our engineering capacity. Over the last year, we actually increased our number of engineers by 20%. We're using different recruiting methods. We're trying to target a much more diverse employees, potential employees. So really trying to make sure they're aware of the flexible working practices that we offer, et cetera. Equally, we're not going to be able to scale unless we change some of the ways we do things. So we're looking at digitizing as much as we can and make sure that none of those administrative tasks that Liam referred to are left in that, but we really swift up the process by which we're doing engineering.

And lastly, I think, and technically, what you're going to see is a modularization over time of what's offered for Technology Solutions. It's not there yet because it's very early days in the way that these things are evolving. But I think over time, things will become more modular. Last week in the U.S., there was a presentation by McDermott, which actually demonstrated a modularization of low carbon Hydrogen Technology using JM technology. And this is the sort of developments that you'll see over time. Okay?

[Liam Condon, CEO]

Thanks a lot, Jane. And on the value businesses, the biggest one that we have by far, that's still to be sold is medical device components. I can tell you there's a queue a mile long for -- of companies who are interested in purchasing that Stephen and Luis Milligan who's here today are driving that process. So maybe Stephen, you can talk a little bit about the process?

[Stephen Oxley, CFO]

Yes. So just to remind you, we've said a target of at least ₤300 million in net proceeds by the end of March '24. We've made really good progress. So we're off. We've got -- we've solved the 2. And look, these are great businesses. Look at the results and the contribution they've made this year, but we're not the best owner of those. So 2 have gone. We're in a process on the other 2. And I can tell you on the Medical Device business, pretty much most weeks, I get an e-mail. We've got more than 100 companies expressing real interest in that business. So look, we're not in a rush to sell. But I'm confident by the end of '24, we'll have delivered and hopefully exceeded that commitment .

[Unidentified Analyst]

Tristan here from Deutsche Bank. Three questions, please. The first is on Catalyst Technologies. So in terms of the Catalyst Technologies contracts, I was just wondering who the main players you are that you're competing with on those, and what technologies Johnson Matthey has that others don't have there?

And then second question, just on the risks around the hydrogen scale-up and the main pushbacks that you're getting from potential end users in terms of your involvement in the supply chain. Are there pushbacks around the dangerousness of the technologies still? Are those still ongoing? And then the third is on the trajectory for Clean Air. So you provided a while back a kind of shape of the Clean Air volume trajectory in terms of auto production. Are you still expecting it to have the same shape? Are you expecting diesel to decline faster than the rest of the market?

[Liam Condon, CEO]

Okay. Great. Thanks a lot, Tristan. So the first one on CT, the competitors. Again, I'll ask Jane to answer that one. On hydrogen scale-up, I'll take that one. And you want to -- Stephen will take the Clean Air, the trajectory and any update on that. Jane?

[Jane Toogood, Chief Executive, Catalyst Technologies]

All right. So just to talk it for a moment then about competitors and about what we've got that's different. So first thing to understand about this kind of market, I was talking earlier about the sort of investments that you're making when you're investing in sustainable fuels and sustainable chemicals, and track record is really important, okay? So being a reliable technology and catalyst provider is essential. And so there aren't lots of competitors in this space typically it's a space where you're looking at maybe 2 or 3 competitors, generally. And that's quite important in terms of the sureness that the customer has at their investing.

In terms of what's different about what we've got and where we have a differentiation. With regard to hydrogen, we have technology that allows a 99% CO2 capture. So when you think about the definition of low-carbon hydrogen, you're pretty close to 100% carbon capture is pretty important. We have the ability, of course, to combine that with other technology should customers wish. With regard to sustainable fuels, we have scalability. We have the ability to take multiple feedstocks, be it waste, biomass, et cetera, and to meet the sorts of requirements that customers need in order to access the tax credits that you need, for example, in the U.S. or in Europe, whatever is required for their local funding or mandatory requirements. And this is quite important, so we have a detailed understanding of that.

And this comes from combining technology and catalysis know-how. So it means that we know not only how to build it but also how to run it cost effectively so you get a really efficient and economic plant. So it's right at the heart of what JM does, catalyzing the net-zero transition. So I think those are 2 major things. I think where we differentiate much more at the end of June, of course, to talk about the -- just I could add 1 thing.

So we don't talk about it so much, but I think there's an article in the paper just the other day about sustainable aviation fuel. And 1 of the things that we've got, it's a little bit further back in terms of where it's coming, but it's another technology that allows you to use 100% sustainable aviation fuel in a flight. In other words, that's sort of aromatics piece, which we codeveloped with a company called Virent, And this -- there's been a couple of planes that have flown with that already, 100% sustainable aviation fuel, and that's also going to help solve some other problems that are around adopting this net zero transition. So all sorts of things to talk about later.

[Liam Condon, CEO]

Thank you, Jane. As Jane mentioned it, I'll just make 1 more connection. We're trying not to deviate too much. But with the example that Jane just mentioned, you actually require a palladium as a catalyst. So new use for palladium and sustainable aviation fuel is, of course, something that could be of great interest going forward. So just to make one more connection.

So on hydrogen scale up. I think there's a unanimous agreement both in scientific and regulatory circles that there's not going to be a net zero transition without an acceleration of the hydrogen economy, so we need to make sure that it's done in the safest possible manner. I think the biggest discussion practically is rather around PFAS -- the use of PFAS in ionomers membranes is a big discussion. I think the identification of -- at the end of the day, what we do as critical to the energy transition has been really important. If we think about PFAS, what we have been discussing with regulatory authorities is we can have a closed-loop solution so that the product never actually enters the environment, and this plays into the strength again of Johnson Matthey as a company with a circular business model.

And we also -- and Maurits can speak to this as well. We also do research and development on PFAS-free alternative ionomers, but that's a long way away. So the industry is going to need this. And as you know, PFAS is in many products, so it's important that they are classified as essential use products in the current regulatory discussions. And from what we're getting is feedback that seems to be on track. So I think by and large, we believe the bigger challenge will rather be the pace of scale up simply because it's a very early stage, a nascent industry, and there's a lot of industrialization that still needs to happen. I think that's rather the bigger bottleneck as opposed to any other concerns from a regulatory point of view. Clean Air?

[Stephen Oxley, CFO]

Yes, so let me pick up Clean Air. So yes, the trajectories broadly as we expected. There are sort of puts and takes, so battery electric vehicle penetration. In China, it's probably faster than we thought. But then on the other side, our customers are talking about things like hydrogen ICE in heavy duty. So there'll be pluses and minuses. But we very deliberately, when we did -- the took you through the seminar last year, we talked through a range of scenarios. And that's why we said at least ₤4 billion.

So in our conservative case, for example, we said in Europe that there have been no light-duty ICE vehicles at all by 2030. That's not just cars, that includes a 6-tonne truck and nobody is saying that. But also really importantly, we're talking about cash, and we have the various levers that we can pull, site closures, R&D coming down, so look, that's why we're confident that it will be at least ₤4 billion by 2031.

[Liam Condon, CEO]

And I think important to add, you might have seen in the news in recent weeks, big OEM manufacturer CEOs in Europe pushing back their electrification targets because they just -- they can't scale up what they originally thought would be possible. So I think we're -- we feel very comfortable with our forecast trajectory.

[Riya Kotecha, Bank of America]

It's Riya from Bank of America. I have 4 questions, please. My first one is a follow-up on the Clean Air scenarios that you presented last year. The China EV penetration seems to be impacting your FY '23 results, and like do you see, and is expected the penetration rate to grow to 35% this year compared to your target in 2030 of 50%. Do you think you'll have to raise that number? And if so, rationalize the fixed cost base at a faster-than-expected pace post 2025?

And my second question is with regards to the Clean Air margin and the targets that you laid out last year as well. So the margin was about 9% compared to your target of mid-double digit, near term and low double digit longer term. So how should I think about that trajectory and the return to historical levels, especially with ICE production forecasted to peak in 2024, 2025, which is another headwind that you'll likely need to deal with.

My third question is on CT and the 100 project pipeline that you mentioned. Can you give a sense of what the backlog might be for next year and the year after that and the delivery of the pipeline timing-wise? And my fourth question is on CapEx that you've raised slightly. Can you speak about where this is going in within Hydrogen? Is it existing investments costing more? Or are you incrementally investing to grow capacity?

[Liam Condon, CEO]

Thanks, Riya. So Stephen will take 1, 2 and 4, and I'll take the third one.

[Stephen Oxley, CFO]

I got bad deal then. Right, so Clean Air China. I think the '23 is more about volumes in China through COVID rather than EV penetration. So that really is the shift and that we'll see how that develops, but that's the answer for that year. The margin, the Clean Air margin, 8.7% for '23 driven by a number of factors: lower volumes, for sure, but also the leakage on inflation. So that's really why that's pushed down. And when we've talked about strong growth in performance for '24, so pushing back up, that will take us back into double-digit margin. And that's really as we're capturing more inflation, but particularly when we're getting the benefits of transformation.

Let me take -- I'll do the CapEx question on HT. So remember, last year, we said about ₤1 billion, about 25% was HT. We've added another ₤100 million to that. That is entirely due to the opportunity that we have with Plug Power in the U.S. that links to, obviously, to the Inflation Reduction Act, so we're spending more there. We're actually accelerating revenue from what we thought before. There is no incremental CapEx for the second strategic partnership, the highest of 1 that we talked about. That will be within the existing U.K. capacity.

[Liam Condon, CEO]

And the third one on the CT projects. We have a target out there, 1 of our milestones, is 10 large-scale projects that's across CT and HT practically, that's the way we broke that down internally to be very transparent, is 8 plus 2, so 8 CT projects, of which we've delivered 5 already. And I'm pretty sure that Jane is going to be working hard to deliver more than that. But I think it's that kind of a pace for last year, at least for this year. And going forward, I think that's the kind of pace that you can expect on this.

[Gunther Zechmann, Bernstein]

Gunther Zechmann from Bernstein. I've only got 2 questions. I hope you're not too disappointed.

The first one is on price versus cost. So you've got a ₤50 million shortfall this year just reported. Do you expect to fully recover that in the upcoming year? What's the time frame? How committed are you today on the contracts? And how big could that leakage be that you've been talking about?

And the second one, Liam, you spoke about the PGM Services business moving from a volume approach to a value approach with a closed loop. Could you just give some specific examples what you've been doing in that business for that shift to happen, please?

[Stephen Oxley, CFO]

So let me start with inflation. So look, we were really honest with you through the year that we started off with a pretty weak commercial muscle. And that's pricing, that's inflation recovery, that's across the board. And we really suffered in the first half, and what you've seen is that we've actually done much better in the second half, so 80% recovery in the second. But look, that still obviously leaves some leakage. I think if you look at benchmarks, 80% is pretty good. It may not be right at the top, but it is actually pretty good. And we're never going to get 100%. That's just the reality of life.

So there is some leakage. There will be some leakage next year. There will be a little bit of a lag from '23 into '24, but we've actually got better at sort of doing this week by week. So the leakage compared to the half year will actually be pretty small. What I would say is contractually as well, it's not just the negotiations where we're writing new contracts with our customers. We're much better at writing inflation clauses into those. So it's easier and faster to get that recovery, so the net position will be smaller in '24 .

[Liam Condon, CEO]

Yes. And on the PGM's business model evolving, I think probably the best example is Plug and the idea behind a strategic partnership. In essence, what we're doing is moving away from transactional type of business where it the past we would have sold a catalyst maybe would have managed the metals for somebody and gotten a fee on that, but it's bits and pieces of sales to a complete offering where we're saying we will take on everything for you will deliver the catalyst coated membrane, we'll manage the metals, we'll do the recycling, will ensure a closed loop and we will have a complete offering for that. That's all priced in, so you get away from the pricing, the bits and the pieces and you can have a much more compelling complete offering. That's the way we see the business evolving.

This is early days. And of course, when you shift any business model, it typically takes some time. But what we have seen as well in parallel is an increase in demand for recycled product. And for the first time, we're having discussions around premium -- a premium pricing for recycled product. But the real kicker, I think, is in offering closed-loop solutions to our customers, and whether it's a Plug Power for electrolyzers and fuel cells are an automotive supplier who wants fuel cells being able to offer the complete solution to them is much more compelling from a value point of view. And that's the direction that we're nudging the business now. We have multiple pilots ongoing, but the biggest example that I could quote you right now is the Plug Power example.

[Ranulf Orr, Citi]

Ranulf Orr from Citi. Just 3, please. So just firstly, following on with recycling and the evolution of the business model. Could you please maybe talk a little bit about the merits of doing so? You go from perhaps quite opaque, but through cycled very high return business to maybe a slightly more transparent one. So trading returns and margin maybe for sort of stability there?

Secondly, just on recycling as well, the new China facility. Could you talk a little bit about the contribution this year and maybe how that will evolve from a volume perspective over time? And thirdly, on Clean Air. We had a slightly disappointing Euro 7 update. I mean has that affected your thinking on China 7 value uplift as well?

[Liam Condon, CEO]

Yes. Thanks. So I'll take the first one on the merits of moving towards a more value-based business model, PGMs. Maybe ask Alastair, who's with us, the Head of PGMs, to talk about China volumes on the refinery side and Clean Air. Yes, will ask Anish, whose the Head of the Clean Air business to talk about that. So the merits, and again, if I go back to the example of Plug Power, allowing us to enter into a strategic partnership because of the complete offering is hugely beneficial. And if you think of the Plug Power example, it's a joint development agreement. It's a long-term supply agreement. So that gives us security of volumes for the future that allows us to invest that allows us to get down the cost curve. And we can basically price in then the complete package.

What you can assume is as we move towards a value-based model that is, of course, will be attractive from a margin point of view. We do have attractive margins, as you know, in our PGM business today. But this is clearly -- if we go -- and -- the more we go in this direction will help the overall margin of the group. That's clearly the intent. And I think is the inevitable consequence if you move from more of a volume-oriented approach towards a value-based approach.

And China volumes, Alastair, in case you want to add anything to the previous comment, please do as well. Alastair runs our PGM business. So -- and maybe you can briefly explain the 3 -- the different components of the 3 core components of the PGM business as well.

[Alastair Judge, Chief Executive, PGMS]

So just the China one. Just tell me again, I'll just make sure I answer it. Just what exactly is the question?

[Ranulf Orr, Citi]

You have a new facility in China ramping up. So what kind of earnings contribution do you think? And does it affect the return on capital of the business...

[Alastair Judge, Chief Executive, PGMS]

That's good. So we've always had the ability to produce pure metals from the refinery in China. And what we've added is the ability to do smelting and a second step called TBRC which is a technical step. So what we can now do is offer customers the whole refining cycle rather than just the end refining, and that makes us also a lot more attractive because we can do the whole job for them, and we can take metal right the way through from sort of impurity to pure metal. So that is a new service we're offering. And that means we can offer a much more integrated refining loop for them.

Just on what Liam said, I think Liam's explained it very well. We've always had brilliant science in our fabrication of PGMs. We still have that. What we're seeing, not just with Plug, but we're seeing it a lot with our pharma customers and our agribusiness customers is they're finding new uses for PGMs. And as they find it, they're having to try and understand what PGMs do. And so we're saying to them, you don't have to worry about all of that. We can explain to you how to do the whole cycle for PGMs from the sourcing through the fabrication through the recycling. And it makes it much easier for them to actually use the metals because it is quite complicated. And some of our customers in automotive have been very good at this for a long time, but some of our new customers doing new users are looking at going that is a really valuable thing for us because we don't want to become experts. So if you can do the whole loop for us, that will make a difference.

[Liam Condon, CEO]

And Clean Air, Anish, our Head of Clean Air business.

[Anish Taneja, Head, Clean Air]

Thank you. Good morning also from my side. Thank you for the question. And I share the slight disappointment on the Euro 7 discussion that is happening because it's absolutely clear. We need a strong Euro 7 legislation at the end of the day to have clean air and to save lives. So everything that is going to have to put Euro 7 in place sooner is great for everyone on this planet.

So on the effects on China. I do not see any negative effects on any legislation around the world because, as Liam has stated before, most of the OEMs are stating clearly that they cannot meet the electrification targets that they had outlined. And additionally, they are saying in some parts of the world, electrification will never get to where it was initially planned a few years ago. So the legislation on catalyst is going to be important to really drive the transformation and we are part of the solution of that, obviously.

[Ranulf Orr, Citi]

Okay. But for China 7 specifically, do you think a similar magnitude of kind of value up left to Euro 7 or...

[Anish Taneja, Head, Clean Air]

China 7 is not as advanced as Euro 7 on how the legislation is going to look like, so it would be kind of guessing what I would tell you. So I'm not going to do that. I just know that in China, electrification is indeed a little bit faster. But if you focus on the rest of the world, electrification is much slower than anticipated. And as I said before, even big OEMs are saying that in some parts of the world, it will never get as anticipated. So we're focusing on that opportunities.

[Liam Condon, CEO]

Thanks, Anish.

[Martin Dunwoodie, Head, IR]

We have nothing on the webcast. So final call for questions in the room. No? In that case, thank you very much, everybody, for attending today, and we will speak to you at the end of June. So thanks a lot, everybody. Thank you.