Report of the Directors
Business Review

Financial Review of Operations
Environmental Technologies

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Performance in 2011/12

Environmental Technologies Division performed well in 2011/12 achieving good growth throughout the year. Revenue grew 20% to £3,255 million; sales were 20% ahead at £1,876 million and underlying operating profit was 29% up at £211.8 million.

Environmental Technologies Division’s return on sales for the year increased by 0.8% to 11.3%. ECT’s overall return on sales improved with higher plant utilisation and as a result of lower costs following the closure of its Brussels plant. However, return on sales was impacted by £15 million of higher costs for rare earth materials incurred in the first half of the year. This was resolved satisfactorily in the second half. Process Technologies’ return on sales was slightly ahead of last year, benefiting from the strong performance from our higher margin DPT business.

The division’s ROIC improved from 11.5% to 14.2% and is expected to improve further as plant utilisation rates increase.

Emission Control Technologies

Emission Control Technologies’ sales grew by 21% from £1,218 million to £1,470 million.

Light Duty Catalysts

Our light duty catalyst business, which represented 66% of ECT’s sales in the year, grew well with sales up 10% to £969 million and operating profit up by a similar percentage.

In Johnson Matthey’s financial year to 31st March 2012, global light duty vehicle sales grew by 3% to 76.1 million vehicles. Global production grew steadily, by 2.5%, with a strong recovery in North America throughout the year, a moribund market in Europe which declined in our second half, and slight growth in Asia, albeit affected in the first half by the Japanese earthquake and tsunami and in the second half by the floods in Thailand. In China, growth in car production was lower than last year, but still increased by 5%.

Estimated Light Vehicle Sales and Production

    Year to 31st March  
    2012
millions
2011
millions
%
change
North America Sales 15.6 14.5 +7.6
  Production 13.6 12.4 +9.7
Total Europe Sales 19.0 18.7 +1.6
  Production 19.8 19.7 +0.5
Asia Sales 30.8 30.5 +1.0
  Production 37.7 37.2 +1.3
Global Sales 76.1 73.9 +3.0
  Production 77.7 75.8 +2.5

Source: IHS Automotive

Our sales in Europe of £588 million, which represent 61% of our light duty catalyst sales, increased by 8%, ahead of the growth in vehicle production which was only up 0.5%. Our sales benefited from growth in the proportion of diesel vehicles produced in Western Europe which represented 55% of total light vehicle production, up from 54% last year. Sales also benefited from the full fitment of diesel particulate filters (DPFs) to light commercial vehicles in Western Europe, completing the process of fitment of these products to all light duty diesel vehicles in the region.

Johnson Matthey’s Light Duty Vehicle Catalyst Sales by Region

  2012
£ million
2011
£ million
%
change
Europe 588 544 +8
Asia 201 168 +20
North America 180 167 +8
Total 969 879 +10

As a result of the complex catalyst systems required to meet European diesel emissions standards, a diesel vehicle currently represents approximately five times the catalyst value of an equivalent gasoline vehicle for Johnson Matthey. Catalyst value will increase further with the introduction of Euro 6 light duty diesel emissions standards in 2014, which will require additional catalyst fitment to meet tighter NOx standards. During the year our European sales also benefited from our strong market share with some of the most successful car companies in the region and from the introduction of higher technology products. These products offer our customers opportunities to reduce costs through advanced technology, including the more efficient use of raw materials.

On 31st January 2011 ECT entered into consultation with the employees at its inefficient Brussels facility regarding its closure. The plant ceased production in July 2011 and all production was transferred to other ECT sites with annual cost savings of approximately £18 million per year.

Despite the challenges presented by the Japanese earthquake and tsunami, the floods in Thailand and slower growth in China, our Asian light duty catalyst business grew strongly with sales up 20% to £201 million. Light duty vehicle production in the region in 2011/12 grew by just over 1%. However, our sales grew at a much faster rate as the result of growth in our market share in many parts of the region and a strong recovery in our Japanese business in the second half with robust demand from the original equipment manufacturers (OEMs) in Japan once their factories were back on line. With continued economic expansion, increasing disposable income and tightening legislation across the region, Asia should remain a growth engine for ECT in the years ahead.

In North America the light duty vehicle market showed good growth with production in the region up nearly 10% in our financial year. Our sales grew at a slightly lower rate, up 8% to £180 million, as our North American Japanese transplant customers, where we have a higher market share, were impacted by supply chain issues following the Japanese earthquake and tsunami and flooding in Thailand.

Since mid 2010, prices of rare earth raw materials have increased dramatically following the imposition of export quotas by the Chinese government. The main rare earth material that we use is cerium oxide, which is used to provide oxygen storage capabilities in catalysts for gasoline vehicles. Rare earth prices peaked in mid 2011 and, although now well below previous highs, prices remain significantly above those in the first half of 2010. In response to this situation, ECT took steps to reduce the impact of rising rare earth material costs by a combination of thrifting, substitution for cheaper raw materials and negotiating price surcharges with its customers. Due to the magnitude and speed of the cost increases, ECT’s results were adversely affected by around £5 million in 2010/11 and £15 million in the first half of 2011/12. However, by the second half of 2011/12 the effects of higher rare earth prices were fully mitigated and any future increases should no longer impact the business.

Heavy Duty Diesel Catalysts

Sales of heavy duty diesel (HDD) catalysts for both on road and non-road applications grew strongly again this year, up 48% to £438 million and operating profit more than doubled.

Production of heavy duty diesel trucks in North America continued to grow robustly throughout the year, increasing by 50% to 452,000 vehicles as trucking companies replaced their ageing fleets. In Europe, truck sales recovered last year from the global downturn and production growth this year remained robust at 7%.

Estimated HDD Truck Sales and Production

    Year to 31st March  
    2012
thousands
2011
thousands
%
change
North America Sales 405.2 287.4 +41.0
  Production 451.8 301.0 +50.1
EU Sales 298.7 257.4 +16.0
  Production 386.4 360.2 +7.3

Source: LMC Automotive

In North America our sales grew in line with truck production, up 52% to £295 million as we maintained our strong market share. In Europe our sales were up 27% to £116 million, well ahead of growth in truck production in the EU. However, our European sales also include export sales of around £5 million to Brazil, where Euro V legislation started at the beginning of 2012, and strong sales into Eastern European markets. HDD catalyst sales in Japan grew from a low base to £27 million, as new legislation requiring the fitment of DPFs came into force. The implementation of Euro IV legislation in China has been delayed until mid 2013 due to issues with the supply of low sulphur diesel fuel. However, very low level sales of HDD catalysts have commenced to OEMs in both China and India as truck manufacturers prepare for future legislation. At only Euro IV equivalent and with relatively simple engines, these markets are likely to have lower technology requirements than Europe or North America and thus we are likely to face much more competition from our existing competitors and local players.

Johnson Matthey’s Heavy Duty Diesel Vehicle Catalyst Sales by Region

  2012
£ million
2011
£ million
%
change
North America 295 194 +52
Europe 116 91 +27
Asia 27 11 +137
Total 438 296 +48

During the year sales also commenced to non-road OEMs, such as manufacturers of construction, mining and agricultural equipment, in the USA and Europe where legislation requiring the use of emission control catalysts is being phased in between 2011 and 2015. Sales of HDD catalysts to non-road customers grew from a low base, contributing £20 million in the year.

Towards the end of the year ECT commenced a major expansion project at its plant in Macedonia that will double capacity at the site. Plans were also approved to increase our DPF production capacity at Royston, UK. Both of these projects will provide additional capacity for the high technology products required for tighter European light and heavy duty diesel legislation, commencing in 2014. In addition, during the year the business has added capacity in China for upcoming HDD requirements and expanded its plants in India and Malaysia to serve growth in car production in India and South East Asia.

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