Report of the Directors
Business Review

Financial Review of Operations
Environmental Technologies

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Performance in 2012/13

Environmental Technologies Division made progress in 2012/13 in the face of challenging conditions in some of its major markets. Revenue fell 8% to £3.0 billion, however, sales were 2% ahead at £1,904 million and underlying operating profit was 7% up at £226.0 million. Environmental Technologies Division’s return on sales for the year increased by 0.6% to 11.9% and its ROIC improved from 14.2% to 14.5%.

Emission Control Technologies

Emission Control Technologies’ sales fell by 1% to £1,461 million but operating profit was slightly ahead partly as a result of process efficiency improvements across the business delivered through our group wide Manufacturing Excellence programme. In Europe, although sales were down 6%, strong cost control and efficiency improvements led to a fall in operating profit of just 4%. Sales and operating profit continued to grow in both Asia and North America.

During the year ECT continued with its major expansion projects at its facilities in Macedonia and Royston, UK. These projects are both on schedule and the necessary capacity will be in place in time to meet our customers’ requirements for the high technology products required for tighter European light and heavy duty diesel legislation.

Light Duty Catalysts

Sales in our light duty catalyst business fell by 3% to £938 million, representing 64% of ECT’s sales in the year. Operating profit was 4% down.

In Johnson Matthey’s financial year to 31st March 2013, global light duty vehicle sales grew by 4.3% to 80.2 million vehicles. Global production increased by a more modest 2.6%, with continued good growth in North America and Asia throughout the year, partly offset by a decline in production in Europe. Within Asia, vehicle production in China grew by 10% and production in South East Asia was 36% ahead, however growth in India and Japan was lower at 2% and 1% respectively.

Estimated Light Vehicle Sales and Production

    Year to 31st March  
    2013
millions
2012
millions
%
change
North America Sales 17.3 15.7 +10.2
  Production 15.0 13.7 +9.5
Total Europe Sales 17.9 19.0 -5.8
  Production 18.0 20.1 -10.4
Asia Sales 34.1 31.0 +10.0
  Production 41.1 38.0 +8.2
Global Sales 80.2 76.9 +4.3
  Production 80.2 78.2 +2.6

Source: LMC Automotive

Our sales in Europe of £543 million, which represent 58% of our light duty catalyst sales, fell by 8%, slightly less than the fall in vehicle production in the region. Despite a 7% reduction in the number of petrol vehicles produced in Europe in the year, our sales of petrol catalysts grew by 7%. This outperformance was due to gains from new business and our strong market share with some of the more successful car companies in the region. However, our sales were impacted by a small decline in the proportion of diesel vehicles produced in Western Europe which represented 53% of total light vehicle production, down from 55% last year. The number of diesel cars produced was 14% lower than in 2011/12 and our diesel catalyst sales declined broadly in line with this.

Johnson Matthey’s Light Duty Vehicle Catalyst Sales by Region

  2013
£ million
2012
£ million
%
change
Europe 543 588 -8
Asia 214 201 +7
North America 181 180
Total 938 969 -3

Due to the complex catalyst systems required to meet today’s Euro 5 diesel emission standards, a diesel vehicle currently represents approximately five times the catalyst value of an equivalent petrol vehicle. Catalyst value will increase by a further 20 – 25% with the introduction of Euro 6b light duty diesel emission standards in September 2014 for new models and September 2015 for all production. This will require additional catalyst fitment to meet tighter NOx standards. New, more efficient petrol engines, such as those using direct injection technologies, also offer opportunities for additional catalyst sales with the introduction of Euro 6c emission standards starting from September 2017.

Light duty vehicle production in Asia grew by 8% in 2012/13. Our light duty catalyst sales were 7% ahead at £214 million. Our sales were well ahead in China, up 18%, where we benefited from continued strong growth in the market and further new business wins. We also saw good growth in our South East Asia business which was slightly ahead of the growth in vehicle production. Our share of the Japanese domestic market was reduced by the trend towards ‘mini cars’, a segment in which we currently have a lower market share. In addition, sales were impacted by our Japanese customers localising production in the US and China as a result of the strength of the yen. Consequently, our sales in Japan were well down.

North American light duty vehicle production grew by over 9% in 2012/13 although our sales were flat at £181 million. Whilst we benefited from higher North American vehicle production, this was broadly offset by a trend towards smaller engines, a customer losing market share and the impact on sales of lower pass through rare earth material costs.

Heavy Duty Diesel Catalysts

Despite an overall decline in heavy duty diesel (HDD) truck production in North America and Europe, our sales of HDD catalysts for both on road and non-road applications grew by 9% in 2012/13 to £477 million and operating profit was well ahead.

Whilst production of HDD trucks in North America was strong in the first half of 2012/13, the second half saw some softening and overall production was 1.7% down on last year. Production in Europe was weak throughout the year and was 11.5% down.

Estimated HDD Truck Sales and Production

    Year to 31st March  
    2013
thousands
2012
thousands
%
change
North America Sales 434.2 404.8 +7.3
  Production 448.9 456.8 -1.7
EU Sales 266.0 299.0 -11.0
  Production 370.9 419.0 -11.5

Source: LMC Automotive

In North America our sales grew ahead of truck production, up 12% to £331 million, with good growth in catalyst sales to our truck engine customers supported by a greater contribution from sales to non-road applications. This year, non-road applications, such as agricultural, construction and mining equipment, accounted for approximately 9% of our total North American HDD catalyst sales. Altogether, sales to non-road applications in North America, Europe and Asia accounted for over £34 million of our 2012/13 HDD vehicle catalyst sales compared with £20 million last year.

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

  2013
£ million
2012
£ million
%
change
North America 331 295 +12
Europe 118 116 +2
Asia 28 27 +4
Total 477 438 +9

Our HDD sales in Europe were up 2% to £118 million, outperforming European truck production. This was primarily due to growth in Brazil (for which catalysts are supplied from our European operations) where Euro V legislation came into force last year. In Asia our HDD sales were up 4% at £28 million.

In Europe, Euro VI HDD legislation came into force on 1st January 2013 for new models and will apply to all production from 1st January 2014. This requires the addition of particulate control filter catalysts and represents a three to four times increase in catalyst sales value per vehicle. We have successfully agreed contracts for the supply of these systems to our customers at a market share that is broadly similar to our current share. We are therefore well positioned for growth in this market, although it is hard to predict how many trucks will be produced in 2013 given the uncertain European economic outlook.

With China adopting the equivalent of Euro IV HDD emissions standards from this summer and India following later, we expect to see good growth in these developing markets over the next few years. This year saw continued low levels of sales to these markets as local truck manufacturers prepared for the start of legislation. At the equivalent to Euro IV legislation and with relatively simple engines, these markets have lower technology requirements than Europe or North America and thus we face more competition from our global and local competitors. However, we expect that our global market share of HDD catalysts will be greater than 50% for the medium term.

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