Johnson Matthey Plc (JMAT) Earnings Call Transcript & Summary

Good morning, and welcome to the Johnson Matthey Plc Hydrogen Call. Today's conference call will be hosted by Johnson Matthey Chief Executive, Robert MacLeod, followed by a Q&A. I will now turn the conference over to Martin Dunwoodie, the Director of Investor Relations. Please go ahead.

Thanks, Jona. Good morning, everyone. I'm Martin Dunwoodie, Director of Investor Relations at Johnson Matthey. I'm very pleased today to welcome our Chief Executive, Robert MacLeod, who will be hosting today's call on hydrogen. In this call, we're going to be providing an insight into the role that hydrogen will play in tackling climate change, our hydrogen business and its competitive positioning, and the attractive growth opportunities that we see in this area. As usual, we will not be giving a trading update as part of this call. And with that, I'll hand over to Robert.

Thank you, Martin, and thanks, everyone, for joining the call today. With me today, I have Jo Godden, who runs our Fuel Cells business. Jo who's actually 25 years in JM -- well ICI and JM. Today is her 25-year anniversary today, and she has wide commercial and operations experience across the group, initially in our Catalyst Technologies business. And I'm joined also by Eugene McKenna, who joined JM nearly 4 years ago from Shell. Eugene is one of our hydrogen experts and responsible for helping to commercialize our blue and green hydrogen technology. He has deep experience in technology and business development. So let's start with what I hope is a familiar statement, JM's vision. Everything we do is about creating a world that's cleaner and healthier, not just today, but for future generations. This drives our strategy. And one of the themes that is really shaping our strategy today is climate change and the move to net zero. And our role in hydrogen to help solve this challenge is the focus of today's session. When you look at the world around us, it's clear that action around climate change has increased, and there is growing momentum around net zero commitments. By achieving net zero, together, we can all limit global warming to 1.5 degrees above preindustrial levels. And to date, 23 countries and regions have put commitments in place to limit their impact on climate change. And that level of commitment is really accelerating. Just 12 months ago, 16% of global GDP derived from nations and regions with net zero commitments. This figure is now at 53%. And importantly, the recent uncertainty caused by COVID-19 has not slowed this trend. It's a trend that will only get stronger, and it's going to require significant change. Net zero means we need to change our entire energy ecosystem, how we supply it and how we use it. Firstly, we will need to switch from fossil fuels to using renewable energy sources to generate electricity for use in many applications. For instance, heating homes and businesses, light-duty vehicles such as cars and vans and many lighter industrial processes. But using renewable electricity doesn't work for all applications, and it's also necessary to have another energy source for electricity and heating during peak periods. And that is where hydrogen comes in. The use of hydrogen will allow us to decarbonize those applications that require higher energy density, such as heavy-duty trucks and long-distance buses, more energy-intense industrial processes such as steelmaking and cement and in submarine and rail applications. And of course, in generating hydrogen, sometimes, you're going to need carbon capture and storage to decarbonize this process. So where does JM fit into all of this? We have a strong position in hydrogen production. And Eugene will come on to the methods by which hydrogen can be produced and explain our offerings in clean hydrogen production, being blue with carbon capture and storage and green hydrogen as well. And he'll talk about that a little later. We also help to decarbonize transport through hydrogen-powered fuel cells for heavy-duty trucks, buses and cars as well as trains and marine that Jo will talk through shortly. So what we're seeing is the transition of hydrogen from its position today as a critical feedstock for chemical processes to its future position in energy, where it will also be a fuel and energy carrier. This move to hydrogen is already happening today and gathering pace. We're seeing that across the globe, led by Europe with the recent EU Hydrogen Strategy, and the German and French national hydrogen strategy. And in Asia, there was an announcement earlier in the year from South Korea with their hydrogen strategy. And this slide shows some of those commitments. And it's not just the policymakers that are driving this. We're also seeing bold statements from OEMs, confirming that hydrogen-powered trucks will be part of their mix. So before I hand over to Jo and Eugene, I want to summarize what you're going to hear from us today and why I'm very excited about the hydrogen opportunity. We've been a leader in hydrogen for many years, and I'm proud to be a board member of the Hydrogen Council, which is the largest industry-led effort focused on developing the hydrogen economy. So hydrogen is going to be a really significant opportunity to JM. The addressable markets are substantial, and we're really well placed because of our existing positions and our integrated offering. And both of these are backed up by our leading technology. These are our differentiators, which give us competitive advantage. They're largely built on our science and platinum group metal expertise from across the group, and we wouldn't be in such a good position today without it. So where are we today? We already have an established and profitable hydrogen business, with current sales of around GBP 100 million across both hydrogen production and fuel cells. And we have strong segment shares. Our businesses are selling into highly complementary customer base that we know well. For example, our customers for fuel cells are largely the same as for our existing heavy-duty diesel business. And in hydrogen production, many are the same today as they will be in the future. And our ability to move quickly with relatively low capital intensity makes it especially attractive. The hydrogen economy is already taking shape. And looking forward, the opportunity for JM is significant. But more importantly, this opportunity is completely aligned to our vision. The world has to move to net zero, and we have a key role to play in this with our hydrogen-based technologies. And with that, I'll now hand over to Jo, who will talk to you about fuel cells; and after that, Eugene, who will talk about our hydrogen production technologies in both blue and green. Over to you, Jo.

Great. Thanks, Robert. Before we get into the detail of fuel cells, let me start with where we play in the value chain because this is really important in understanding why we have a competitive advantage. As we do across JM, we play in a complex part. For fuel cells, this is making the components, as I'll come to on the next slide. This is where the clever chemistry lies, and it's the key to delivering a high-performance fuel cell. Although the value chain is still developing, it's similar to what you've seen today in clean air and battery materials. We're a Tier 2 supplier, but we have a very close relationship with the OEM. So a fuel cell converts hydrogen and oxygen into electricity and water, therefore, a key technology in a transition to a clean, low-carbon economy and the decarbonization of transportation. You can see from the right-hand side that there are a number of components, but the fuel cell itself is made up of 3 main layers: an anode and a cathode, which are both platinum-based catalysts separated by a proton exchange membrane or a PEM. At our sites, automated lines produced membrane rail to rail, which is then coated with thin catalyst layers. The catalyst coated membrane, or CCM, is then cut to the customer-specific side and seals. The size of the CCM will depend on the application. But generally, it's around the size of a piece of A4 or A5 paper. A gas diffusion layer is added to the sealed CCM to create the membrane electrode assembly, or the MEA. Many of these are then added together to form fuel cell stack. Producing a fuel cell is essentially applying a catalyst to a substrate, and this is something that JM deeply understands. It's our bread and butter. The clever chemistry and the piece which gives the best performance is in the membrane and at the amazing cathode layers, the CCM. This is where the smarts are. We know exactly how to layer the catalyst onto the membrane. But we're not restricted to the CCM. We have a strong position throughout by controlling all of the elements in the value chain, we can influence the performance of the fuel cell. We can tailor exactly to our customers' requirements. So looking now at our competitive advantage in fuel cells, firstly as a science. You've seen that the way that we manufacture a number of parts in the fuel cell, and this is key to making sure the digital components in the system work together in the best way. We're unique because we can optimize the catalyst as well as the membrane. No one else can do what we do. But it's not just the science used within the catalyst coatings, it's the knowledge and expertise of how these layers are put together to optimize the whole system. We also produce our own membrane. Again, this is important for giving the membrane electrical conductivity and for delivering enhanced power. Not only this, but producing in-house ensures we have total control over the technical steps and importantly, the costs. And it's this holistic understanding of the fuel cell, that means we can offer a customized high-performance solution to specific applications. What really matters to customers in terms of performance is durability, or really maintaining that performance over kilometers driven, and our science expertise means we can deliver on that. For a truck, this means achieving over 40,000 hours, and we know how to make improvements that will meet and exceed this. Secondly, we're a world leader in pgms. If fuel cells have pgms in them, with our legacy expertise in this space, then who better to win than Johnson Matthey? We can also recycle these pgms so there is potential to have a closed-loop offering. And this process has a lower carbon footprint. The carbon footprint of primary metal is significantly higher than secondary metal. And we're already seeing from our conversations with customers that our ability to offer sustainable sourcing in our lower carbon supply chain is really important to them. As well as this, for years now, we've been optimizing the use of precious metals by thrifting out metal from our catalysts in our Clean Air business, skills we are applying to fuel cells today. We use our science and know-how to reduce the number of MEAs required without impacting the performance of the fuel cell stack, which ultimately reduces cost to the customer. And then thirdly, we are a trusted partner, and this has been built over many years, which makes it hard to replicate. We have a commercial product today, and our customers come to us because we know -- they know that we can deliver the solution that they want. And finally, we have established manufacturing at scale, both in the U.K. and China. We've been manufacturing fuel cell components for over 20 years. This started as a very manual-intensive process, which has been developed and automated over time. Achieving a high yield is not easy. This is really complex chemistry, and the ability to do this without defects is hard. If there is one defect within one MEA, then the whole stack may be compromised. We've also proven that when volumes ramp up, we can manufacture efficiently at a high yield. In fact, we've managed to increase our yield twofold in the last few years, and we want to go further. We're currently expanding to meet future demand. So let's turn now to our fuel cells business today. We are a leader in this market with a strong position in material handling market as well as the emerging transportation sector. Our business is profitable, and we're seeing very strong growth, 30% compound annual growth rate over the last 4 years. Our customers are across the main segments: auto, truck, nonroad and stationary. And we're working with big names, including major truck and auto OEMs. And in China, we're working with the 2 main government-approved system integrators. Indeed, China is a huge growth market, and we're already on a significant number of buses and commercial vehicle platforms. In autos, we've had strong success. 25% of our sales are now into auto applications. This is an area where we've seen a real shift in momentum over the last 18 months. And now, we're working with a low double-digit number of major truck and also OEMs on platforms planned to launch over the next few years. And this includes the largest truck brand. So we're working with the players that you'd want us to work with. With the strong increase in demand that we're seeing, we've invested GBP 15 million to double our manufacturing footprint, which will be complete by March next year. We're able to quickly add capacity as this business is relatively capital light. So as the world pushes towards net zero, there is a huge role that fuel cells can play in the decarbonization and transportation. And the major opportunity in the near term is trucks and buses. So why is this? So firstly, costs. Fuel cell technology is expected to become the lowest cost option for heavy-duty trucks compared to diesel and battery from the latter half of this decade. Also, the weight of a fuel cell is significantly lower than that of the size of the battery needed for the kind of ranges required. And due to the relatively low energy density of batteries, the range offered by a fuel cell truck is much greater than that of the battery truck, and the refueling time is much lower. So even if the energy density of a battery improves by 2 to 3x, it will still take in the order of hours to refuel and a fuel cell truck refuels in minutes. So fuel cells in these applications make sense, and we're seeing evidence of this today. On the truck side, numerous companies have announced substantial investments in this area. One example is the Cummins acquisition of Hydrogenics for just over $0.25 billion. In terms of buses and commercial vehicles, we've already talked about our progress in China. But this is just the start. The Chinese government is targeting 1 million to 2 million fuel cell vehicles by 2030 and over 1,000 hydrogen refueling stations. So beyond truck and buses, there will, of course, be further opportunities in autos as costs come down through increasing sales volume as well as thrifting out metal and improving efficiencies but also, as hydrogen infrastructure develops and hydrogen prices come down. So as we move out past 2030, battery electric vehicles will make up the majority of zero-emission passenger car vehicles on our roads, but fuel cells will also have a significant presence. We see this as a good opportunity, particularly for larger SUVs and vehicles that regularly travel long distances with high utilization, where the rapid fueling and long-range advantages of fuel cells will add value. And beyond this, there will be rail and marine applications. There are already fuel cell trains in commercial operation in Europe today, rising to around 60 trains later next year. And we've also seen momentum with fuel cell trains in China. So it is clear that the momentum is gathering in the fuel cells market. We feel this momentum, and we really have a significant opportunity. So the biggest opportunity is in the automotive market: trucks, buses and cars. We already have a leading market share today in emissions control and fuel cell technology. We know the customers and we have the solutions. So the potential revenue in this area is significant. Around 5% of trucks are forecast to be fuel cell-powered by 2030. We've provided the estimated value of the CCM, and the numbers you see there are expected costs in 2030, which include the cost balance. And as I mentioned earlier, we are playing our part in these cost downs. The main areas of focus being pgm thrifting, which is a core competency for us and something we've been doing in Clean Air for years; improving yields through manufacturing efficiencies, such as automation; and improving power density, using our skills in pgm chemistry. We can improve where we place those metals and with our coating expertise, we can create better catalyst layers. It is the coated layer structure that determines performance. So the CCM value to us will be around GBP 2,500 per truck and GBP 800 per car. These are big numbers, multiples of what we supply in a clean air heavy-duty diesel catalyst system today. So putting this all together, you get an opportunity in the region of GBP 1 billion per annum in 2030 and then more than GBP 10 billion per annum in 2040. So hopefully, you can see that we have a really strong position in this market, and we're really excited by the opportunity that lies ahead. I'll now hand over to Eugene to talk about hydrogen production.

Thanks, Jo. So we talked about one of the key uses of hydrogen in fuel cells. And now, I want to spend some time taking you through how hydrogen is actually produced. So Johnson Matthey is a global leader in hydrogen, and has been for many years so from 1936, for example. Today, we mainly focus on new technologies in blue and green hydrogen, given that these are the technologies that will become increasingly important as we transition to a low-carbon world. As you can see, there are a number of routes to make hydrogen, and these have been given different colors to differentiate them. So for example, we have brown, which uses coal as a feedstock; gray and blue, which use natural gas; and green, which uses renewable energy to electrolyzed water. Now today, the vast majority of hydrogen is manufactured by steam methane reforming. This is gray hydrogen, where natural gas is converted at high temperatures into hydrogen and carbon dioxide, which is then allowed to skip into the atmosphere. The largest markets today for hydrogen are from manufacturing clean fuels in refineries and as a feedstock from methanol and ammonia. Johnson Matthey has leading catalyst technology in gray hydrogen with 40% segment share, and our involvement is selling the catalyst for the process. So now moving on to those cleaner technologies, both blue and green hydrogen, the process can be decarbonized or, indeed, made carbon-free. So you can capture the carbon dioxide from advanced gas reforming technology and stored in a process called carbon capture and storage. So this is blue hydrogen. Carbon capture and storage is a process for storing the vast quantities of carbon dioxide produced in geological formations often offshore using existing assets. It has been demonstrated at multiple sites globally, particularly in the North Sea over decades, and it's widely recognized as an essential technology that the world is decarbonized. And as the market evolves with the energy transition, we are well positioned as technology advances towards blue hydrogen production. We know this market well as we have an existing business, understand the customer base, we have strong relationships and the technology expertise to succeed. So finally, you can also avoid carbon altogether by using renewable energy for electrolysis of water, and this is green hydrogen. Now the estimated cost of production today are higher for blue and green hydrogen. But over time, as these processes scale further and volumes increase, costs will be driven out quickly, and along with the implementation of carbon taxes, the economics will improve. As we transition towards net zero, the demand for energy across the world will not decline. If it's not hydrocarbon such as oil satisfying that need, then it will need to be something else carrying the required energy, hydrogen. So when we look at the move away from gray hydrogen, it's not really a move from gray hydrogen we should be talking about, but all the new applications that will require blue and green hydrogen. Of course, those applications that are currently using gray hydrogen today will transition to using blue and green, and this will take some time, most likely incentivized by carbon taxes. For example, BP's energy outlook is assuming carbon taxes rise from around $40 a tonne of carbon dioxide emitted today, to $100 a tonne by 2030 and $250 a tonne by 2050 for developed countries on a path to net zero. So on this chart, you can see a projection of hydrogen volumes from the different production methods are likely to evolve over time. And importantly, we can see blue and green hydrogen are both playing key roles. Given the levels of greenhouse gas emissions, brown and gray hydrogen will not be viable solutions in the longer term for their existing applications, with structural increases in the cost of these processes as they will likely be subject to carbon taxes. And there are no use, of course, at all for the new clean applications. Blue hydrogen will enable the transition towards a carbon-free gas system and remain established in certain geographies where it is the lowest cost option, and we'll go to more of that on our next slide. But ultimately, blue and green adoption will be driven by geology, infrastructure and the cost of renewable energy. And we're also likely to see incentives, particularly for green hydrogen, where significant cost downs are needed. Looking at this chart, you can see the extent of the required cost downs. Additionally, the adoption of blue and green will vary depending on region. For example, blue hydrogen is likely to be a long-term solution in places with the right geology and infrastructure, such as the U.K. and the U.S., where there is an existing natural gas infrastructure for the transport hydrogen as well as depleted oil and gas fields and locations for carbon storage. Green hydrogen will be favored in some regions more than others, for example, Australia, for wide-scale adoption, renewable energy and capital costs will need to decline. So now looking at our blue hydrogen technology. As you can see from this schematic, our -- we use 2 processes with a gas-heated reformer and an autothermal reformer linked. The process is used in our existing methanol solution at scale, and we've been able to apply the technology to enable rapid deployment of a unique process that produces low-carbon hydrogen from natural gas. Our blue technology differentiates us from our existing competitors in a number of ways and a number of important ways. It's the most energy efficient. It uses, for example, 9% less natural gas compared to steam methane reforming plus carbon capture to produce a kilogram of hydrogen. For the project, the size of Phase 1 of HyNet, which I will introduce in a moment, this would mean a saving per annum of around GBP 6 million to GBP 7 million, and that's a project that intends to scale up by an order of magnitude from there. We also have the lowest capital costs, 40% lower than conventional steam methane reforming technology with carbon capture. Our greater efficiency and lower capital intensity comes from clever process engineering, where we use heat as efficiently as possible and keep carbon dioxide in the process stream, so we don't have to capture from the air. This all means that our process is easier and cheaper to decarbonize through carbon capture and storage. And indeed, more than 95% of the carbon dioxide produced can be captured for user storage. So our existing capabilities have been tightly important in supporting the development of this leading technology, and I'll give some more color around this in the next slide. In gray hydrogen, we supply a range of catalysts. And today, this business generates sales of around GBP 60 million a year. This is recurring business, and the catalysts we sell are generally in service for around 3 to 4 years before replacement. We have many years of experience in gray hydrogen, a 40% segment share and over 400 customers, including oil and gas majors and industrial gas companies. This underpins exactly why we can be successful in blue hydrogen. In blue hydrogen, our offering is much more comprehensive than in gray. We will supply the catalyst, some equipment, engineering expertise, and we'll also license the technology, which means the opportunity is larger for us. Something I'll talk to you shortly. Our experience in this area is hard to replicate, and we've built on our expertise in gray hydrogen and in methanol to develop the best technology for blue hydrogen. When people spend hundreds of millions of dollars or indeed billions on new plants, this is at a massive scale, where people want to have the confidence that the technology will work. Customers get that confidence with us, they have known us in hydrogen for years, they've seen our commitment to developing blue hydrogen and seen similar processes in methanol working at huge scales. They also know that we will give them the support all the way through the process and guarantees some performance once the plant is running. This means that we expect to achieve a leading segment share. Customers will choose the best process. By that, I mean, not only that with the lowest technology risk that I've mentioned, but also the most efficient and lowest capital cost. For example, one of the largest operating costs in the process is natural gas, so using 9% less than the equivalent process is a huge saving. On the customer side, we're making good progress with both existing and new customers. Our technology is already starting to commercialize, is currently being used in a number of projects, including HyNet project and the Acorn hydrogen project, which I'll come to in the next slide. So HyNet is a hydrogen energy and carbon capture utilization and storage project in the North West of England, and its establishment should create a low-carbon cluster in that region. HyNet's aim is to reduce carbon emissions from industry, homes and transport, and we're delighted to be involved in this high-profile project, which will use our blue technology for the first time. This first deployment is an important milestone in demonstrating our leading technology at scale, and the initial plant is the first of multiple plants planned on that side. Phase 1 will produce 80,000 tonnes of low-carbon hydrogen for industrial and domestic customers, which is already equivalent to a world-scale hydrogen plant. And there are 3 more phases to follow. To give you an idea of the scale of this project, by the time all of these phases are complete, to produce the same amount of green hydrogen, it would require 6x the energy of the world's largest offshore wind farm. So these are massive projects. So HyNet chose us for 3 main reasons. Firstly, the technology risk is minimal. We use similar process technology in methanol, so it's already proven at scale, and we continue to invest in R&D to ensure we stay market leading. Secondly, the economics are attractive. Our technology requires the lowest OpEx and is least capital intensive. And finally, we are a trusted partner to our customers, we have decades of experience and a strong reputation in this space. We're also involved in a slightly smaller project in Scotland, the Acorn project for blue hydrogen; production from North Sea Gas, and that will also be based on our low-carbon hydrogen technology. And of course, we're working with a number of customers globally, and we have a strong pipeline of future projects. So looking towards to this low-carbon future. There will need -- there will be a need for blue hydrogen, and we see significant opportunity here. If we assume around 30% of the global hydrogen demand in 2030 comes from blue hydrogen, then the total market size accessible to JM would be around GBP 1.5 billion to GBP 2 billion per annum. Our opportunity is primarily through the licensing of our technology and the supply of engineering and our process catalysts. To give you a few more details, an average one-off fee per plant could be in the region of GBP 50 million to GBP 60 million, and this will of course vary depending on projects and the size of those projects. Beyond that, a typical change-out period for catalysts is every 3 to 4 years, and this could be around GBP 5 million per refill. So it's a very significant opportunity for us in 2030 and accelerates in the years beyond. Moving on now to green hydrogen. What is it? Put simply, it involves splitting water into oxygen and hydrogen using electrolysis. So it's very similar to fuel cell technology. Effectively, the reverse of fuel cell technology in the process. And there are several types of electrolyzers that can be used to make green hydrogen. The main ones being alkaline electrolyzers and proton exchange membranes, or PEM electrolyzers, which use precious metal catalysts. Alkaline electrolyzers are more mature, the technology is more mature. They are typically used in larger continuous applications, and the technology is more commoditized, which isn't really where JM competes. The particular advantage for PEM electrolyzers is that they can be scaled to the required size, they're very robust and noncontinuous use applications, for example, when coupled to renewables such as wind turbines. PEM will also be more cost competitive at scale. It's a new technology today, and there's plenty of scope for cost downs, for example, thrifting out pgm content and scaling up manufacturing, something which JM can do very well. PEM electrolyzers are a particularly good match for JM as they use precious metal catalysts in a similar way to fuel cell technology. So given the economics, this opportunity is slightly further off than blue hydrogen, but we are confident that we will be successful. PEM technology matches to our core science, it plays exactly to our strength. Jo has just talked about our long heritage and expertise in fuel cells, and given the strong similarities between fuel cells and PEM electrolysis, we're able to apply our expertise in this space. We have a competitive advantage in pgm catalysis. In particular, platinum and iridium chemistries are important for green hydrogen, and our ability to optimize the yield of hydrogen per gram of noble metal is a core competence for JM. We also know how to scale up this business. We've got experience of this from fuel cells. And our pgm recycling expertise is also part of JM's DNA, which means there is the potential to offer a closed-loop service to our customers, where we would design solutions from the outset that take into account end-of-life options. More importantly, we are experienced in enabling new technologies that have already started testing -- and have already started testing with leading electrolyzer players, including a major global industrial company. The market for green hydrogen is big. We're already starting to see progress with a number of targets, for example, as part of the recently announced EU Hydrogen Strategy. Germany alone has committed to invest EUR 7 billion in hydrogen-related businesses and research. And we think the estimated addressable PEM market is in the range of GBP 2 billion to GBP 4 billion per annum in 2030. Given the strong overlap of fuel cells and our core science capabilities, we know we have the ability to succeed. We are well positioned to bring new solutions to the hydrogen space and look forward to playing an important role in this energy transition. Back to Robert.

So thank you, Eugene. Thank you, Jo. So to conclude, as legislation tightens and concern over climate change gain momentum, we believe that hydrogen will play a significant role in enabling the energy transition. And with such a key role to play across multiple sectors, investments in hydrogen-based technologies and associated infrastructure is accelerating. We already have an established and profitable fuel cell hydrogen production business today. And with our leading technology, we're uniquely positioned to benefit from what is a very significant growth opportunity in a fast-growing market. Our opportunity in hydrogen is not an accident. It's founded on decades of experience and underpinned by our science expertise across the group. We're proud of our role in enabling the transition to a global low-carbon economy. For us, the opportunities are broad but more importantly, it helps us to deliver on our vision for a cleaner, healthier world. So that finish what we were going to present for the day, so now it's over to you for questions. So I'll hand over to the moderator first, and then we'll welcome your questions.

[Operator Instructions] Your first question comes from the line of Tom Wrigglesworth from Citi.

I'll limit myself to 2 questions. Well I've got a lot of learning to do clearly. First question is around the alternative technologies. I think other companies have started looking at non-pgm-based exchange membranes. Could you maybe help explain why -- do they have any viability? What is -- what might change the landscape in that regard? And then secondly, when it comes to -- could you unpack a little bit of your addressable market from GBP 2 billion to GBP 4 billion in 2030? You've given some assumptions, but what percentage of a cost of say a fuel cell for 100 kilowatts vehicle is -- would be the PEM membrane? And similarly, in an electrolysis of, let's say, 10 megawatts, what's the cost of the PEM membrane in a 10-megawatt electrolysis system? Would be very helpful.

Thanks, Tom. So let's go, Eugene, with the first one. And then the second one, I'll try and sort of carve that out a bit, but give you a bit of color. Eugene, the alternative technology is non-pgm-related electrolysis between hydrogen.

Yes. Thanks, Tom. So there are alternative technologies being discussed at the moment. They're at much earlier stages of development of technology readiness. In particular, there's a technology called AM and exchange membranes. And they work at a simple level, they work in a similar way to PEM electrolysis, but there's no requirement for platinum group metals. So it is entirely possible, as we go decades into the future that AM technology may catch up with PEM electrolysis. I would say, however, is that being expert at PEM electrolysis we've positioned the company very well for moving through into AM technology as that develops in the future.

Okay. Thanks, Eugene. And on the addressable market, I think, Tom, you were asking a little bit about car, trucks and also about green hydrogen. And if I just look at green hydrogen first because that's, I think, still on the slide or maybe it's not on the slides anymore. So the GBP 2 billion to GBP 4 billion of addressable market is very much linked to the assumptions that we made previously around the growth in the hydrogen market, which we showed on slide, I'll get the number in front of me in a second, on Slide 19, which is the sort of terawatt hours required for green hydrogen. And we've assumed, as have the Hydrogen Council and BP, a pretty much equal split between green and blue. So you can debate that, but that's the assumption that we've used. And then in coming up with the GBP 2 billion to GBP 4 billion market, we've ranged that between, well how much does PEM -- what's the PEM share compared to the other types of technology, as Eugene referred to, the alkaline water technology. So at the lower end of PEM share, as I said on the slide, assuming 30% share, then you end up with a GBP 2 billion market opportunity. And at a 60% share, you end up with a GBP 4 billion market opportunity. So that's how we try to frame it on that. And you're talking around about MEA value, ex metal of conversationally about $50 per kilowatt. On the fuel cell side, Jo, do you want to give a bit of color on the fuel cell side on the kilowatt side, probably focusing on trucks, I guess?

Yes, yes, sure. So for 2030 for trucks, we see that the penetration starts to happen with 5% of vehicles with a fuel cell platform. And the kind of a dollar per kilowatt there in trucks in 2030, the cost downs are getting towards $25 per kilowatt. And this translates into -- and the MEA of the fuel cell stack is about 30% of that stack. And you're getting towards GBP 3,000 around that level for the MEA component. And then the CCM, as we've put it down there on Slide 16, is around GBP 2,500.

Okay. Tom, does that give you enough...

Yes.

Okay. Fair enough. Those are assumptions, of course, but that's what we expect the market size roughly to be. So thanks, Tom.

Your next question comes from the line of Alex Stewart from Barclays.

Thank you very much for the presentation and all the information about the industry side. That's really interesting and helpful. You've talked a lot about total addressable market and revenue opportunity. You haven't put a huge amount about profitability or relative profitability and returns. Can you give us some sense of which of the various opportunities you talked about today is the most attractive in terms of the return on capital you can make? And whether they all would satisfy, at scale, your 20% aspiration for the group return on invested capital? And then secondly, hopefully, a simple question. Your fuel cell component business today, which I appreciate is a small part of the group. Do you have any sense of what sort of share of the market you have? Do you think you're a minority player? Do you think you have a sort of decent proportion of the new orders that come through or the new business that comes through? Any sense of that would be really useful.

Of course. Actually, do both. Well I'm going to ask Jo to answer the one on the fuel cell share. But on the return on capital and margins, look, I think, in both -- all of these businesses, absolutely. We believe we can meet our target aspirations of a greater than 20% return on capital. The exact projection of margins and profit growth will obviously depend on how the market evolves. But they're relatively low capital-intent opportunity, particularly on the fuel cell side because they're relatively low capital intensity, as Jo explained. And on the hydrogen side, particularly on the blue hydrogen side, we already have developed the technology and the process technology. And the catalysts that will go into those plants come off our existing lines that we already have -- or production capacities that we already have today. So from a return on capital point of view, they should be attractive. I'm not going to give the relative attractiveness between the different opportunities, but they all are sufficiently attractive. Jo, do you want to talk a little bit about share?

Sure, sure. Look, as you know, we have a well-established profitable business in fuel cells today. And we've built our reputation over the last years really in emerging markets of nonroad, and we have a 25% share in the material handling market. And now we're really building significant momentum in automotive, and that has grown to 25% of our business. And that's primarily been in China, which is very much the early adopters of MEAs that we're supplying onto buses and commercial vehicles, logistics vehicles in China. So that's where we're positioning and we're securing more business in that sense over time, which is why we've invested in our manufacturing facility in China. But it is an emerging market and it is quite fragmented with different components in different parts of the value chain.

I think, Alex, it's hard to give an absolute number to show. I mean I think we can give a number per share for the broader truck market because that's more established. I think it's quite hard, particularly in China, to be clear about the exact share that we have. But it does feel like we have a meaningful share. So what is meaningful? Sort of 20%, probably. But it's really hard to be precise about it.

That's really helpful. Perhaps, if I could just answer that -- I'll ask it another way. Do you feel like there's a lot of competition for the parts of the fuel cell, the MEA, that you're manufacturing? Or will this be a pretty consolidated market?

Jo, do you have a view on this?

Yes. Well there's not that many players in the MEA at this time. And actually, we're really well positioned as we're in lots of points of the value chain. As you saw in the slides, we're in the pgm, we're in the catalyst, we're able to coat and supply the membrane as well through the MEA. So that's a real opportunity to be working and collaborating as the market develops with our customers and tailor the performance of our products to their fuel cell systems.

Your next question comes from the line of Adam Collins from Liberum.

It's been very interesting. I had 3 questions, please, at this stage. Firstly, on the blue hydrogen opportunity, thanks for the details on the average value per project. I think you said GBP 50 million to GBP 60 million for licenses, and GBP 5 million for the catalyst refill values. Could you perhaps give us a sort of sense on what the value opportunity then might be for HyNet if it scales to Phase 5? You suggest it's a very big project, but just to give us a sense for what it might mean on what looks like is going to be one of your first and biggest opportunities. On the MEA side then for PEM electrolysis, I know that's kind of quite long term. But would you be able to say whether the value per kilowatt in electrolysis is similar to fuel cell? Essentially, is it the same value proposition? I've heard it said that the value proposition is slightly less in electrolysis, despite the fact that sort of technology plays the same. And then finally, on PEM fuel cell, could you discuss what the likely role of captives is going to be in this equation? To what extent do you think that the OEMs themselves will be producing part of the value chain?

Adam, nice to speak to you again. Thank you very much for your question. And I think you get the [ prize ] of being able to make it very easy for me to show the questions out. Three questions, and I'll take one, Eugene takes one and Jo takes one, so the [ prize ] for that. But we'll start off, Eugene, with HyNet. Maybe you can give an answer there.

Yes. I think I'm quite comfortable with giving numbers for general plant. So the first, the HyNet Phase 1 is about half the size of the plant that we've given you an example at size of GBP 50 million, GBP 60 million for and refill size. And it's kind of public information, how big that plants go. And clearly, that there'd be commercial discussions about the exact size of that opportunity between us and HyNet.

Yes. I think we hope to give too much on that. So I'll...

Okay. May I just ask just a point of clarification? We know how big that project is in terms of production volume, but we don't know when you talk about a typical project and the sales values, what is a typical project then in terms of blue hydrogen volume?

So HyNet, it's about 80,000 tonnes a year. The typical projects will scale to about twice that size, 160,000 a year, which we think we'll be heading towards a typical world-scale plant whenever that gets off at scale.

Yes. So your numbers are based on 160,000?

So if you look at then -- if you -- When you do get the slides, Adam, if you look at Slide 24, which is where we have the data, there's a little sub -- superscript 1, a number, super -- 1. Again, based off of that means plant size of 160 kilotons. So those are what our numbers are based on.

Okay. That helps.

Okay? Now on the -- so the second question about the sort of relative values per kilowatt. I think we see -- or we based the numbers at least on slightly more value per kilowatt on the electrolysis MEA versus the vehicle MEA, and that's principally because the -- it's a slightly thicker and more -- it needs to be more durable MEA in some respects. And so therefore, the membrane will be thicker, the coating -- probably the catalyst layers will be a bit thicker, too. And as a result, sort of the absolute value per MEA might be greater. So we're talking about something like $50 per kilowatt for a green hydrogen MEA in 2025, going down to, say, $40 per kilowatt. And Jo has already said that we would expect $25 per kilowatt in 2030 for a truck. So those are rough sort of numbers.

Great.

And that's how we based -- so what -- sorry, that's how we based our -- the numbers that we've presented to you. So we're not warranting that those are going to be the absolutely right numbers, but that's the sort of pathway that we expect to be going under. And Jo, your question on the likely role of captives in the fuel cell market.

Thank you. The earlier adopter OEMs that have been leading on fuel cell vehicles have certainly been doing a lot of their deep research, their learning and developing of the fuel cell system in-house. And that's been at a time when the supply chain is just becoming established. So it's always difficult to say what will happen over time in an emerging market. But we're certainly in a great position to start to work with those, and just, well we are working with those OEMs for business as the market starts to scale. So for example, if we are able to supply something that has better performance, improved durability, high quality for a competitive cost, then that's something they would really want to evaluate as they scale their business and require a broader supply base. So what we're doing now is working with them, proving this to them. And it's the reason why OEMs and Tier 1 customers want to work with JM, because they recognize the need for continual improvements and believe that we're well positioned to do this. So there's lots of opportunities to collaborate and supply some or indeed all of our components.

May I ask a quick follow-up?

Sure. Yes.

Is there a strategic or technical value in the fact that you do both the electrode and the membrane as opposed to just doing CCMs?

Yes. There is. And as -- we're deeper experts really in these aspects, from the catalysis, the ability to coat the membrane, placing those molecules where we exactly want them. So this -- we can really optimize those key elements that really give the durability and performance, as I mentioned in the presentation. So that structure of membrane, together with how we coat the catalyst layers and it all interacts, really determines the performance. And that's where our capabilities really are and delivers -- that's our competitive advantage.

And we absolutely think we have strategic advantages with CCM, the catalyst coated membrane, where you then go on to the MEA, which is where you're putting a seal in the gas diffusion layer. That's more about -- what's the word I'm looking for? It's more about assembly, which is not where our competitor's advantage lies. So whilst there might be more value in supplying an MEA, the real competitive advantage, we believe, is in the catalyst coated membrane. Okay. Thanks, Adam, for your questions.

Your next question comes from the line of Charlie Webb from Morgan Stanley.

Definitely some insight in there. A few from me. Just first off, on blue hydrogen. Just wanting to be clear. Is this all about new opportunities, as in there isn't really a retro opportunity versus the gray hydrogen where you already, I guess, have kind of traditional catalysts? Do you see -- is there any way you can upgrade or scale? Is this very much for new blue hydrogen plants? Just to clarify that. Then just on green, kind of circling back to kind of -- obviously, this is nascent. You guys kind of mentioned that the technologies continue to evolve. How do you ensure -- I mean, is this an area where you need to have partnerships with some of those other leading electrolyzer producers, I guess, Hydrogenics, ITM? Is that where you need to form some sort of technology development partnership to ensure that your technology has a good chance? I mean how do you kind of ensure that? Because it does feel like there's a lot of different paths being taken right now in terms of moving towards green hydrogen, how to scale it up. Just how are you thinking about kind of developing your product offering? And then lastly, kind of tying it together, just thinking about the capital cost, the CapEx. I mean you clearly see growth opportunities across all 3 of these kind of production and on the fuel cell side. How much CapEx do you need to put to work to continue to support the growth? Is there -- is that kind of captured in your already planning today? Or are there changes here where you need to invest more to make sure you're positioned for this scope?

Charlie, thank you for the questions. So start off, Eugene, on blue hydrogen and the new versus retro.

Yes. So these are new applications for hydrogen that we're interested in, where it's being used as an energy vector at really high volumes, which is quite difficult to hide gray hydrogens being used. So there are benefits of doing this at large scale where you're close to carbon capture and storage. A lot of gray hydrogen. It's small, inland close to end markets. So we think the hydrogen infrastructure will evolve in a different way over the next 20 years. And indeed, the gray hydrogen market is already transforming where traditional small plants are being replaced by larger, more efficient plants that then distribute their hydrogens on a pipeline network rather than building them like that. So I think that gray hydrogen will be replaced, but it won't be as simple as simply replacing an existing gray hydrogen plant with a new blue hydrogen plant.

And does -- sorry, just a quick follow-up on that. Does that mean that when you think about these large hydrogen opportunities, therefore, you're kind of more steered towards, I guess, opportunities in methanol, ammonia, which traditionally, I guess, have been the larger world-scale-type hydrogen plants? Or is it, as you say, these -- the more -- the energy vector side? Just trying to get a sense. Is it more industrial use? Or do you think it's more energy use?

Well it's for production of hydrogen at scale, at very, very large scale, and even for distribution into -- for example, in HyNet, hydrogen will go into the gas distribution network for domestic users. It'll also go into large industrial users. It'll also go into transport. There are advantages in producing the hydrogen at very large scales. Typically, that 160,000 tonne-a-year size would be a good world scale to think about to get the efficiencies of scale there. But it'll go into all of those applications, which are very different to where gray hydrogen is used today.

Okay.

Okay? So on the green hydrogen, you're absolutely right, Charlie, it is nascent, and we are working with a number of the sort of suppliers of electrolysis at the moment. And how we exactly move this forward? I don't think we'll be doing it all ourselves. We will be working in some development partnerships and stuff like that. But exactly how this moves forward, we'll navigate our way through. But absolutely, I suspect it will be very much like the way we work in our existing businesses, which are working in partnership with our customers because this is a technology solution and people want their different -- they want to work with us on the technology to develop it together. And lastly, on CapEx for all 3. Well I've mentioned that it's relatively low capital intensity in these areas. The -- and in -- particularly in hydrogen, we have the capacity at the moment for the catalyst production. And once you develop the technology, you don't need to put the licensing. You don't need to invest. That's not -- that's a very, very capital-light business because it's a technology and people engineering business. On the fuel cell side, the doubling of our capacity that we've just -- we are close to finishing. We'll finish by the end of this year. Cost us about GBP 15 million, I think it was, Jo, to double our capacity from where it was before. And so I think the ability to scale up, we can do that. We did that project within less than a year. And so therefore, the ability to scale up rapidly and at relatively low capital cost is there for us.

Okay. Your next question comes from the line of Sebastian Bray from Berenberg Bank.

My first one would be on the cost structure for blue hydrogen. Rob, you mentioned earlier a figure of about $40 per kilowatt for electrolysis. If I take your market share assumptions and accessible market sizes, is it fair to say we're talking about roughly a figure of half of that on a per unit hydrogen or per kilowatt basis for blues of roughly $20? And as a second question on that, is there any precedent for licenses being quite as big or as valuable as the GBP 50 million to GBP 60 million? I do have a third question on green electrolysis, but I'll pause there.

So, Sebastian, thank you for your questions. I think -- I'm not sure if I got your first question. Could you repeat it again, please? Because I think there were puzzled faces in this room.

For a unit -- let's say that -- if -- is, all things being equal, Johnson Matthey providing the catalyst of a technology to make 1 kilogram of annual capacity of blue hydrogen worth roughly half of what it would get for the equivalent amount of green hydrogen capacity in an electrolyzer?

Crikey. I don't -- can we come back to you on that one? I think we've looked at it in a slightly different way because we -- and I don't know if I have all the detail per kilowatt.

So I guess I would say this on a slightly different way in which the revenue flows because there are upfront lump sum payments to us in blue hydrogen at the start, followed by refill once every 3 to 4 years as things progress forward, which is a slightly different way, I think, of going green hydrogen. However, and just a straight -- if you want a straight translation over the -- as far as the kilotons per year of hydrogen production, we'll have a translation directly across into kilowatts, and we can get that to you immediately after.

Yes. I think the translation we've used is roughly 40 kilowatts per kilogram of hydrogen. So -- and that's a sort of well-used sort of rough range of value. So I guess I'll have to get my calculator out and work about 160 kilotons and then turn that into terrawatt-hours or gigawatts. So then compare that with the value for the green hydrogen. But hopefully, your calculation will be better than mine, Sebastian.

It's -- I just was wondering perhaps in principle from revenue or profitability terms or maybe both, would you prefer 1 unit of green or 1 unit of blue hydrogen?

I don't think I look at it like that. I look at the opportunity, and I think the opportunities are good in both. The return on capital should be good for both. And I think that with the offering that JM has, I think we could be competitive, and both of them could be attractive for us. I mean if you think about JM, the way we operate, we operate in niches. Our strategy is very much to operate in niches which require a technology solution. And the technology solution required for green hydrogen is around an MEA that works with thrifting the Pgm content on that -- in that system, which allows us to capture value. And the same thing is true in blue hydrogen around the technology and the catalyst. If you can make a better catalyst, you can attract more value. And in both of them, I think they're potentially attractive markets. Now on the licensing question, Eugene, GBP 50 million to GBP 60 million per plant. Do you want to answer that one? It was around, as we've seen -- are we seeing something of that scale before? And...

In methanol? Well I think -- so yes, we've seen data -- a plant of that scale in methanol. And so no blue hydrogen plants exist at the moment. So they have a -- plants using this scale of technology, our scale of technology, do exist where the final application is methanol. So we're quite confident of the scale.

I hope answer your question, Sebastian, because as we said, we don't have a -- there are at least 3 hydrogen plants of this scale that exist at the moment.

Understood. That is helpful. My last question was on the electrolysis area. What exactly is it that Johnson Matthey can sell to electrolyzer providers that they themselves are not doing at the moment? And if you were to say -- let's say on a 5-year view, is it likely that there will be any commercial sales to this area by 2025 not as a matter of guidance but just what is your gut feeling saying?

So I think the opportunity in green hydrogen is here -- coming very rapidly. And it's incredible how it's evolved in the last 12 to 18 months and probably -- arguably even in 6 months. And there are a relatively small number of players here in the PEM market. What they will be looking for is an MEA, so the membrane electrode assembly, exactly like they'll be looking for the truck manufacturers and the auto manufacturers are looking for in -- for their fuel cell stack. So what we would be looking to offer is either the catalyst coated membrane or, if some people wanted it, they'd go further down to the MEA. But we think where we have competitive advantage would be the catalyst coated membrane. And we are talking to, at the moment, not all but certainly some of the existing main players. And obviously, what we think we can offer is, and why they'll be attracted to us, is our deep Pgm chemistry expertise and the fact that we've got proven track record in fuel cells because actually, the fuel cell for a truck is not that different from a fuel cell for a green hydrogen plant. Do we another question? We do.

Your next question comes from the line of Andrew Stott from UBS.

I had a couple of questions. And first of all, I just want to check the methodology in the numbers. So very, very useful getting that overall view of your addressable markets in each of the 3 segments. Just checking that, that is a revenue number as is normal with JMAT. So it's ex substrate, ex Pgm content. So it's the revenue number that then you apply on margin, too? So I just wanted to check that, first of all.

That's very easy. Yes. Yes. Yes.

Perfect. And sorry, just while we're on that margin application, I sort of got a sense from what you were saying through the presentation that the margin might be a bit above the average of the group. I just wanted to check if that's right.

So I guess the question is -- so in the medium term, or, let's say, longer term, the answer to that -- and the answer to that, absolutely, yes. But clearly, in the scale-up phase....

Sure. Sure, sure.

It will be -- but there's no reason why it shouldn't be higher than the current average margins for the group, yes.

Yes. Great. Second question was entirely different. It was around the slide on autos and trucks. I'm just trying to work out the trade-off between your existing HDD franchise and the opportunity in fuel cells. I just want to check this math with you basically. Are we looking at a similar margin on the CCM business to HDD? And therefore, I just apply the multiple difference on the revenue line to get to my EBIT? So in other words, it's about -- I think I'm right in saying about 3x the opportunity in trucks? So I wanted to check that math, please.

So I think you're absolutely right. At the moment, we sell -- I mean, it all depends on the size of the truck, of course.

Yes.