Johnson Matthey Plc (JMAT) Earnings Call Transcript & Summary

Thank you, Nadia, and good morning, everyone, and thank you for joining this call at short notice. I know it's a busy morning for many of you. You should all have seen our announcement this morning that we have agreed a long-term strategic partnership with Plug Power and Hydrogen Technologies. Take you through the details of this, I'm very pleased to welcome our Chief Executive, Liam Condon; our Chief Financial Officer; Stephen Oxley; and Chief Executive of Hydrogen Technologies, Mark Wilson. We'll have a short presentation followed by plenty of opportunity for Q&A. Ahead of the presentation there, I'll point you to our cautionary statement. With that I'll hand over to Liam Condon, Chief Executive.

Thanks, Martin, and good morning, everyone. I'm really excited to be talking to you this morning to give you an update on one of our key strategic milestones. Back in May last year, we said that one of our milestones was winning at least 2 large-scale strategic partnerships in hydrogen technologies and that we want to win with the winners. As you'll have seen, we've agreed a long-term strategic partnership with Plug Power, one of the world's leaders in hydrogen. This is a game-changing deal as we scale our hydrogen technologies business. We're supporting Plug in accelerating the deployment of fuel cells and electrolyzers. At a high level, the partnership includes a supply and joint development agreement to at least 2030. This covers supply of existing products from 2023 and future generations of technology for both fuel cells and electrolyzers. To meet Plug's demand, we're co-investing in a new manufacturing plant in the U.S. with capacity of 5 gigawatts initially scaling to 10 gigawatts over time. And this deal underpins our targeted sales in hydrogen technologies of GBP 200 million by 2024, '25 and an acceleration beyond this. Today, we'll explain the partnership and its strategic significance. I won't go into all of the financial details for one agreement, but we'll update you more fully for the whole of our hydrogen technologies business in May with our full year results. Before I get into the details, let me first set the scene. You may recall this slide from our results presentation in November. And it's a really important point. The growth markets we talked about as part of our strategy update last year are coming at us faster than we originally expected. Specifically in the U.S., the Inflation Reduction Act is a game changer for the hydrogen industry. It's driving investment and demand, and you're now seeing a concrete example, albeit very early of how important this act is in accelerating demand. Momentum is building. The energy crisis in Europe is also driving demand for sustainable technology solutions, including electrolyzers for power generation. As the world's decarbonization journey accelerates, global demand for clean hydrogen is expected to grow more than 100 fold in the 10 years to 2030. We're pleased to be working together with Plug, a world leader in hydrogen to meet the growing demand in this market. The hydrogen economy is a term used a lot. So it might be worth explaining briefly the different parts of it and how they all fit together from production to end users. You can see in the center of this slide where JM plays. We're involved in the production of hydrogen and its use in fuel cells. We help produce electrolytic or so-called green hydrogen from renewable energy sources. We can also help produce low carbon hydrogen or so-called blue hydrogen. We're also involved in the use of hydrogen powered vehicles through fuel cells. I'll come back to what exactly we do in these areas, but in each of them, we are decarbonizing and [ catalyzing ] the net-zero transition. Once hydrogen is produced that can be used in many different applications instead of fossil-based energy sources, it can be thought of as replacing oil. You can see on the right of the slide, it can be used for blending into household use to power generation and hydrogen fueling stations on the right side of the slide. On the left, you can see how hydrogen can be converted into different fuels for shipping or store to provide energy when needed when renewable energy sources cannot provide enough when the sun doesn't shine or the wind doesn't blow. So you can see that this is a truly integrated chain, and we are at the heart of it accelerating the hydrogen economy and decarbonization through our unique technologies. So now before I get into the detail of the partnership, let me show you the value chain as this is important in understanding why the combination of JM and Plug is so strong and will create a lot of value. JM is the #1 supplier and recycler of platinum group metals, the critical materials needed in fuel cell and electrolyzer components. This is one of our core competencies. As we do across JM, we play in a complex and valuable part of the value chain. The key component which defines the performance of a fuel cell or an electrolyzer is the catalyst coated membrane or CCM. Our clever chemistry and expertise in PGMs developed over 200 years, enables us to optimize the performance of the membrane and also the Catalyst layers. It's the interactions between these components that really determines performance of the fuel cell or electrolyzer. That's where our capabilities are. Plug is a leading provider of turnkey hydrogen solutions for the global green hydrogen economy. They will take our CCMs, which are combined in a stack, and this then powers the end application. And these are across the wide variety of applications already mentioned. And importantly, at end of life, we intend to provide closed-loop recycling. So whilst the value chain is still nascent, this partnership allows JM and Plug to focus on their specific areas of expertise, which will accelerate deployment of Plug's next-generation products and the development of the market. Plug is an existing customer of ours, and we've had many discussions with their CEO, Andy Marsh and his team over recent months. We share very similar aspirations. Plug's is to build a clean hydrogen economy and ours is to catalyze the net-zero transition. And I'm excited about building on our relationship and collaborating further to accelerate growth. We already have an established hydrogen business. We have over 20 years' experience in fuel cells, and we are well along the experience curve. We're a strong partner for Plug with our expertise in PGM chemistry and catalysis, our ability to supply, manage and recycle PGMs and existing manufacturing. Plug is a world leader in hydrogen and building an end-to-end green hydrogen ecosystem. Some of the key customers include Amazon, Walmart, [indiscernible] and BMW, and they have really ambitious sales targets, a quadrupling of sales between 2026 and 2030 to $20 billion. When I talked about strategic partnerships in hydrogen technologies, Plug is exactly the type of organization that we want to be working with. We don't want to win with the winners. It's about identifying world-class partners who can strongly complement each other and together develop a market-leading offering. This partnership is about growing together, leveraging our areas of expertise and accelerating growth. Now let me get into the detail of the agreement. JM will be a lead supplier to Plug of membrane electrode assembly components, including catalyst-coated membranes, catalysts and membranes for fuel cells and electrolyzers. We will be supplying a substantial portion of Plug's demand. So this is really a significant development, particularly given Plug's ambitions and the strong market growth expected. We've agreed to supply and joint development agreement to at least 2030. This includes supply of MEA products from existing facilities in the U.K. from 2023. This essentially formalizes and extends an existing relationship with Plug and we'll also be supplying future generations of CCMs from the new U.S. plant. Plug will take these CCMs and then produce the MEAs. We will also work with Plug to fast track product development, delivering components with significantly improved performance, durability and cost compared to today's technology. This is a critical part of the collaboration. To scale quickly, we need to stay ahead on technology as well as cost. And of course, Plug values us for our expertise in PGMs, our ability to be a reliable supply chain partner for those critical raw materials, particularly in platinum and iridium. And our goal is to provide a closed-loop solution as we aim to create a sustainable ecosystem. I'll talk in more detail on the next slide. We're co-investing in new manufacturing capacity in the U.S. Importantly, this capacity is customer-backed. Plug has committed to minimum quantities of product from JM. Together with Plug, we're building a dedicated manufacturing capacity in the U.S., which will supply Plug's Gigafactory in Rochester. This new plant will initially have 5 gigawatts capacity scaling to 10 gigawatts over time. We expect production to start in 2025. So if you include our existing capacity of 2 gigawatts today and also our planned 3 gigawatt expansion in Royston, in the U.K., our total hydrogen technologies capacity will be scaling to around 15 gigawatts by 2025 and beyond. The key thing with this capacity expansion is that we're not doing this alone. It's a partnership with Plug. This is an approach that diversifies and reduces risk. Plug will be responsible for construction of the building and related site services, and we will provide and operate the equipment. And importantly, this investment into the new plant is broadly included within our existing group CapEx guidance of GBP 1 billion to 2024, '25. So you've heard the JM perspective on this deal and how excited we are about collaborating with Plug. I now want to share with you a very short video from Plug's CEO, Andy Marsh, to give their perspective.

Hi. I'm Andy Marsh. I'm the CEO of Plug. Plug is building out a complete hydrogen ecosystem. I believe partnerships will allow this industry to grow rapidly, bring together the core strengths of both companies. That's why we partnered with Johnson Matthey as we've done with others like [indiscernible] in Europe for our JV with our JV [indiscernible] in South Korea. But here, bringing Johnson Matthey's core capabilities in PEM design and manufacturing, coupled with Plug's capabilities in that area as well as fuel cell systems will really allow this industry to continue to grow. Plug doesn't do anything for the short-term. Johnson Matthey and Plug, 2 of the leaders in the fuel cell industry are joined together in this partnership to accelerate the industry's growth as well as the unique capability that Johnson Matthey brings to the table, which no one else has, is the access to precious metals and more important, their ability to recycle precious metal. I couldn't be more thrilled to be partnering with Johnson Matthey and my friend Liam to really help grow and accelerate this industry.

So now you've heard from Andy at Plug and how excited they are about this partnership, too. It has tremendous benefits for both Plug and JM. With Plug, we have a partner who is selling [indiscernible] to the customer. And this opens up a range of end markets to us. It gives us access to greater commercial strength, bringing us closer to the final customer. And these benefits reach beyond the partnership itself. Plug is more advanced than many others in developing partnerships throughout the hydrogen value chain. There are other companies who may be earlier in this journey who are doing a lot of things themselves, but there are benefits of having partners specializing in their own areas of expertise, and this is exactly what this partnership demonstrates. Two leading players working together to accelerate growth and expand into new markets. So to conclude, I'm incredibly excited that JM is the technology partner of choice for Plug, 2 leaders in hydrogen partnering to create significant value. We're delivering on our milestone of strategic partnerships in hydrogen technologies, and this is a game changer in the development of our business. The partnering with Plug and through partnering with Plug and being a lead supplier, we're taking a significant step in our ambition to be a leading global supplier of CCMs. And this deal underpins our targeted sales in hydrogen technologies of more than GBP 200 million by the end of '24-'25, with an acceleration of growth thereafter. What we'll do is provide a more detailed business update for hydrogen technologies alongside our full year results in May. You can see on its own, this is a great partnership for JM, but the value extends much further. Strategically, this puts us in a great position to be a leading player in CCMs for the hydrogen industry. I look forward to working with Plug and the team over the coming months and years. it's very clear that our ambitions are aligned, and we're committed to making this a successful partnership. I'm more convinced than ever that Johnson Matthey has an exciting future ahead. We're sustainable technology platform, working across multiple industries to help our customers decarbonize. And doing so, we're catalyzing the net zero transition. With that, we're now happy to take your questions.

[Operator Instructions] Our first question today comes from Ranulf Orr, Citi.

Just a couple of questions for me, please. So firstly, how would the economics ownership, investment, profit distribution on the coinvestor plant to be shared between you and Plug Power. Secondly, what kind of return on capital do you expect the minimum sales volume guarantee to generate to Johnson Matthey on the investments? And thirdly, on revenue progression. So I believe you're targeting over 200 million sales by 2025 from your 5 gigawatt total capacity by then. We're adding another 5 gigawatts in 2025, presumably split with Plug Power. So are we expecting another GBP 100 million revenue coming through in 2025, 2026. I will join the queue for more questions.

Okay. Thanks a lot, Ranulf. And as Stephen is going to answer most of your questions with Mark. I want to highlight on this one upfront. Because this is, let's say, one very big commercial deal that we, of course, going to be careful not to give out too many confidential details related to this. So what we intend to do in May rather to give you a more comprehensive picture around the overall hydrogen technologies business. So we're not disclosing customer-specific commercial details. But to give you -- just to try and answer directionally some of your questions, Stephen will start together with Mark.

I'll just pick up your second question first on the minimum volumes. And at the very lowest level, what I'll say is we expect the contract to [indiscernible]. But obviously, we expect very significant upside to that, which will, in time, be accretive to the group's overall returns and margin.

Really excited to be here. So to take the first question, Plug will be investing in the facility, the building, if you like, and will be, as Liam said, buying the equipment and installing it and operating it. So it's not a joint venture. It's a strategic partnership. And Plug's investment in the facility is reflected in the pricing formulas that are there. So we'll be making the sales to Plug, but their investment is reflected in the pricing formulas we've agreed.

And Ranulf, let me pick up your last question on sales. So we've said our expectation is that sales from hydrogen technologies will be GBP 200 million by the end of financial year '25, and that's supplied through our existing 5 gigawatt capacity. And we've said that the Plug facility in the U.S. will initially be 5 gigawatts scaling to 10. So you can do the math on that very simply. But recognizing, of course, that is just for one customer in Plug, and we expect other strategic partnerships beyond this.

And I think maybe just one final point, Ranulf. I think you were asking as well, whether there was additional sales in 2025. Our 2025 number to GBP 200 million in sales was never really -- the bottleneck was never really demand. There was always a question of supply, which is why we are building the Royston plant as well. And so we could actually get up to that GBP 200 million. This is a new deal and that the primary benefit is going to be in the time beyond 2025 because the plant starts up in '25. So it underpins what we're doing but adds, of course, great growth momentum then from '25 onwards.

And the next question goes to Gunther Zechmann of Bernstein.

A couple of questions from my side as well. First one is on the customer relationship. So if someone knocked on your door tomorrow and asked for a couple of gigawatts of your capacity as well, would you be limited in signing any further contracts given your customers probably want to have some reassurance about existing capacity in the ground. So your thoughts about that would be my first question, please. And then secondly, on the CapEx. The 3 gigawatt expansion in Royston is GBP 80 million in CapEx as a brownfield. So investing in the U.S. in a greenfield, how should we think about the CapEx then? How much of that do you think could be covered by the IRA, please?

Yes. Thanks a lot, Gunther. So on the customer relationship side, how we're thinking overall about this, I mentioned earlier last year, what we're clearly doing is moving away from transactional type of relationships where we're selling components like maybe a membrane or a catalyst and that we're really only interested in strategic partnerships that add value them for both sides where we focus on our core competence, which is a catalyst-coated membrane. And here, of course, this is a very, very big step forward. We are in discussion with other potential strategic partners, but we will not be in discussion with any kind of transactional partners going forward. And so I think this is really the focus for us if a customer comes knocking at the door, they're interested in a truly long-term arrangement, where the skin in the game from both sides, and we're willing to talk. And of course, they have to meet our minimum requirement of being one of the winners because our strategy is to win with the winners. We were not on a play with everybody, but we will be playing with the companies that we think will ultimately be the leaders in this industry. So that's just how we think about it from a customer point of view. And on the CapEx side, Stephen can give you a few pointers about how to have the best frame this.

Yes. So on the CapEx, you're spot on. We've said that Royston, which is 3 gigawatts will cost around GBP 80 million. And yes, that is brownfield. We're very deliberately putting that investment into our Clean Air [ largest ] production from there moves to our efficient operations in Poland. So the U.S. is greenfield. But of course, what we've said is that we're providing the equipment, and we'll operate the equipment, but Plug will put down that new building for us. And we will, of course, make use of grants and available support in the U.S. as well.

Okay. If I could just follow up on the CapEx then. I think one of the reasons Plug decided to partner with you is the closed-loop approach around PGM recycling as well. The CCM capacity is not the most capital-intense investment in the portfolio. So how do you think about additional capacity requirements in the U.S. for PGM recycling as well in addition to what you have at the [ West Deptford ] recycling facility, please?

Yes. Let me -- I'll pick that up as well. So yes, you're right. That is a key element of this partnership, the provision and recycling of PGMs. And we've talked before about our significant reinvestments in our refinery in the U.K., which maintains our -- and expand our world-leading position. So that refining capability for this arrangement on hydrogen and others will be very much through those reinvested facilities.

Our next question goes to Charlie Webb of Morgan Stanley.

Maybe just kind of one follow-up on the mix of [indiscernible] you mentioned fuel cells and green electrolyzers within the release. Presumably, today, most of your sales of Plug is centered around the fuel cells. So just understanding how that split develops with this investment and this project looking forward, are you seeing quite a lot of traction on the green electrolyzers? Because I think last time we discussed with you that was more in development rather than commercial. So just trying to understand, is this centered a little bit more around the fuel cell side and you do mention green electrolyzer. So what do you see there in terms of that deployment development commercialization with Plug.

Yes, sure. Thanks a lot, Charlie. And Mark will take that.

Thanks, Charlie. So this is a strategic partnership with Plug that covers both electrolyzers and fuel cells as you say, and MEA, CCM components as we move forward. And so we will design the factory so that we can, of course, flex the production to meet Plug's demand. Overall, though, I would say given where the market is and the relatively lower power density and higher volume expectations for fuel cells in the beginning, it will be biased towards fuel cells and then we'll see how it develops over time. And we should remember that Plug are actually one of the most advanced electrolyzer manufacturers with real orders and real deployments. So I would expect that to move over time.

Next question goes to Kevin Fogarty of Numis.