Johnson Matthey has come far from its roots as a gold assayer in London’s Hatton Garden to become the world’s largest supplier of vehicle catalytic converters by volume

August 15, 2013 4:55 pm

Johnson Matthey looks to Brussels to drive up sales

By Mark Wembridge

Although devoid of links with famous historical figures that encourage such monuments in London, the British chemical engineering company believes that an event in 1974 at its plant is worthy of such note – it is the location where the world’s first catalytic converter was manufactured. Nearly four decades on, Johnson Matthey has grown to become the world’s largest supplier of vehicle catalytic converters by volume, with sales of devices that alter environmentally damaging car and truck emissions comprising more than half of the FTSE 100 company’s £2.7bn annual turnover. The group has come far from its roots as a gold assayer in London’s Hatton Garden, where it regularly burnt the floorboards and carpet in shops located in the London jewellery district to extract any leftover precious metals.On an August morning at its Royston R&D plant, chemists and engineers in white laboratory coats strive to create the most effective chemical formula for Johnson Matthey’s catalytic converters.

The adjoining building plays host to a scene that could be straight out of BBC TV programme Top Gear, where a red sports car and an eastern European sedan await their turn to have the effectiveness of their catalytic converters tested in a sealed room by a robotic driver.

Yet Johnson Matthey does not create the ceramic or metal substrates that form the base of the catalytic converters: it simply applies a high-tech coating that contains several grammes of platinum group metals – including palladium and rhodium – that alters the composition of exhaust gases.

“This technology is not easy to replicate,” says Neil Carson, Johnson Matthey chief executive.

By using a honeycombed format, each catalytic converter utilises a surface area equivalent to several football fields, maximising the contact between the exhaust and the chemical compound.

 

“You can perform a pretty good analysis of what [catalytic converters] contain, but not how they are put together. The real key to making a successful catalyst is getting the right components in the right place to effectively do that chemistry.

“It is that complex. Tiny differences in the material can make a major difference in the performance.”

However, in its most recent annual results for the year to April, the British group endured a torrid time, as continental European vehicle sales fell to levels last seen in 1995 and dragged down pre-tax profit 13 per cent to £355m. Sales excluding precious metals – a measure that strips out fluctuating commodity prices – were flat at £2.7bn.

This was compounded by dwindling prices for platinum and palladium, industrial action in South Africa’s mining industry, problems at its Salt Lake City refinery and changes to a favourable contract with Anglo American Platinum.

“[The lower car sales] hurt because Europe’s a huge market for us. But we hope it has bottomed out,” says Mr Carson, who started his career at Johnson Matthey in 1980 as a graduate trainee, moving up to head the group in July 2004.

Although the group’s sales mimic the fluctuations in sales of cars and trucks, a silver lining can be found in the form of Brussels’ ever-tightening legislation governing car emissions.

“[New emissions] legislation actually drives our sales up, even in a flat [automotive] sales market,” says Mr Carson, whose company employs some 11,000 people across 30 countries.

Matthew Waugh, analyst at Credit Suisse, estimates that new emissions legislation “provides a quality earnings growth profile that places a lower dependence on cyclical upturn in markets compared with sector peers”.

After falling as low as £16 in late 2011, shares in Johnson Matthey have recovered to nudge the £30-mark in the past few months.

But Mr Carson is quick to acknowledge that in a world where electric and hydrogen-powered cars are poised to gain wider traction, Johnson Matthey must possess a broad portfolio of interests, should the market for catalytic converters wane.

Through acquisitions such as last year’s £40m cash takeover of Axeon, Johnson Matthey has moved into fuel cells and vehicle battery technology, while the company’s fine chemicals division remains one of the world’s largest producers of opiates used in pain relief medication.

But Mr Carson is adamant that – like other UK manufacturers – it is niche technology and cutting edge R&D that will drive Johnson Matthey’s future prospects.

The group spends more than 5 per cent of its revenues, or about £140m annually, on R&D, in an effort to lower the amount of precious metal used in its catalysts, while enhancing their effectiveness.

“If the legislation in a certain area isn’t getting tighter, if you can make a better catalyst, you can thrift some of the costly materials, and you can share some of those benefits with your customers,” says Mr Carson.

Chemical reaction

Over the course of two centuries, Johnson Matthey has evolved from a small gold assaying business into a speciality chemicals company with a market capitalisation of almost £6bn.

The group began life in 1817 when Percival Johnson established a gold business in London, shortly thereafter moving to Hatton Garden – the capital’s jewellery hub. A series of partnerships and permutations ensued until 1851, when George Matthey joined the company. A year later, the group was appointed official assayers and refiners to the Bank of England.

By 1875 the company was supplying platinum leads for the first electric lamps, and later branched out into the fabrication of precious metal sheet, wire and tube for jewellery and industrial applications. By the turn of the century, Johnson Matthey was listed on the London Stock Exchange, and made its first acquisition in the US.

The discovery of vast platinum mineral deposits in South Africa prompted the company to devise a process for extracting and refining platinum group metals. The company relocated from Hatton Garden to Royston, near Cambridge, and expanded into continental Europe.

In 1974, the company produced the world’s first catalysts to control vehicle pollution. By 2001, Johnson Matthey had opened plants in India and China, and commenced work on a fuel cell manufacturing facility in Swindon. Over the past two years, the company has acquired Axeon, a maker of automotive batteries, and Formox, a formaldehyde catalyst business.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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