Chief Executive's Statement

Johnson Matthey delivered good results in 2001/02 despite more difficult market conditions.

Most of the growth was generated by Catalysts & Chemicals Division and the newly formed Pharmaceutical Materials Division. The group has continued to invest significantly in new production facilities and R&D to support future growth.

In 2001/02 we have made significant progress on growing our businesses, both by increasing investment in new facilities and R&D and also by the successful completion of three bolt-on acquisitions. Capital expenditure of £133.8 million has been carefully targeted at the growth parts of the business, particularly Catalytic Systems, Chemicals, Fuel Cells and Pharmaceutical Materials. Our investment in R&D has been increased, particularly for Fuel Cells.

Despite these major steps the group still has a strong balance sheet. This will allow us to invest in organic growth and pursue further bolt-on acquisitions.

Over the last two years in Catalytic Systems we have invested heavily in new process technology for autocatalyst production around the world. The majority of our products are now manufactured using this new technology, which enables us to produce more advanced catalysts to higher specifications at a minimum cost for our customers. In the coming year we will be completing the final phase of this investment programme. Capital expenditure in 2002/03 will be somewhat lower than in 2001/02.

New product development is the lifeblood of our autocatalyst business. In 2002/03 we will be putting additional investment into expanding our technology centres at Royston in the UK and Gothenburg in Sweden with particular emphasis on developing new diesel catalysts. Additional investment is also planned at our testing facilities in Detroit in the US and at Kitsuregawa in Japan.

In Chemicals, we are part way through a major project to expand and upgrade our platinum group metal refineries at Royston and Brimsdown in the UK and at West Deptford in the US. In collaboration with Chematur AB we have developed an innovative technology for catalyst recovery using a unique, patented processing technique. We will introduce this new technology in the second half of 2002/03 under the trade name Aquacat®. Two novel polymer fibre technologies, resulting from our investment in Oy Smoptech AB, were commercialised during the year and offer good prospects for growth. The year also saw the launch of Johnson Matthey Catalytic Services, a new business providing a fee based contract development and optimisation service for catalytic processes.

Our Fuel Cells business has made very good progress during the year in both product development and in emerging commercial relationships with key customers. We have been selected as the lead supplier and Membrane Electrode Assembly (MEA) development partner in several of our key customer programmes in the past year. These are targeting nearer term commercial opportunities in stationary and portable power applications as well as longer term automotive development. While our customer relationships remain largely confidential, the market is visibly developing. Some early commercial fuel cell products have been launched aimed at niche markets where early adopters of this new technology are willing to pay a premium for some of the benefits of fuel cells. These include back up power systems for telecommunications and portable power applications.

Johnson Matthey has maintained its position as the world’s largest fabricator and distributor of platinum group metals (pgms). We continue to seek new markets for pgms and to invest in R&D to find new applications for the metals. We are the sole marketing agent for Anglo Platinum, which is the world’s leading primary producer of pgms.

Demand for pgms has increased significantly over the last ten years. Consumption of platinum has risen by more than 50% to 6.2 million ounces per annum while palladium usage has grown even more strongly. The outlook for platinum is good with increasing demand for autocatalysts, particularly for diesel powered vehicles, and the continued growth of demand for platinum jewellery in China. The primary producers are responding to this anticipated growth by increasing supply but demand is still expected to outstrip supply over the next few years. Johnson Matthey is well positioned to benefit from this growth in the platinum market.

Colours & Coatings experienced more difficult market conditions in 2001/02 but still managed to achieve margins of 10%. Our recent investment strategy has ensured that we are the world’s lowest cost frit producer, enabling us to protect our margins. New frit facilities in Spain and Brazil are being commissioned and will be fully operational by the summer of 2002. We are also continually introducing new high margin products, particularly in Glass, where over 35% of turnover comes from products launched in the last two years. Having completed the current investment in our new facilities future investment is likely to be reduced, resulting in strong cash generation.

Pharmaceutical Materials became a stand alone division in 2001 following the acquisitions of Pharm-Eco and Meconic. The new division has performed very well in its first year. The addition of Pharm-Eco has enabled the group to offer manufacturing services to customers from pre-clinical trials all the way through to full scale manufacture of proprietary and generic drugs. The subsequent acquisition of Meconic has, through its operating company Macfarlan Smith, given the division a European base and provides major opportunities for cross selling and sharing research and development.

Johnson Matthey manufactures active pharmaceutical ingredients, which are sold to pharmaceutical companies. The division has a strong worldwide position in the manufacture of controlled substances, particularly painkillers where the world market is estimated to be growing at 6% p.a. Within that market the growth of semi-synthetic opiates is more rapid, both in North America and Europe. We were notified this month that the group will receive conditional registration from the US Drug Enforcement Administration (DEA) to import the raw materials needed to manufacture codeine and morphine. This will enable our West Deptford, New Jersey facility to improve its market share of opiate drugs in the US. Johnson Matthey will now be positioned to manufacture a full range of these products on both sides of the Atlantic. Overall, we see excellent long term growth prospects for this division.

Financial Highlights
In the financial year to 31st March 2002 Johnson Matthey’s profit before tax, exceptional items and goodwill amortisation rose by 4% to £187.2 million. Earnings per share before exceptional items and goodwill amortisation rose by 6% to 60.4 pence.

Total sales fell by 18% to £4.8 billion reflecting significantly lower prices for platinum and palladium, particularly in the second half of the year. Sales excluding the value of precious metals rose by 12% to £1.1 billion, with double digit growth in Catalysts & Chemicals. Pharmaceutical Materials’ sales benefited from the contribution from the two acquisitions made in 2001/02 as well as from good organic growth in the second half of the year.

Operating profit before exceptional items and goodwill amortisation rose by 10% to £193.3 million. The group had a net interest charge of £6.1 million compared with a net credit of £5.3 million last year. This change reflects the funding costs of the major investments and share buy-backs undertaken in the year, and higher interest paid on gold and silver leases.

The board is recommending to shareholders a final dividend of 17.1 pence making a total dividend for the year of 24.6 pence, an increase of 6%.

Operations
Catalysts & Chemicals Division’s sales fell by 11% to £1,303 million reflecting the significant fall in pgm prices. Sales excluding the value of precious metals rose by 11% to £597 million. The division’s operating profit rose by 17% to £94.7 million.

The Catalytic Systems business, which encompasses our global autocatalyst, heavy duty diesel and stationary source emission businesses, had an excellent year. Global car sales in Johnson Matthey’s financial year were 2 to 3% down on last year but catalyst volumes were flat, as we gained market share in Europe.

The double digit growth in sales excluding the value of precious metals reflects the continued introduction of new products using more complex formulations with higher material costs. Over half of the products that we make in Catalytic Systems today have been introduced into production within the last two years. Margins have improved as these higher performance products, precision coated to tolerances that have become the industry benchmark, have saved our customers money whilst achieving tighter legislative limits.

The heavy duty diesel (HDD) market has also taken several steps forward in recent months. The retrofitting of aftertreatment devices has continued to grow as several major cities including New York, Los Angeles, Washington DC, Seattle and more recently Hong Kong and Tokyo, have instigated significant trials of clean buses and trucks. Johnson Matthey’s patented CRT® technology has secured a majority share of these trials and subsequent sales. We are also collaborating with all manufacturers of HDD engines as they prepare to start fitting these devices as original equipment in the next few years.

Chemicals also had a good year, with most of the growth coming in pgm refining with increased intake from primary producers. Catalyst sales were weaker, reflecting the downturn in some of the end markets. A number of new products were introduced in 2001/02, which should have a positive impact on the current financial year. Construction began during the year on a pgm chemicals manufacturing facility in Shanghai, to better serve the developing Chinese market. The plant is scheduled to open in late summer 2002. Our catalogue based Research Chemicals business, which sells fine chemicals mainly to research institutes, pharmaceutical and chemical companies, achieved excellent growth. In February 2002 we acquired Avocado Research Chemicals Limited, which is a supplier of specialised organic chemicals with an established catalogue. Since acquisition the business has performed well.

We have stepped up our investment in Fuel Cells, the costs of which are included in the results of Catalysts & Chemicals Division. The year has seen the completion of our major investment in expanding fuel cell R&D and testing facilities at our research centre at Sonning Common, UK. This facility is now operating on a 24 hour basis and is an invaluable, worldclass resource for our research and product development teams as well as our partners in our many collaborative programmes. Good progress has been made on the first phase of our dedicated manufacturing facility for MEAs at Swindon, UK. A new plant for testing and developing fuel processors and associated catalyst coated components has been completed at West Whiteland, USA.

Precious Metals Division’s sales fell by 24% to £3.2 billion, as a result of the fall in pgm prices. Despite this drop, the operating profit for the division fell by only 3% to £55.9 million. Commission income was lower, reflecting the impact of lower pgm prices. This reduction was largely offset by higher volumes of platinum sold, good results on pgm fabrication, and the inclusion in last year’s figures of a one-off charge of £2.6 million to restructure our Canadian business.

Platinum and palladium prices fell sharply in the first half of 2001/02 from the highs seen in January 2001. The average price of platinum for the year was $503 per oz, 13% lower than in 2000/01. The average price of palladium was also lower at $473 per oz, down 39% in the same period. The prospect of a global economic slowdown, the liquidation of long positions held by speculators and, in the case of palladium, a sharp fall in consumer demand, saw prices reach their low points in October. Thereafter the prices of both metals enjoyed a modest recovery as economic sentiment improved in the USA and Russian palladium sales were curtailed.

Although negative market sentiment undermined the price of platinum, the metal’s fundamentals remained strong with demand outstripping supply. Autocatalyst demand increased as the market share of diesel engine cars, which use platinum based catalysts, grew significantly and new legislation in Europe came into force. Although jewellery demand declined in the USA and Japan as consumer spending fell, the market in China once again displayed remarkable growth.

The group’s platinum fabrication businesses achieved good growth in the year with most of the increase coming from products for medical devices. However, trading profit for the Gold and Silver business was below last year. The gold refining market remains very competitive with pressure on margins.

Colours & Coatings Division increased its sales by 1% to £253 million. Operating profit for the division fell by 21% to £25.5 million.

All of the division’s businesses experienced weaker demand in the second half of the year. The Glass sector performed well with good sales of decorative and gold products in Europe. The Structural Ceramics sector, which sells mainly to the tile industry, achieved modest sales growth but margins came under pressure in the second half. Tableware experienced very difficult market conditions with a sharp fall in demand. The division took swift action to reduce costs by rationalising production including the closure of a major site in Staffordshire. This rationalisation should produce savings of £3 million in 2002/03 and £7 million in the following year and should also be cash positive following the sale of assets.

Pharmaceutical Materials Division increased sales by 200% to £106 million, with most of the rise coming from the acquisition of Meconic plc at the beginning of July 2001 and Pharm-Eco Laboratories, Inc., acquired in April 2001. Operating profit rose by 74% to £31.3 million.

Profit for the group’s existing business, based in New Jersey in the US, was 8% up on last year at £19.4 million with most of the growth coming in the second half. The business benefited from three new product introductions, which received FDA approval in 2001/02 and were launched towards the end of the financial year. Meconic, through its operating company Macfarlan Smith, made a good start under Johnson Matthey ownership making a profit of £10.0 million in the nine month period with good sales of specialist opiates. Pharm-Eco also performed well with a steady increase in sales since its acquisition and a strong order book for the new financial year.

Outlook
The growth achieved by Johnson Matthey this year in difficult market conditions emphasises the resilience of the group. We continue to see excellent opportunities for our growth businesses despite uncertain economic conditions. The outlook for platinum demand remains encouraging. Both Catalysts & Chemicals and Pharmaceutical Materials are well placed to deliver further growth in the current year.

Chris Clark
Chief Executive