In the near term our main focus will be to deliver the major organic growth opportunities we have been investing in over the last few years. These include emission controls for new heavy duty diesel (HDD) vehicles (trucks and buses); further opportunities in light duty diesel vehicles including catalysed soot filters (CSFs); new catalyst technology for hydrogen production and gas to liquids (GTL) and new products for Pharmaceutical Materials. We believe the group is particularly well positioned for organic growth over the next few years. In the longer term fuel cell components remain an exciting market opportunity.
Our funding policy is to maintain a strong balance sheet with conservative gearing and use cash generated to invest in organic growth and bolt-on acquisitions. Where cash generated exceeds our investment requirements we will return the money to shareholders either in the form of share buy-backs or special dividends.

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Review of Results 2004/05

Johnson Matthey made good progress in 2004/05 with profit before tax, exceptional items and goodwill amortisation up 4% despite adverse exchange translation. Earnings per share before exceptional items and goodwill amortisation increased by 5%.
On a constant currency basis both Catalysts and Precious Metal Products Divisions achieved 6% growth in operating profit. Pharmaceutical Materials was 2% down as a result of the expiry of the carboplatin patent while Colours & Coatings continued its good recovery with profits 17% up.
Cash generation was good with a net £16.1 million used to buy back shares and net borrowings reduced by £24.9 million. The group is well positioned to benefit from organic growth over the next few years and we have also taken action to improve the returns on underperforming assets.
Total sales grew by 3% to £4,639 million. At constant exchange rates sales grew by 7% with most of the increase coming from more buoyant trading conditions for platinum group metals and higher average prices. Sales excluding the value of precious metals fell by 2% to £1,200 million. This fall partly reflected the impact of exchange translation but also lower pass through costs for autocatalyst substrates.
Operating profit before exceptional items and goodwill amortisation rose by 1% to £208.1 million. Adverse exchange translation reduced profits by £8.0 million compared with 2003/04 mainly because of the fall in the value of the US dollar which averaged $1.85/£ compared with $1.69/£ for the last financial year. Translated at last year’s exchange rates, operating profit before exceptional items and goodwill amortisation increased by 5%.
Interest was £3.0 million lower than last year as a result of lower average borrowings and more favourable average interest rates, particularly for platinum. The return on retirement benefits assets and liabilities improved by £3.2 million reflecting the increased funding surplus at 31st March 2004.
Profit before tax, exceptional items and goodwill amortisation increased by 4% to £204.0 million. Earnings per share before exceptional items and goodwill amortisation rose by 5% to 67.1 pence benefiting from a more favourable average tax rate.
Total exceptional items amounted to £51.9 million. Most of this charge related to the loss on disposal of Pigments & Dispersions and the restructuring of underperforming assets. We expect that this process will ultimately generate £50 million of additional cash which we are using to buy back shares.
Taking into account exceptional costs and goodwill amortisation, profit before tax on a statutory basis fell by £47.0 million to £131.0 million and earnings per share were 15.4 pence lower at 40.6 pence.
The board is recommending to shareholders a final dividend of 19.0 pence, making a total dividend for the year of 27.7 pence, an increase of 5%, which is in line with the growth in earnings per share before exceptional items and goodwill amortisation.

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Outlook

The outlook for the next few years is very encouraging. We expect the group to achieve good top line growth from the introduction of new products and also generate cash.
The group’s profits were higher in the first half of 2004/05 than in the second half, partly as a result of exchange translation. In 2005/06 we expect this trend to be reversed, with most of the growth coming in the second half of the year.
The much publicised problems in the US car industry are likely to have some impact on Johnson Matthey’s results in the first half of 2005/06. We expect car production to be down in the US in our first half which will reduce demand for autocatalysts in that region. However, both Europe and Asia are now bigger car producing regions than the US and Johnson Matthey’s businesses in those regions are continuing to see good demand which should more than offset the shortfall in the US. In the first half of 2005/06 we expect profits in our Pharmaceutical Materials Division will be down on the equivalent period in 2004/05 when we were still benefiting from the carboplatin patent, which expired in October 2004.
Despite these factors the underlying growth trend is favourable. HDD legislation in Europe will begin to have an impact in October 2005 and we expect to see demand for aftertreatment devices from original equipment manufacturers start to grow in the second half of the year. We also expect sales of catalysed soot filters for light duty diesel vehicles to grow during the year. Pharmaceutical Materials should benefit from new product launches in early 2006.
Earnings per share will also benefit from the share buy-backs we have undertaken using the proceeds generated by our programme to improve the returns on underperforming assets. We expect to purchase an additional £25 million of shares in the first half of 2005/06. We have completed our review of underperforming assets and do not expect any further exceptional rationalisation costs in 2005/06.

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Operations

Johnson Matthey has operations in 34 countries and employs around 7,400 people. It is organised into four global divisions: Catalysts, Precious Metal Products, Pharmaceutical Materials and Colours & Coatings.

Catalysts Division

Description of the Business
Catalysts Division consists of three global businesses:

Environmental Catalysts and Technologies (ECT)
ECT comprises Johnson Matthey’s global autocatalyst, heavy duty diesel and stationary source emission control businesses. We are a world leading manufacturer of catalysts for vehicle exhaust emission control and a leader in catalyst systems for the reduction of volatile organic compound emissions from industrial processes. Manufacturing takes place in the USA, UK, Belgium, Mexico, Argentina, South Africa, Japan, Malaysia, India and China. R&D facilities are in the USA, UK, Sweden, Japan and Brazil.

Process Catalysts and Technologies (PCT)
PCT manufactures base and precious metal process catalysts, fine chemicals and electrochemical products. Our platinum group metal (pgm) refining business recovers spent catalysts and other secondary material and also refines primary pgms from global mining operations. Manufacturing facilities are in the UK, USA, Germany, India and China. Our Research Chemicals business is based in the USA, UK and Germany.

Fuel Cells
Johnson Matthey is the world leader in catalysts and catalysed components for fuel cells.

Performance in 2004/05
Catalysts Division’s sales rose by 4% to £1,184 million. At constant exchange rates the increase was 7%. Sales excluding the value of precious metals fell by 3% to £698 million. At constant exchange rates sales excluding the value of precious metals rose slightly. Sales growth was held back by lower pass through substrate costs associated with the increasing proportion of diesel catalysts sold.
The division’s operating profit increased by 2% to £111.5 million. At constant exchange rates operating profit grew by 6%.

Environmental Catalysts and Technologies
Environmental Catalysts and Technologies achieved good growth in profits in autocatalysts, with all the growth coming in Europe and Asia. Profits were lower in North America. In Johnson Matthey’s financial year global light duty vehicle sales grew by 2.9%, with most of the growth arising in Asia where sales rose by 4.1%. Sales in Europe increased by 1.7%, with most of the growth coming in Eastern Europe. In North America light duty vehicle sales were slightly up but domestic production fell by 1.8% with an increased number of imports mainly from Asia.

Light Vehicle Sales and Production

ECT’s strong performance in Europe reflected the continued growth in diesel car sales where Johnson Matthey has leading technology. For the year to 31st March 2005 diesel car sales in Western Europe accounted for nearly half the market for cars. There is increasing focus on reducing particulate emissions from diesel vehicles in Europe and Johnson Matthey has been working closely with many of the leading car companies to develop catalysed soot filters (CSFs) which remove particles from diesel exhaust emissions. CSFs are likely to be required on all diesel cars in Europe from 2010, but many car manufacturers plan to fit these devices much earlier. We are investing in new production capacity to manufacture CSFs and expect sales to grow in 2005/06.
Our autocatalyst businesses in Asia benefited from strong demand. In India, where Johnson Matthey has a strong market position, car sales grew by 25% while the growth rate in car sales slowed in China but was still 12.5% up on prior year. We are expanding our factory in Shanghai and we have also put in a new production facility next to our technical centre in Japan. This has been well received by customers and we expect to see additional sales in Japan in 2005/06. In North America car production fell, particularly in the final quarter of our financial year when domestic production was down 4.5%. Autocatalyst volumes were also down and Johnson Matthey’s profits in the region were lower than last year. In South America vehicle production showed a strong recovery and our facility in Argentina was well ahead of prior year.

In 2003/04 ECT benefited from strong sales of heavy duty diesel (HDD) retrofit products in Japan supported by an incentive programme from the Tokyo Metropolitan Government. There were no similar sized programmes in 2004/05 and consequently revenues from HDD retrofit products were down. The outlook for HDD sales to original equipment makers is very encouraging. New legislation on HDD vehicle emissions (EU IV) will come into effect in Europe for new models in October 2005 and for all new vehicles in October 2006. New legislation in the US starts in January 2007. The great majority of truck and bus manufacturers will be using aftertreatment devices to meet this legislation and Johnson Matthey has leading technology to meet the new standards.
Tightening emissions standards worldwide are the most important driver of ECT’s business. Following closely behind these first waves of on road heavy duty diesel emissions regulations are a series of tighter standards which will come into effect in Europe, Japan and the United States over the next five years. These are illustrated in figure 1 and require major reductions in the emissions of both particulate matter (PM) and oxides of nitrogen (NOx). This presents significant challenges for manufacturers of HDD engines and vehicles. While engine modifications can often be used to lower the level of one of these pollutants, this results in an increase in the other. For example an engine can often be made to run at a lower temperature to reduce NOx emissions but this will result in higher emissions of PM. As legislation tightens it will force the use of highly sophisticated catalyst systems. It is estimated that by the end of 2008, this HDD legislation will have created a market for catalysts worth $600 million per annum in sales excluding the value of precious metals.
The success of Johnson Matthey’s Continuously Regenerating Trap (CRT®) technology in retrofit programmes has established the CRT® technology as the benchmark for control of hydrocarbons (HC), carbon monoxide (CO) and PM emissions from heavy duty diesel vehicles. This has resulted in the generation of millions of hours of operating data on a wide variety of HDD engines and places the company in a strong position to assist HDD original equipment manufacturers as they prepare to meet tougher emissions standards.
Control of NOx emissions from diesel engines presents some formidable challenges as diesel exhaust contains a great deal of oxygen and thus is a strongly oxidising atmosphere. The removal of NOx, however, requires a reducing atmosphere (one containing very little oxygen) or a reductant that can selectively reduce the NOx in the presence of excess oxygen. Therefore, in order to achieve the reduction of all four pollutants (HC, CO, PM and NOx) it is necessary to use highly sophisticated systems. There is no single solution to fit all applications. Johnson Matthey has a full ‘tool box’ of HDD emission control technologies which will enable customers to meet continuously tightening standards, whichever approach they choose.
In addition to on road HDD emissions legislation, which will undoubtedly continue to tighten beyond 2010, there is also legislation in place in the European Union and the United States that will take effect from 2011 requiring off road or ‘non road’ vehicles such as construction, mining and agricultural equipment to meet the same tight emissions standards. This is an additional new market that will be of a similar size to the on road HDD market and will have similar technology requirements. Again Johnson Matthey is well positioned to benefit from this legislation.
Emissions standards for light duty gasoline and diesel vehicles also continue to tighten around the world. Figure 2 illustrates legislated limits for emissions of NOx in the world’s major car markets. Emission standards for HC and CO are also following this worldwide trend and, as outlined above, there is increasing focus on particulate emissions from diesels in Europe. This will undoubtedly spread to other parts of the world as the use of light duty diesel engines increases. Continuously tightening emissions standards bring new technical challenges to our customers which require innovative, high performance catalysts to meet them. This will drive the growth of our autocatalyst business well into the next decade and beyond.

Process Catalysts and Technologies
Process Catalysts and Technologies performed well in 2004/05 with sales and profits comfortably ahead of the previous year. At the end of last year we announced the acquisition of the AMC group of companies (AMC), the market leading supplier of Sponge Nickel™ catalysts located in Tennessee, USA. Sponge Nickel™ catalysts are extensively used in the pharmaceutical and speciality chemicals industries and are often the first catalysts to be evaluated when designing a new chemical process. The former AMC business, now Johnson Matthey Catalysts, Tennessee, performed in line with our expectations and made a welcome contribution in its first full year of ownership.
Our other catalyst businesses also had a good year, nowhere more so than the Ammonia, Methanol, Oil and Gas (AMOG) business which saw strong growth in income from both licensing and catalyst sales and another excellent performance from its gas processing and purification segments. The development of a new class leading methanol flowsheet came a stage closer with the formation of OneSynergy™, a partnership with Davy Process Engineering and Aker Kvaerner to take advantage of Johnson Matthey’s new catalyst and process technologies for both methanol synthesis and reforming chemistry.
The dramatic rise in the price of oil has continued to focus investment on the economic use of natural gas, both as a precursor for transport fuel and as a petrochemical intermediate. This, coupled with increased demand for hydrogen in oil refineries worldwide driven by the need to reduce the sulphur content of fuels, has and will continue to drive demand for the AMOG business’ products and will allow it to grow ahead of general economic indicators.
The high price of oil also benefited Tracerco, PCT’s oil processing services business which saw record demand during 2004/05. In addition to increased sales of services and equipment to production platforms and refineries, Tracerco continues to benefit from good demand for its hydrocarbon tagging products. This results from action taken by various governments around the world to detect and prevent fuel adulteration.
High oil prices also help to boost interest in the gas to liquids process, which turns often stranded natural gas into sulphur free diesel fuel for which there is a growing market driven by tightening fuel standards. During the year we have made progress in developing our technologies for the two key stages of this process; syngas generation and Fischer Tropsch catalysis.
Our Polymers, Chemical Catalysts and Edible Oils (PCEO) business recovered from the effect of last year’s rapid rise in nickel prices and hydrogenation catalysts in general had a good year. Market overcapacity and anticipation of the expiry of a key patent softened income in polymers but important successes in a number of new product areas look likely to stabilise this business in the near term.
The platinum group metal refining business continued to be adversely affected by the weak palladium price and overcapacity in the market. After an extensive review we decided to restructure the business in the UK and reduce the intake of low grade materials which had left us with large quantities of residues which are difficult to process. An exceptional charge of £10.2 million has been taken to cover the cost of this rationalisation. One objective of the restructuring will be to reduce the quantity of precious metals held in the refinery and thereby release over £20 million of cash from inventory reduction.
Our Research Chemicals business continued its recent record of strong growth in 2004/05. During the course of the year we acquired the operations of Lancaster Synthesis from Clariant AG. The acquisition was temporarily delayed as a result of a serious fire at Lancaster’s UK premises in late July. However the deal was completed at the end of September at a significantly reduced cost. The Lancaster business represents a good fit with our Research Chemicals business and excellent progress has been made in integrating stock and order management systems while maintaining the value of the Lancaster brand with its strong market franchise.

Fuel Cells
The annual cost of our Fuel Cells business reduced by £1.1 million to £10.4 million. The market for stationary fuel cells has not grown as quickly as our customers had expected but developments in automotive fuel cells continue to be very encouraging. At this stage in the development of fuel cells the emphasis is very much on establishing durability in real world applications. This inevitably takes time, particularly for a number of the stationary applications for which durability requirements are very demanding.
During the year we transferred most of our UK fuel cell activities including product development to our facility at Swindon, while longer term research remains at our technology centre at Sonning Common. This will allow the business to operate more efficiently with integrated marketing, product development and production teams based at Swindon working in close collaboration with key customers to meet nearer term targets, while the research group at Sonning Common focuses on the next generation of materials needed for mass automotive markets in the future.
The first fuel cell vehicles to be manufactured in any quantity will be powered by hydrogen. In California, the State government is taking action to develop a network of filling stations for hydrogen powered vehicles. The success of hybrid cars has shown that customers are prepared to pay a premium for environmentally friendly vehicles. Most of the world’s major car companies are continuing to invest heavily in the development of fuel cell vehicles as concerns over fuel security, global warming and air quality become more pressing.

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Precious Metal Products Division

Description of the Business
Precious Metal Products Division is organised into two groups:

Platinum
Consists of our worldwide platinum marketing and fabrication activities. Marketing is headquartered in London with support facilities in Philadelphia and Hong Kong. We are the world’s leading distributor of platinum group metals and the sole marketing agent for Anglo Platinum, the world’s largest producer of platinum. Our platinum fabrication business makes a wide range of platinum group metal products primarily in the UK and USA.

Gold and Silver
Comprises our worldwide gold and silver refining and bullion manufacturing operations. Johnson Matthey is a market leader in the refining of gold and silver. The business serves the world’s mining industries and recycles secondary scrap material. Gold and silver refining operations are located in the USA, Canada and Hong Kong.

Performance in 2004/05
Precious Metal Products Division’s sales grew by 4% to £3,069 million, reflecting more buoyant trading conditions for platinum group metals (pgm) and higher average prices. At constant exchange rates sales grew by 8%. Operating profit increased by 3% to £45.4 million, despite the revised terms of the renewed contracts with Anglo Platinum and adverse exchange translation. At constant exchange rates operating profit was 6% up.

Platinum
The price of platinum reached its peak for 2004/05 of $937/oz in April, a 24 year high, driven by good physical demand and substantial speculative interest. After a sharp correction in late April and early May, which saw the price fall back to $783/oz, the price of platinum followed an upward trend for the rest
of the year. The average price was $848/oz, a 14% increase on 2003/04.
Total consumption of platinum edged up marginally in 2004/05, with the autocatalyst sector underpinning demand. The increase in market share of diesel cars in Europe and tightening emission controls for diesel powered trucks in Japan were key drivers. However, purchases of platinum for jewellery manufacture fell in 2004/05 as a result of the strength and volatility of the platinum price. Demand in the key Chinese market declined, while consumption in North America and Japan also suffered.

Supplies of platinum expanded faster than demand as South African output exceeded 5 million oz for the first time. Although platinum demand again exceeded supplies, the market deficit was reduced to the lowest level for six years.
The palladium price also reached its peak for 2004/05 in April, touching $333/oz as investors extended their already substantial long positions. However, production and stocks were more than adequate to meet demand and the price fell back to a low of $178/oz in December. The average price for the year was $219/oz, an increase of 9% on 2003/04.
Physical demand for palladium climbed steeply in 2004/05. Most of this increase came from the jewellery sector, led by the rapid development of palladium jewellery manufacturing in China. Demand in the autocatalyst sector was also up as US car companies increased their market purchases, having run down their stocks in 2003.
Growth in demand was almost exactly matched by a rise in supplies, particularly from Russia where a considerable volume of metal was sold from government stocks. Total supplies exceeded demand by a significant margin, leaving palladium in surplus for the fourth consecutive year.
The price of rhodium staged a sharp recovery in 2004/05. Growing auto demand and increased speculative interest resulted in a tight and illiquid market. The average price more than doubled to $1,203/oz in 2004/05, reaching a peak of $1,665/oz in February 2005.
Despite the revised terms of the new Anglo Platinum contract and adverse foreign currency translation, profits from the division’s marketing and trading operations were higher than in 2003/04. Commission income benefited from higher average metal prices and trading margins improved as a result of more favourable platinum and rhodium markets.
The division’s pgm manufacturing business continued its profitable growth, benefiting from good customer service and technical leadership. Demand for our pgm catalyst, sheet and wire products for industrial applications was strong throughout the year. Our medical parts business, based in California, also recorded excellent growth. Increased usage of nitinol in medical device applications in both Europe and the US, resulted in a strong demand for products from our San Jose factory.
Business levels at our precision machining factory in San Diego, where we completed our first full year since relocating to an expanded facility, were also strong. To increase our product offering of key medical device components, we acquired, in May 2004, a manufacturer of medical hypotubes based in Temecula, California. The business had a very successful first year and we are now well positioned at all of our production facilities to take advantage of continued growth in the medical devices market.

Gold and Silver
In September 2004 the board took the decision to close the group’s UK gold and silver refinery. Tight refining margins and the weaker US dollar resulted in a loss in 2003/04 of £1.6 million after metal interest and a similar performance in the first five months of 2004/05. The closure was completed on schedule, by the end of March 2005, at a cost of £13.2 million. As part of the closure programme a significant proportion of the customers from our UK refinery were successfully transferred to our refineries in Salt Lake City and Toronto, where spare capacity existed. This boosted profits in North America which finished ahead of 2003/04. Refining volumes in Hong Kong were good in 2004/05 but fell short of the exceptional prior year levels. However, sales of Johnson Matthey group products into the burgeoning Chinese economy more than compensated for this.

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Pharmaceutical Materials Division

Description of the Business
Pharmaceutical Materials Division is a global, integrated supplier of active pharmaceutical ingredients (APIs), which provides services to pharmaceutical companies through every phase of the development of a new product.
The division’s Macfarlan Smith (UK) and West Deptford (USA) businesses provide a full range of commercial scale manufacturing services for APIs to both generic and branded pharmaceutical companies. Both businesses specialise in the manufacture of low volume, high value products, especially controlled drugs.
Pharma Services (USA) provides contract research and development and manufacturing services to pharmaceutical companies from pre-clinical through to commercial launch.
The Pharmaceutical Materials Ireland business specialises in the manufacture of prostaglandin APIs, which are very low volume, high value, chemically complex molecules.

Performance in 2004/05
Pharmaceutical Materials Division’s sales fell by 6% to £132 million. Adjusting for exchange translation the drop in sales was 2%. The fall in sales reflected lower selling prices for carboplatin, which went off patent in October 2004, and lower revenues from contract research, partly offset by increasing sales of controlled drugs. Operating profit fell by 5% to £40.0 million partly as a result of adverse exchange translation. At constant exchange rates the fall in operating profit was 2%, in line with the drop in sales.

Macfarlan Smith
Macfarlan Smith, which is based in Edinburgh, UK and manufactures controlled drugs for sale to generic pharmaceutical companies, performed well in the year. Sales and profits were both ahead of last year with most of the growth coming from high margin specialist opiate products. The world market for drugs to manage severe pain is growing at around 6% per annum as medicine is able to treat more acute conditions; the world’s population ages; and people are generally less tolerant of pain. Overall growth of the opiates market is driven primarily by the introduction of new applications and new dosage forms for specialist opiates such as oxycodone, hydromorphone and buprenorphine, the markets for some of which are growing at double digit rates.
Macfarlan Smith’s new facility to manufacture low volume, high potency products (mainly analgesics), which we announced last year, has made a valuable contribution to profits in its first year of operation and we expect to achieve further growth in this specialist market in 2005/06. During the year we continued our programme of capacity expansion at the Macfarlan Smith site, particularly in support of growth in specialist opiates.

West Deptford
As anticipated, our active pharmaceutical ingredient manufacturing business in the US, which is based in West Deptford, NJ, saw its profits fall in the second half of 2004/05 as the contribution from carboplatin was reduced following the expiry of the patent in October 2004. Now that the patent has expired we expect to supply to both Bristol-Myers Squibb and generic producers but at lower margins. Sales of other products grew, including opiates where we have successfully transferred manufacturing technology from Macfarlan Smith.
Growth in sales of opiate drugs will continue as an increasing number of customers obtain regulatory approvals to market products containing APIs manufactured at West Deptford. Sales of non-opiate controlled drugs also improved during the year and significant progress was made on the development of several attractive generic products which will reach commercialisation over the next few years.

Pharma Services
During the year we changed the name of Pharm-Eco to Pharma Services to better reflect its market segment. Although manufacturing continued to grow, contract research revenues were down in the second half of the year and profits were below last year.
In 2004/05 Pharma Services increased its investment in the development of several low volume, generic APIs. While these will take several years to reach commercial approval this will serve to broaden the portfolio of the Pharma Services business and counteract the somewhat lumpy profile of the contract research and development side of the business.

Ireland
During 2004/05 Cascade Biochem, which we acquired in 2002, was consolidated into its Cork, Ireland facility and renamed Pharmaceutical Materials Ireland. The business has continued to expand its customer base and geographic coverage during the year. Regulatory filings of new generic products containing our prostaglandin APIs have been made by our customers and are currently in review stages. Our products are also being qualified for new generic drug dosage forms targeted for sale in major world markets.

Colours & Coatings Division

Description of the Business
Colours & Coatings Division is ranked among the world’s top integrated suppliers of decorative products and associated raw materials for ceramics and glass. The division is structured into two businesses; Colour Technologies and Ceramics.

Ceramics
Headquartered in Spain, our Ceramics business is a leading global supplier of raw materials and intermediate products to the ceramic industries. The business has a presence in all the major geographical regions with core manufacturing facilities in Spain, Italy, UK, Brazil, USA, Malaysia, India and China.

Colour Technologies
Headquartered in the Netherlands, our Colour Technologies business manufactures black obscuration and silver conductive enamels for automotive glass. It also makes colours, enamels and decorative precious metal products for other glass applications such as bottles and architectural glass as well as for tableware and other ceramic applications.

Performance in 2004/05
We restructured Colours & Coatings Division during the year following the sale of Pigments & Dispersions in September 2004 for £22.2 million (after costs). Several other sites are in the process of being closed, the largest of which is the division’s decal factory in Stoke-on-Trent. An exceptional charge of £10.3 million has been taken to cover the cost of these closures. The decorative precious metals, glass coatings and tableware businesses have been renamed Colour Technologies and will be transferred to Precious Metal Products Division and included in that division’s results next year. The remaining business, Structural Ceramics, has been renamed Ceramics and will be shown as a stand alone division in 2005/06.
Sales for the division, excluding Pigments & Dispersions, rose by 8% in 2004/05 to £242 million. At constant exchange rates sales grew by 12%. Operating profit increased by 13% to £27.4 million. At constant exchange rates profits grew by 17%.

Ceramics
Our Ceramics business had sales of £166 million and contributed about two thirds of the profits of the division. It supplies decorative materials for ceramic products, mainly to the tile industry. The business achieved good growth in sales and profits in 2004/05. Demand for tiles in the Western European market was flat and the strength of the euro adversely impacted European tile producers who are major exporters to other parts of the world. More than 50% of the tiles manufactured in Italy and Spain are exported outside the euro zone. As a consequence, prices and volumes in Europe remained under pressure. However, there was good growth in China, India and Brazil where Johnson Matthey has production facilities and is well represented. Demand was also strong in Eastern Europe, especially Poland and Russia, and our sales into the region showed good growth.
The Ceramics business is realising the benefits of investments made in recent years to position it as one of the lowest cost, high quality producers in the world. While growth rates in the more mature markets like Western Europe are modest, the business is strongly cash generative and there are a number of important growth opportunities in Eastern Europe, the Middle East and Asia. During 2004/05 the Ceramics business started work on the expansion of its manufacturing facility in China and it has plans for further expansion in both China and India over the next few years to meet rapidly growing demand in the Asia region.

Colour Technologies
Colour Technologies performed well in 2004/05. Sales to the automotive sector increased, particularly sales of both black obscuration enamels and conductive silver paste. This was mainly due to increased market penetration in the United States and South America and the launch of innovative new products with enhanced technical and processing characteristics. Demand for decorative products for other glass applications was also up, benefiting from new product introductions which are helping the business to consolidate its market leading position in this segment.
During the year Colour Technologies launched new ranges of lead free enamels for architectural and appliance glass applications and the business remains fully committed to minimising the environmental impact of its products. Towards the end of the year it launched ranges of inorganic inks for both ink jet and digital printing applications.
Following the announcement of the closure of the decal factory in Stoke-on-Trent, the ceramic side of Colour Technologies’ business has been refocused on a much reduced range of decorative products for the tableware industry. Sales into this industry in 2004/05 were at the same level as the prior year, despite the continued contraction of the UK tableware market. Going forward, the business has a small flexible team with innovative products and a commitment to world class technical support and it is hoped that it will see a return to growth from this much reduced base.

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Research & Development

Research and development is the lifeblood of Johnson Matthey’s high technology businesses. We maintain a high level of R&D expenditure to ensure the continuous flow of new products and technologies to provide our customers with cost effective solutions to legislated and technical requirements. In 2004/05 Johnson Matthey spent £58.2 million on research and development.

Johnson Matthey Technology Centre
The Johnson Matthey Technology Centre (JMTC), located at Sonning Common, UK is the group’s main centre for longer term research. It employs over 120 scientists, specialists in the fields of catalysis, precious metals, materials science and many other disciplines in which Johnson Matthey operates. JMTC has state of the art facilities for preparing and testing catalysts and other products as well as a world class analytical science group, equipped with the latest tools to characterise and understand the materials with which Johnson Matthey works.
In addition to projects directly sponsored by the operating divisions to meet their long term objectives, JMTC also runs a set of core science projects to extend the group’s knowledge of the science at the heart of many of its businesses, particularly in the fields of catalyst engineering, modelling, preparation and characterisation. This knowledge can then be applied to accelerate and improve product development across the group.
JMTC works in close collaboration with an extensive network of technology centres and development groups within Johnson Matthey’s global businesses. Examples of two long term projects currently underway at JMTC are described below followed by a review of R&D activities within the operating divisions.

Emissions Control
Over the next five years, advanced compression-ignition engines are expected to deliver much better fuel economy than the engines currently available. Apart from lowering carbon dioxide emissions, the new engines will produce very low SOx (oxides of sulphur) emissions by running on ultra low sulphur diesel, biodiesel and gas to liquids (GTL) fuels. Even so, their exhausts will still contain the other common pollutants from internal combustion engines; carbon monoxide, hydrocarbons, NOx (oxides of nitrogen) and particulates.
At the Johnson Matthey Technology Centre we are already designing exhaust aftertreatment systems for 2010 and beyond, when conventional three-way gasoline and diesel catalysts will no longer meet the demands of new engine technologies.The experience that we have gained over 30 years means that we have an extensive knowledge base on which to build our designs. By inputting performance measurements into mathematical models, we are even able to predict how potential catalysts would perform on vehicles that do not yet exist.
Among the technologies we are developing is a very simple strategy for destroying NOx. Known as hydrocarbon-SCR, this technology does not require a special reductant to be carried on board the vehicle, but relies on a small amount of fuel being injected into the exhaust. Our biggest challenge is to avoid the fuel immediately combusting. In order to achieve this we are engineering a catalyst surface that provides a reaction pathway for the fuel molecules to react with NOx, before they can react with oxygen.

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