 | | | | | | | Above: Heavy duty diesel catalyst manufacturing at our facility near Philadelphia, USA. | | | | | | | Johnson Matthey achieved good results in 2006/07. Sales excluding the value of precious metals were 25% up at £1.45 billion. Profit before tax and one-off items, including the results of discontinued operations, was up 10% at £242.6 million and earnings per share on the same basis were 12% ahead at 81.2 pence.
 Catalysts Division performed well with strong growth in both its Environmental Catalysts and Technologies and Process Catalysts and Technologies businesses. Precious Metal Products Division had an excellent year benefiting from buoyant market conditions and a strong contribution from its manufacturing businesses. Pharmaceutical Materials Division returned to growth following its disappointing performance last year with a good recovery in its US operations.
At the end of February we concluded the sale of our Ceramics Division. The proceeds will be used to buy back shares and fund bolt-on acquisitions. This sale completes the process, which we announced in November 2003, of disposing of parts of our former Colours & Coatings Division and focusing the group on our core activities.
Our strategic intent is to deliver superior growth in earnings by capitalising on our world class technology in catalysts, precious metals, fine chemicals and process technology where our expertise provides a competitive edge. In order to achieve this we continue to invest heavily in the future of our businesses.
In 2006/07 capital expenditure was £119.8 million which was 1.5 times depreciation. Most of this investment was in Catalysts Division with Environmental Catalysts and Technologies (ECT) spending £63.9 million on new manufacturing capacity. During the year a new diesel catalyst production facility was completed in the United States and construction of an additional catalysed soot filter (CSF) plant in Royston, UK is well underway. Additional capacity has been added at our plants in South Africa and Japan and we are building new factories in South Korea and Russia. In Process Catalysts and Technologies (PCT) we have invested in additional manufacturing capacity for the Ammonia, Methanol, Oil and Gas (AMOG) business.
Despite this high level of investment in capex and in R&D we continue to make progress towards our pre-tax target of a 20% return on assets (ROA). This year we improved our group ROA to 17.4% and expect to maintain or improve the group’s return over the next few years.
Global concern about the environment and the need to make the most efficient use of finite resources such as hydrocarbons, from which we currently derive most of our energy, is providing our business with many exciting opportunities for growth. Our long term commitment to investment in R&D and capital expenditure has ensured that we are well positioned to help address these concerns.
Emission control legislation continues to tighten around the world. 2006/07 saw the start of legislation in Europe and North America that is driving the new market for heavy duty diesel (HDD) catalysts. In fact, in the second half of the year we made sales excluding the value of precious metals of £46 million into this brand new market. HDD emission limits will tighten further in Europe, Japan and the United States in 2009 and 2010 and these new standards will require more sophisticated catalyst systems to meet them. China, India, Brazil and South Korea all have plans to introduce HDD emissions legislation by 2010. This will add significantly to the market for HDD catalysts. A further new market will emerge from 2011 as the US and Europe phase in similar tough emission standards for off road diesel vehicles. We estimate that by 2014/15 the global market for HDD catalysts will be worth approximately US$3 billion in sales, excluding the value of precious metals.
We are also continuing to benefit from technology leadership in light duty diesel catalysts where concerns about particulate emissions are resulting in the early fitment of catalysed soot filters ahead of the Euro 5 light duty diesel legislation which comes into full force in 2010.
Growth in our catalysts business is by no means limited to vehicle emission control. High oil prices coupled with concerns about global warming have created further opportunities for our PCT business. There is a growing consensus that the world needs to reduce carbon emissions through the more efficient use of energy and the introduction of alternative energy sources, thus starting a transition towards a lower carbon and ultimately a hydrogen economy. Catalysts will play a crucial role in this transition. Johnson Matthey is a world leader in catalysts for the generation of hydrogen and has a strong position in other technologies that are helping our customers to make the most efficient use of hydrocarbon resources and to begin this transition towards a lower carbon future. The acquisition of Davy Process Technology (DPT) in February 2006 has been a great success, providing us not only with additional opportunities to grow our catalyst sales but also with good visibility of future developments in chemical processes and alternative fuels. Ultimately, when hydrogen is more widely used as a fuel we will benefit from our leadership in fuel cell technology.
From 1st April 2007 we have reorganised our divisional structure to give greater focus on our technologies concerned with protecting the environment. We have created a new Environmental Technologies Division comprising the ECT business, which has been renamed Emission Control Technologies, the process technologies businesses within PCT (AMOG, DPT and Tracerco), which form a new Process Technologies business, and Fuel Cells. This new division brings together our core skills in catalysts and process technology and is well placed to serve current and emerging markets. Increasingly CO2 will be viewed as a ‘pollutant’ and we are concentrating on how Johnson Matthey, and in particular our new Environmental Technologies Division, will thrive in the future as governments legislate for lower carbon emissions in response to the threat from climate change.
The remaining businesses within PCT, which serve the speciality chemicals and pharmaceutical markets, have been merged with Pharmaceutical Materials to form a new Fine Chemicals & Catalysts Division. This combines the group’s fine chemicals and related catalysts businesses and will enable us to take advantage of the marketing and technology synergies that exist between these businesses. The structure of our Precious Metal Products Division remains unchanged.
In recent years Johnson Matthey has made great progress in the field of corporate social responsibility (CSR). We pride ourselves on having a strong team ethos where every employee has a key role to play in the growth and success of our business. We therefore place a great deal of emphasis on career development. The excellent performance achieved in 2006/07 is the result of outstanding efforts from our workforce and management teams around the world. Going forward we will increase our focus on developing people to ensure that we make the most of the opportunities ahead of us. We also continue to work hard on improving our health and safety record. While our accident rate continues to fall and is below industry averages we believe that any accident is unacceptable and it is our objective to achieve a zero accident rate. The group’s policies in this important area are set out in our CSR report on the company’s website at www.matthey.com.
Over the last year we have been examining how to make our business more sustainable as a first step towards developing a sustainability strategy for the group. In doing this we have been focusing on two key questions: Firstly, how can we be more efficient in the way that we use resources in our manufacturing operations and offices? Secondly, how can we design products that are both better than those of our competitors and help our customers become more sustainable? There is a real groundswell of support for sustainability initiatives amongst our staff and together we are working on developing new strategies for the future.
We have a number of excellent growth opportunities before us. Our long term commitment to investing in R&D and capital expenditure, as well as in the skills of our excellent team of people, means that we are well positioned to capitalise on these opportunities. The outlook for the group and particularly for our new Environmental Technologies Division over the next few years is very encouraging. A more detailed outlook statement is included in our Operating and Financial Review (OFR).
Neil Carson
Chief Executive
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