| Financial Review
| | | | | | | | | | | | | Operating Profit for the Continuing Businesses
(before one-off items) | | | | | Year to 31st March | | | | 2007 at 2006
exchange | | | | | | | 2007
£ million | | 2006
£ million | | change
% | | rates
£ million | | change
% | | | | |
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| | | | Catalysts | 148.8 | | 134.2 | | +11 | | 152.7 | | +14 | | | | Precious Metal Products | 85.3 | | 62.2 | | +37 | | 87.1 | | +40 | | | | Pharmaceutical Materials | 35.5 | | 33.8 | | +5 | | 36.2 | | +7 | | | | Corporate | (17.2) | | (16.8) | | | | (17.2) | | | | | | |
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| | | | | | Operating Profit | 252.4 | | 213.4 | | +18 | | 258.8 | | +21 | | | | |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | |  | | | | | | | | Introduction
Johnson Matthey performed very well in 2006/07. Revenue grew by 34% to £6.2 billion. Profit before tax for the continuing businesses rose by 18% to £226.5 million and earnings per share were 37% up at 96.9 pence. Excluding one-off items (profit on sale of Ceramics Division and last year’s £6.0 million impairment charge) earnings per share were 12% up at 81.2 pence.
 We sold our Ceramics Division on 28th February 2007 for £143.9 million giving a profit on sale of £33.3 million after tax. The sale of Ceramics Division completes the process, announced in November 2003, of disposing of parts of the former Colours & Coatings Division and focusing the group on its core activities. Under International Financial Reporting Standards (IFRS) the results of Ceramics Division are shown in discontinued operations on a post tax basis. Profit before tax in the income statement comprises the results for the continuing businesses only. The results for 2005/06 shown in the income statement have been restated accordingly.
Sales and Margins
Revenue (total sales) increased by 34% to £6,152 million. Precious metal prices grew strongly over the year which boosted sales in both Catalysts Division and Precious Metal Products Division.
Johnson Matthey’s turnover is heavily impacted by the high value of precious metals included in the group’s products, particularly in Precious Metal Products Division. The total value of sales varies each year according to metal prices, the mix of metals sold and the level of trading activity. The value of the precious metals included in sales is generally separately invoiced and payment made within a short period. Consequently, although return on sales (operating profit / revenue) for the precious metals businesses is low, return on investment is high.
To provide a more useful measure of return on sales, the table below shows return on sales by division excluding the value of precious metals. In the year to 31st March 2007 sales excluding precious metals rose by 25%, driven by good growth in Catalysts Division.
Return on Sales excluding Precious Metals | | | | | | | | | | | | | | | | | Sales excluding
precious metals | Return on
sales excluding
precious metals 1 | | | | | | | | | 2007
£ million | | 2006
£ million | | 2007
% | | 2006
% | | | | |
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| | | | Catalysts | 1,036 | | 786 | | 14.4 | | 17.1 | | | | Precious Metal Products | 290 | | 245 | | 29.4 | | 25.3 | | | | Pharmaceutical Materials | 129 | | 127 | | 27.6 | | 26.6 | | | | |
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| | | | Continuing Businesses | 1,454 | | 1,159 | | 17.4 | | 18.4 | | | | |
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| | | | | | | | 1 | Operating profit before one-off items divided by sales excluding precious metals | | | | | | | | | | | | | | | The return on sales excluding precious metals for the continuing businesses fell by 1.0% to 17.4%. This fall largely reflected a drop of 2.7% in Catalysts Division whose sales excluding precious metals grew by 32% in the year. Some of this growth was attributable to the increased costs of substrates which are required for heavy duty diesel catalysts and catalysed soot filters and which are pass through costs for Johnson Matthey. The division still achieved 11% operating profit growth which is more representative of the underlying volume growth.
Operating Profit / Exchange Translation
Operating profit before one-off items increased by 18% to £252.4 million, despite adverse exchange translation. Translated at last year’s rates the growth would have been 21% (see table above).
The main impact of exchange rate movements on the group’s results comes from the translation of foreign subsidiaries’ profits into sterling. A quarter of the group’s profits are made in North America, mainly in the USA. The average rate for the US dollar was $1.896/£ compared with $1.785/£ for 2005/06. Each one cent change in the average rate for the dollar has approximately a £0.4 million effect on operating profit in a full year. The fall of over 11 cents in the dollar in 2006/07 reduced reported group operating profit by £4.6 million.
Most major south east Asian currencies were weaker, adding a further £1.5 million to adverse exchange translation. The South African rand also weakened substantially, from R11.4/£ to R13.4/£. However, the catalysts manufactured by our South African business are ultimately for export and the benefit of a weaker rand on margins more than offsets the translational effect. Overall, excluding the rand, exchange translation reduced group profits by £6.4 million compared with 2005/06.
Catalysts Division’s operating profit was up 11%, benefiting from strong top line growth. Environmental Catalysts and Technologies’ sales were well ahead of last year with good growth in autocatalyst sales in Asia, increased sales of catalysed soot filters in Europe and the emergence of the new market for heavy duty diesel catalysts in both Europe and North America. Process Catalysts and Technologies also achieved good growth with strong sales of methanol catalysts and a good contribution from Davy Process Technology.
Precious Metal Products’ operating profit (before one-off items) was up 37%, benefiting from buoyant trading conditions for platinum group metals, particularly in the second half of the year, and good growth in its manufacturing businesses. A one-off impairment charge of £6.0 million was included in operating profit for the prior year (2005/06) relating to the write-off of redundant assets in Pgm Refining following the restructuring of that business.
Pharmaceutical Materials Division achieved 5% growth in operating profit in 2006/07 with a recovery in its US operations.
All three divisions’ results were held back by adverse exchange translation. The table at the top of this page shows the results translated at last year’s exchange rates. More detailed reviews of the progress of each division are given in the Operations section.
Interest
The group’s net finance costs rose by £11.1 million to £26.8 million. Average borrowings were significantly higher than last year as a result of the major investment in both capital expenditure and working capital to support the rapid growth in Catalysts Division, and the acquisition of Davy Process Technology in February 2006. However, with the sale of Ceramics Division at the end of February 2007, net debt fell significantly in March to end the year at £364.8 million. Interest rates also rose, particularly for floating rate US dollars, which on average were 1.3% up on 2005/06.
Profit before Tax
Profit before tax and one-off items for the continuing businesses rose by 15% to £226.5 million. After one-off items the rise was 18%. If the operating results for discontinued operations are included in the total, profit before tax was £242.6 million which was 10% up on last year’s reported profit before tax and one-off items of £219.8 million.
Taxation
The group’s tax charge for the continuing businesses was £64.7 million, an increase of £10.0 million on last year reflecting the growth in profit before tax. The average tax rate for the continuing businesses was 28.6%. The £33.3 million profit on disposal of Ceramics Division was largely tax free as a result of the substantial shareholdings exemption for tax on UK disposals.
Tax paid was £81.4 million which was much higher than in 2005/06. Some of the difference related to timing with payments falling into the first quarter of 2006/07 rather than the final quarter of the previous year. In addition, in 2005/06 we reached agreement with HM Revenue & Customs in the UK on several years’ tax assessments which resulted in a repayment of tax and benefited that year’s first half cash flow.
Dividend
The board is recommending to shareholders a final dividend of 23.7 pence, making a total dividend for the year of 33.6 pence, an increase of 12%, which is in line with the growth in earnings per share before one-off items. The dividend for the year would be covered 2.42 times by earnings per share before one-off items.
Return on Investment
We set a target of 20% for the pre-tax return on assets (ROA) for all our businesses with a minimum threshold of being ahead of our cost of capital (11.2% on a pre-tax basis). For the group as a whole ROA was 17.4% which was 0.4% up on last year. We are targeting to achieve a gradual improvement in the return over the next few years as the benefit of the investments we have been making in new product development comes through.
On a post tax basis the return on invested capital was 12.4% (applying the group’s underlying tax rate of 28.6% to operating profit in the calculation below). The estimated weighted average cost of capital (WACC) for the group is 8%. The margin above the cost of capital for the year was 4.4% which was 0.4% up on last year.
Return on Assets | | | | | | | | | | | | | | | | | Average net operating
assets employed 1 | Return
on assets 2 | | | | | | | | | 2007
£ million | | 2006
£ million | | 2007
% | | 2006
% | | | | |
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| |
| | | | Catalysts | 945 | | 838 | | 15.7 | | 16.0 | | | | Precious Metal Products | 198 | | 173 | | 43.2 | | 36.0 | | | | Pharmaceutical Materials | 306 | | 306 | | 11.6 | | 11.1 | | | | Ceramics | 63 | | 125 | | n/a | | 17.0 | | | | Corporate / other | (62) | | (64) | | n/a | | n/a | | | | |
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| | | | Total Group | 1,450 | | 1,378 | | 17.4 | | 17.0 | | | | |
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| | | | | | | | 1 | Average of opening and closing segment assets less segment liabilities as shown in note 1 on the accounts on pages 58 and 59. For the group, the average of opening and closing equity plus net debt. | | | | | | | | | 2 | Operating profit before one-off items divided by average operating assets employed. | | | | | | | | | | | | | | | Precious Metal Products Division’s return improved in 2006/07 and remains well above the group target. Catalysts’ ROA fell by 0.3% in 2006/07 despite good growth in operating profit reflecting the heavy investment made in the year, both in terms of capital and R&D, which will benefit future years. Pharmaceutical Materials’ return improved and was back above the group’s cost of capital in 2006/07, having fallen slightly below that level in 2005/06, and is expected to show steady improvement over the next few years.
Cash Flow
Johnson Matthey generated a net cash inflow of £13.8 million in 2006/07. Net debt disposed of with the sale of Ceramics Division amounted to £19.1 million. After taking into account the impact of exchange translation on foreign currency borrowings the group’s net debt fell by £47.2 million to £364.8 million.
The proceeds of sale of Ceramics Division amounted to £146.0 million (cash received plus net debt disposed of on sale). The group spent £8.6 million on acquisitions in the year and a net £50.4 million on share buy-backs. Excluding these items the group had a free cash outflow of £54.3 million. | | | | | | | | Change in Net Debt | | | | | | | | | | | | | | | | | | | | 2007
£ million | | 2006
£ million | | | | | |
| |
| | | | Cash flow from operating activities | | 159.1 | | 212.3 | | | | Net finance costs / dividends | | (91.9) | | (74.5) | | | | Capex / asset sales | | (121.5) | | (114.6) | | | | | |
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| | | | Free cash flow | | (54.3) | | 23.2 | | | | Acquisitions / disposals | | 118.5 | | (24.3) | | | | Shares bought | | (50.4) | | (25.9) | | | | | |
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| | | | Net cash flow | | 13.8 | | (27.0) | | | | Debt acquired / disposed with subsidiaries | | 19.1 | | (1.4) | | | | Exchange on net debt | | 14.3 | | (13.4) | | | | | |
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| | | | Change in net debt | | 47.2 | | (41.8) | | | | | |
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| | | | | | | | | | This outflow was the result of major investments in the year on capital expenditure and working capital to support the future growth of Catalysts Division, particularly ECT. In addition, working capital grew as a result of the rise in precious metal prices which affected both inventories and receivables. In total, the cash outflow on working capital was £114.4 million, although the ratio of working capital to revenue fell.
Capital expenditure for the year was £119.8 million which was 1.5 times depreciation. Most of the investment was focused on Catalysts Division where capex was 2.0 times depreciation, with the other divisions spending at levels close to or below depreciation. The cash outflow on capital expenditure in the year was £121.5 million (net of asset sales) with a reduction in payments accrued.
Capital Expenditure to Depreciation | | | | | | | | | | | | | | | | | | Year to 31st March 2007 | | | | | | | Capital
expenditure
£ million | | Depreciation
£ million | | Capex /
depreciation
(times) | | | | |
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| | | | Catalysts | 91.5 | | 46.0 | | 2.0 | | | | Precious Metal Products | 11.2 | | 13.4 | | 0.8 | | | | Pharmaceutical Materials | 10.7 | | 10.5 | | 1.0 | | | | Discontinued / other | 6.4 | | 7.6 | | 0.8 | | | | |
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| | | | Total Group | 119.8 | | 77.5 | | 1.5 | | | | |
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| | | | | | | | | | | | | | | | | | | Environmental Catalysts and Technologies spent £63.9 million in 2006/07 with major investments in new capacity. We have completed the new diesel products facility in North America and are building a new CSF manufacturing facility in Royston in the UK. Additional manufacturing capacity has been installed in our production facilities in Japan and South Africa and we are building new factories in Russia and South Korea which should be completed and commissioned in 2007/08. In Process Catalysts and Technologies we have added capacity in AMOG and in 2007/08 we will be investing in additional capacity in Clitheroe, UK to manufacture the latest generation of synthesis gas catalysts.
Pensions
The surplus on the group’s UK pension schemes fell by £23.2 million to £45.5 million on an IFRS basis at 31st March 2007. During the year the trustees completed the triennial revaluation of the fund incorporating the latest statistics on life expectancy and demographic experience. The revaluation showed the fund was still in surplus as of 31st March 2006 but at a lower level than previously estimated. Market conditions improved somewhat in 2006/07 with a rise in the discount rate and a good return on equities although inflation assumptions have also risen. The cost of providing future pensions has gone up and both employee and employer contributions have been increased to help maintain a satisfactory funding position.
Worldwide, including provisions for the group’s post-retirement healthcare schemes, the group had a net surplus of £0.9 million on employee benefit obligations at 31st March 2007 compared with £18.8 million at 31st March 2006.
Capital Structure
In 2006/07 we invested heavily in capital expenditure and working capital to support organic growth, particularly in ECT. We also purchased 3.6 million shares into treasury at a total cost of £52.6 million. Proceeds of £2.2 million were received from option exercises to give a net outflow on share transactions of £50.4 million. However, these outflows were more than offset by the proceeds from the sale of Ceramics Division of £146.0 million. Gearing (debt / equity) fell by 5.6% to 33.8%.
In 2007/08 we will continue to invest in organic growth, with capital expenditure budgeted to be 1.5 times depreciation and further additional investment in working capital. Despite this significant investment we expect to maintain or improve the group’s return on assets. We plan to continue to buy back shares in 2007/08 and we are looking at a number of possible bolt-on acquisitions. Together these investments will increase gearing and make more efficient use of the group’s balance sheet.
New Divisional Structure
From 1st April 2007 we have reorganised our divisional structure, creating a new Environmental Technologies Division which comprises ECT, the process technologies businesses within PCT and Fuel Cells. 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. Precious Metal Products Division is unchanged.
The segmental results for 2006/07, restated for the new divisions, are shown in the table below.
Segmental Information for New Divisions | | | | | | | | | | | | | | | | | Year to 31st March 2007 | Sales to
external
customers
£ million | | External
sales
excluding
precious
metals
£ million | | Operating
profit
£ million | | | | |
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| | | | Environmental Technologies | 1,864.3 | | 896.2 | | 120.1 | | | | Precious Metal Products | 3,824.4 | | 290.0 | | 85.3 | | | | Fine Chemicals & Catalysts | 463.0 | | 268.0 | | 64.2 | | | | Corporate | - | | - | | (17.2) | | | | |
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| | | | Continuing Businesses | 6,151.7 | | 1,454.2 | | 252.4 | | | | |
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| | | | | | | | | | | | | | | | | | | Borrowings
Net debt at 31st March 2007 was £364.8 million, a reduction of £47.2 million on 31st March 2006.
In April 2006 the US$100 million 6.36% fixed rate bonds issued in 1996 matured and were repaid. In December 2006 we issued a further US$300 million of long term debt to improve the group’s maturity profile. The issue was in three tranches: US$100 million of 5.55% seven year bonds; US$50 million of seven year floating rate bonds with an interest rate of LIBOR + 0.28%; and US$150 million of 5.67% ten year bonds which were subsequently swapped into floating rate debt.
At 31st March 2007 the maturity profile of the group’s debt was as follows:
Borrowings and Finance Leases | | | | | | | | | | | | | | | | | | | | | | 31st March 2007 | | 31st March 2006 | | | | | £ million | | % | | £ million | | % | | | | |
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| | | | Five to ten years | 300.2 | | 69 | | 165.9 | | 30 | | | | Two to five years | 109.7 | | 25 | | 243.5 | | 45 | | | | One to two years | 0.6 | | - | | 45.3 | | 8 | | | | Within one year | 27.5 | | 6 | | 90.3 | | 17 | | | | |
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| | | | Gross borrowings | 438.0 | | 100 | | 545.0 | | 100 | | | | Less: cash and deposits | 73.2 | | | | 133.0 | | | | | | |
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| | | | | | Net debt | 364.8 | | | | 412.0 | | | | | | |
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| | | | | | | | | | | |  | | | | | | | | Financial Risk Management and Treasury Policies
The group uses financial instruments, in particular forward currency contracts and currency swaps, to manage the financial risks associated with its underlying business activities and the financing of those activities. The group does not undertake any trading activity in financial instruments. Our treasury department is run as a service centre rather than a profit centre.
Interest Rate Risk
At 31st March 2007 the group had net borrowings of £364.8 million. Some 51% of this debt was at fixed rates with an average interest rate of 5.20%. The remaining 49% of the group’s net borrowings was funded on a floating rate basis. A 1% change in all interest rates would have a 0.8% impact on profit before tax and one-off items. This is within the range the board regards as acceptable.
Liquidity
The group’s policy on funding capacity is to ensure that we always have sufficient long term funding and committed bank facilities in place to meet foreseeable peak borrowing requirements. Within long term debt of £410.5 million at 31st March 2007, the group had borrowings under committed bank facilities of £15.4 million. Total committed bank facilities amounted to £310.0 million of which £294.6 million was undrawn at 31st March 2007. The group also has a number of uncommitted facilities, including metal leases, and overdraft lines at its disposal.
Foreign Currency Risk
Johnson Matthey’s operations are located in over 30 countries, providing global coverage. The majority of its profits are earned outside the UK with the largest single investment being in the USA. In order to protect the group’s sterling balance sheet and reduce cash flow risk the group has financed most of its investment in the USA, Europe, Japan and China by borrowing US dollars, euros, yen and renminbi respectively. Although an element of this funding is obtained by directly borrowing the relevant currency, a large part is achieved through currency swaps which can be more efficient and reduce costs and credit exposure. The group uses forward exchange contracts to hedge foreign exchange exposures arising on forecast receipts and payments in foreign currencies. Currency options are occasionally used to hedge foreign exchange exposures, usually when the forecast receipt or payment amounts are uncertain. Details of the contracts outstanding on 31st March 2007 are shown on pages 82 and 83.
Precious Metal Prices
Fluctuations in precious metal prices can have a significant impact on Johnson Matthey’s financial results. Our policy for all manufacturing businesses is to limit this exposure by hedging against future price changes where such hedging can be done at acceptable cost. The group does not take material exposures on metal trading.
All the group’s stocks of gold and silver are fully hedged by leasing or forward sales. Currently the majority of the group’s platinum stocks are unhedged because of the lack of liquidity in the platinum market. | | | | | | | | [ back to top ] | | |
