Introduction
Johnson Matthey achieved very good results in 2007/08, with revenue well ahead of last year as a result of strong underlying volume growth and rising precious metal prices. Sales excluding the value of precious metals increased by 20% with all three divisions achieving good growth. Demand for catalysts was strong with expanding sales of diesel particulate filters and a full year’s sales of heavy duty diesel (HDD) catalysts to original equipment manufacturers in Europe and North America. The group also achieved strong growth in Asia, particularly in China, both for emission control catalysts and process catalysts.
On 6th February 2008 we completed the acquisition of Argillon Group for €214 million. Argillon is an international group specialising in catalysts and advanced ceramic materials, with leading technology for the control of emissions of oxides of nitrogen (NOx). Within its portfolio Argillon has non catalyst businesses manufacturing ceramic insulators and alumina products which Johnson Matthey has offered for sale. Under International Financial Reporting Standards (IFRS) these businesses are classified as “assets held for sale” and their results shown in discontinued businesses below profit after tax in the income statement.
Also under IFRS we are required to capitalise certain intangible assets upon acquisition such as the fair value of customer relationships, technology and trademarks and then amortise their value through the income statement. In presenting the group’s results we have focused on operating profit before amortisation of these “acquired intangibles” which we believe provides a better guide to the underlying performance of the group.
Operating Profit for the Continuing Businesses (before amortisation of acquired intangibles)
Sales Revenue increased by 22% to £7.5 billion. Precious metal prices grew strongly over the year which boosted sales in both Environmental Technologies Division and Precious Metal Products Division. Sales excluding the value of precious metals rose by 20% to £1,750 million reflecting good underlying volume growth and increased non precious metal material costs, some of which are a pass through for Johnson Matthey.
Environmental Technologies Division grew its sales excluding precious metals by 27% to £1,140 million. Emission Control Technologies (ECT) provided most of the growth with sales up 32%. Sales excluding precious metals of HDD catalysts to original equipment manufacturers trebled to £159 million as new emission standards applied for the full year. Sales of light duty products were also well ahead with good growth in diesel particulate filters in Europe and autocatalysts in Asia. Process Technologies had a good year with sales excluding precious metals up 10%.
Precious Metal Products Division’s sales excluding precious metals increased by 6% to £307 million with good growth in the manufacturing businesses. Fine Chemicals & Catalysts sales excluding precious metals increased by 13% to £303 million. The division achieved good growth in Asia and sales were also boosted by the high price of nickel.
Operating profit before amortisation of acquired intangibles divided by sales excluding precious metals.
We measure return on sales as operating profit before amortisation of acquired intangibles divided by sales excluding precious metals. Return on sales for the group fell by 0.5% to 17.0% in 2007/08 as a result of increased material costs.
ECT’s return on sales has fallen in each of the last two years as a result of the rapid growth in sales of new products, particularly filters. The uncoated filter substrates are currently very expensive. The price is agreed between the car company and the substrate supplier and the cost is a pass through for Johnson Matthey. Filter costs are now coming down and we expect ECT’s return on sales to stabilise at current levels despite continued growth in these new products.
Operating Profit
Operating profit before amortisation of acquired intangibles rose by 16% to £296.8 million. Exchange translation was again adverse. The impact on individual divisions is shown in the table above.
Environmental Technologies Division had an excellent year with operating profit before amortisation of acquired intangibles up 20% at £147.3 million. Argillon, acquired in February 2008, contributed £2.9 million of this profit growth. Excluding acquisitions profits were 17% higher. ECT generated most of the growth with profits up in all three regions. Click here for more details of the division’s performance.
Precious Metal Products Division also had a strong year with operating profit 20% up at £102.1 million. The division’s marketing and distribution business benefited from the favourable conditions in the platinum group metal (pgm) markets with the average price of platinum rising by 20% in sterling terms. The manufacturing businesses also had a good year. Click here for Precious Metal Products Division’s results.
Fine Chemicals & Catalysts Division achieved mid single digit growth in operating profit, in line with volume growth in its underlying markets, with profits 5% higher than last year (6% at constant exchange rates) at £67.1 million. Click here for more details of the division’s results.
Exchange Rates
The main impact of exchange rate movements on the group’s results comes from the translation of foreign subsidiaries’ profits into sterling. Around a quarter of the group’s profits are made in North America, mainly in the USA. The average rate for the US dollar was $2.007/£ compared with $1.896/£ for 2006/07. Each one cent change in the average rate for the dollar has just under a £0.4 million effect on operating profit in a full year. The fall of 11 cents in the average exchange rate for the dollar in 2007/08 reduced reported group operating profit by £4.1 million. The South African rand also weakened, from R13.4/£ to R14.3/£. 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.
Sterling weakened against a number of other currencies, particularly the euro, which partly offset the translation loss on the US dollar. Overall, excluding the rand, exchange translation reduced group profits by £2.6 million compared with 2006/07.
Interest
The group’s net finance costs rose by £3.5 million to £30.3 million as a result of higher average borrowings, partly offset by the benefit of lower US dollar interest rates towards the end of the year. Average borrowings were higher than last year when net debt fell towards the end of the year following the sale of Ceramics Division. In 2007/08 net debt increased by £245.6 million with most of the rise occurring in February 2008 following the acquisition of Argillon Group. Interest rates for short term US dollar borrowing fell towards the end of the year as the US government tried to stimulate the US economy.
Profit before Tax
Profit before tax and amortisation of acquired intangibles rose by 16% to £265.4 million. After amortisation, profit before tax was also 16% up at £262.3 million. Included in profit before tax is a loss of £1.1 million in associates compared with a profit of £0.9 million last year. This relates to AGR Matthey, the Australian gold refining business in which the group has a 20% stake, which is taking a restructuring charge to reduce the cost base of its business.
Taxation
The group’s tax charge for the year was £77.2 million, an increase of £12.5 million on 2006/07 reflecting the growth in profit before tax and a slightly higher overall average tax rate. The average tax rate for the continuing businesses was 29.4%, an increase of 0.8% on last year. The increase in the rate partly reflected higher taxable profits in countries where marginal tax rates are above the group average, such as Japan and the USA.
Tax paid was £71.5 million which was below tax payable and less than tax paid in 2006/07. The difference arises from timing of tax payments. We are expecting tax paid to rise again in 2008/09.
Earnings per Share
Underlying earnings per share were 9% up at 89.5 pence. The sale of the group’s Ceramics Division in February 2007 and a slightly higher average tax rate have had the effect of slowing the growth in earnings per share in 2007/08 compared with growth in profit before tax. Total earnings per share were 88.5 pence, 9% below 2006/07 which included the profit on sale of Ceramics Division.
Dividend
The board is recommending to shareholders a final dividend of 26.0 pence, making a total dividend for the year of 36.6 pence, an increase of 9%, which is in line with the growth in underlying earnings per share. The dividend would be covered 2.45 times by underlying earnings per share.
Pensions
The surplus on the group’s UK pension schemes increased by £19.6 million to £65.1 million on an IFRS basis at 31st March 2008. This increase was attributable to the rise in the discount rate from 5.4% to 6.5% which reflected market rates applying at 31st March 2008. Long term inflation expectations have also risen, from 3.1% p.a. to 3.5% p.a., giving an increase in “real” interest rates (i.e. inflation adjusted) from 2.3% to 3.0% which has resulted in a reduction in the actuarial valuation of the pension scheme’s liabilities under IFRS.
Worldwide, including provisions for the group’s post-retirement healthcare schemes, the group had a net surplus of £17.2 million on employee benefit obligations at 31st March 2008 compared with £0.9 million at 31st March 2007.
Return on Invested Capital
The group’s return on invested capital (ROIC) increased by 0.9% to 18.5%, despite high capital expenditure to support future growth and the acquisition of Argillon in February 2008. On a post tax basis the group’s return was 13.1% which is 5.1% above our estimated cost of capital of 8%.
Our long run group target for ROIC on a pre-tax basis is 20% and we made good progress in 2007/08 towards that goal. All our divisions were comfortably above our pre-tax cost of capital of 11.3%. Precious Metal Products Division was also ahead of the 20% target with a return of 54.3%. Environmental Technologies Division’s and Fine Chemicals & Catalysts Division’s ROICs were 15.2% and 13.9% respectively.
Return on Invested Capital
Average
invested
capital1
2008
£ million
Return on
invested
capital2
2008
%
Environmental Technologies
970
15.2
Precious Metal Products
188
54.3
Fine Chemicals & Catalysts
483
13.9
Corporate / other
(34)
n/a
Total group
1,607
18.5
1
Average of opening and closing segment assets less segment liabilities as shown in note 1 on the accounts. For the group, the average of opening and closing equity plus net debt.
2
Operating profit before amortisation of acquired intangibles divided by average invested capital.
Cash Flow Johnson Matthey had a net cash outflow of £239.0 million in 2007/08. After taking into account the impact of exchange translation on foreign currency borrowings and debt acquired with subsidiaries the group’s net debt increased by £245.6 million to £610.4 million.
The group spent £159.9 million on acquisitions and disposals in the year and a net £44.6 million on share buy-backs. Excluding these items the group had a free cash outflow of £34.5 million.
This outflow was the result of major investments in the year on capital expenditure and working capital to support the growth of Environmental Technologies Division, particularly Emission Control Technologies. In addition, working capital grew as a result of the sharp rise in precious metal prices towards the end of the financial year which affected both inventories and receivables. In total, the cash outflow on working capital was £90.5 million, although the ratio of working capital to revenue fell once again.
Capital expenditure for the year was £145.0 million which was 1.9 times depreciation (excluding amortisation of acquired intangibles). Most of the investment was focused on Environmental Technologies Division where capex was 2.4 times depreciation.
Environmental Technologies spent £105.8 million in 2007/08 with major investments in new capacity. Emission Control Technologies completed three new factories in the year: in South Korea; the Russian Federation; and Royston, UK. Two new factories are now under construction in Macedonia and Pennsylvania, USA to manufacture diesel catalysts. Additional capacity is being installed in India, China and Japan. Process Technologies is investing in additional capacity in Clitheroe, UK to manufacture the latest generation of synthesis gas catalysts. Fine Chemicals & Catalysts Division increased its capital expenditure in the year to 1.4 times depreciation with the investment above depreciation focused on Catalysts and Chemicals, where a new factory was completed in Shanghai, China, and on Research Chemicals for a new facility in Germany.
Capital Structure
Johnson Matthey has excellent growth prospects in its major markets. The board’s policy is to maintain a strong balance sheet to ensure that the group always has sufficient resources to be able to invest in future growth. We have a long term target range for gearing (net debt / equity) of 50% to 60% although in any given year gearing may fall outside this range depending on future plans.
In February 2007 we sold Ceramics Division for £146.0 million. Gearing fell to 33.8% at the end of the 2006/07 financial year. In the first half of 2007/08 the group purchased 2.4 million shares into treasury for £39.1 million taking the total number of shares acquired over two years to 6 million at a total cost of £91.7 million (an average price of £15.28 a share). In 2007/08 a further £5.5 million was spent on purchasing shares for the group’s employee share ownership trust (net of proceeds of option exercises). On 10th December we announced we had reached agreement to acquire Argillon Group for €214 million. That acquisition took us over the 50% gearing threshold and we suspended the share buy-back programme. With continued heavy investment in capital expenditure and working capital, net debt increased by £245.6 million to £610.4 million and gearing rose to 52.6% at 31st March 2008. Despite the increased investment, return on invested capital for the group improved.
In 2008/09 we plan to spend about 1.8 times depreciation on capital expenditure, with further increases in working capital likely to be needed to support sales growth. We are also planning to sell the Insulators and Alumina businesses acquired with Argillon and expect to reinvest the proceeds in further bolt-on acquisitions.
The increase in borrowings in 2007/08 was mainly funded out of the group’s committed bank facilities. At 31st March 2007, following the receipt of the proceeds of sale of Ceramics Division, we had only drawn £15.4 million under these facilities. At 31st March 2008 drawings had risen to £230.7 million out of total committed facilities of £ 310.0 million. To increase our headroom we have recently agreed a further £100 million long term loan facility from the European Investment Bank which is provided to support the group’s investment in research and development.
