Johnson Matthey earned profits before tax (excluding exceptional items) of £130.2 million in the year to 31st March 1998, an increase of 20% over the previous year. Turnover rose by 27% while operating profit was up 20% at £139.2 million. The growth in operating profit was achieved despite an adverse exchange translation effect of £5.6 million.

Earnings per share excluding exceptionals rose by 23% to 44.3 pence. Including exceptionals earnings per share rose by 34% to 48.2 pence.

Net cash flow from operating activities increased by 26% to £156.4 million. Free cash flow improved to £28.8 million.

The Board is proposing a final dividend of 12.6 pence per share to give a total dividend for the year of 17.8 pence, an increase of 15% over last year. The recommended dividend is covered 2.5 times by earnings excluding exceptionals.

Operations

Precious Metals Division (PMD) increased its operating profit by 19% to £52.5 million. Sales were 32% up at £2,262 million. All three of the division's sectors (Platinum, Gold and Chemicals) were well ahead of the previous year.

The Platinum sector benefited from favourable market conditions and good growth in fabricated metal products. The Gold businesses were well ahead despite the weak gold price. Sales rose by over 80% in Asia reflecting high levels of activity following the economic crisis in the region. The division's Chemicals business, which now accounts for over one third of PMD's profits, achieved very good growth. The upgraded platinum metals refinery in the UK achieved a significant increase in refining revenues. Precious metal salts and catalogue sales were also well up on the previous year.

Catalytic Systems Division (CSD) increased its operating profit by 33% to £45.4 million with an 8% increase in sales to £390.8 million. Unit sales of autocatalysts grew by 7% in Europe, slightly ahead of overall growth in the market. North American unit sales rose by 10%, well ahead of the overall market, reflecting continued growth in sales of light trucks which use more catalysts per vehicle than cars and are a market sector where our major customers are strong. New high performance catalysts were introduced helping to increase market share and protect margins while profitability benefited from continued cost control.

Pharmaceutical Materials continues to be the most rapidly growing part of CSD with 46% growth in operating profit. In September we announced that Johnson Matthey and Schein Pharmaceutical, Inc. had received final US Food and Drug Administration approvals to manufacture and market methylphenidate. That product was successfully launched in October and sales have grown strongly since then. Sales of other pharmaceuticals have also continued to grow and there are a number of new products in the pipeline. Manufacturing capacity has been expanded and additional new capacity will come on stream this year to meet increased demand.

Electronic Materials Division (EMD) increased its operating profit by 30% to £40.1 million. Sales increased by 27% to £438.1 million. The new semiconductor packages facility at Chippewa Falls in Wisconsin successfully completed its production ramp up and is now achieving unit sales of 1.5 million a month. The largest contributor to EMD's profit growth was Wafer Fabrication Materials which enjoyed a significant recovery in high purity titanium sales following last year's fall in demand from DRAM producers. Johnson Matthey also continued to increase its share of the growing worldwide market for sputtering targets. The Assembly Products sector recovered well from the anticipated loss of sales following the rapid transition from ceramic to plastic laminate packages. A range of new thermal management products was successfully introduced during the year which enabled the sector to match last year's results. Laminate Products, the ACI multilayer printed circuit board business, suffered some margin pressure from Asian competitors in the second half of the year and ended the year in line with the previous year's result.

Ceramic Materials Division (CMD) was formed in early February 1998 when Johnson Matthey purchased Cookson Group's 50% stake in Cookson Matthey Ceramics. Johnson Matthey's share of the operating profit for CMD's continuing businesses fell by 29% to £9.4 million. Johnson Matthey's share of CMD's sales increased by 13% as a result of acquiring 100% ownership for the last two months of the year. Underlying sales fell by 3%. The division experienced difficult trading conditions in the financial year and was particularly affected by the strength of sterling which reduced margins on export sales and led to destocking by some of CMD's principal customers in the UK. Following the acquisition we have introduced a major cost reduction programme and have divested peripheral businesses including the Perlite and German Minerals businesses (Otavi Minen AG) and the UK Minerals business.

Exceptional Items

An exceptional provision of £4.9 million is included in operating profit for restructuring CMD following the acquisition of Cookson Group's 50% stake in February 1998. Also included is a £3.1 million charge arising from several rationalisation programmes comprising the group's share of the £2.6 million cost to rationalise the Decorative sector of CMD prior to acquisition, £1.4 million for PMD to reduce costs in a number of businesses and £0.4 million for CSD to transfer UK autocatalyst production to Brussels. These exceptional costs have been partly offset by a £3.5 million exceptional profit on the sale of shares in Ballard Power Systems, Inc.

Johnson Matthey sold part of its holding in AnorMED Inc. in the year and reduced its overall investment in the company from 40% to 25%. The disposal generated an exceptional profit of £2.6 million. In addition the sale of Otavi Minen AG generated an exceptional gain of £1.8 million. Overall, exceptional items gave rise to a small charge of £0.1 million before taxation.

The group achieved a tax saving of £8.7 million by paying dividends as Foreign Income Dividends (FIDs). This credit has also been treated as exceptional.

On a post-tax basis exceptional items amounted to a net credit of £8.6 million.

Exchange Rates

Adverse exchange rates had a significant impact on Johnson Matthey's results for the year. Exchange translation reduced profits by £5.6 million. Nearly 60% of Johnson Matthey's profits are earned in North America. The average rate for the US dollar was 1.64, compared with 1.59 last year, which accounted for £2.9 million of the translation effect. In addition, the strength of sterling reduced margins in the group's UK based businesses, particularly CMD.

Interest and Hedging

The group's interest charge rose by £1.0 million as a result of increased borrowing costs for precious metals and higher borrowings in the last few weeks of the year following acquisition of 100% ownership of CMD.

Following the sharp rise in platinum and palladium interest rates in the first quarter of the year, it was no longer possible to hedge the group's stocks of these metals by covering forward or leasing on a cost-effective basis. The group is now carrying the majority of its platinum and palladium stocks unhedged. Prices of these metals strengthened towards the end of the financial year. At the year end the market value of the group's stocks was well above cost. Given the volatility of the prices of these metals we have not recognised the gain in this year's accounts and the unhedged precious metal stocks are shown at cost in the balance sheet.

Taxation

Johnson Matthey paid its final dividend for 1996/97 and its interim dividend for 1997/98 during the year as FIDs which will enable the group to obtain a refund of £8.7 million of Advance Corporation Tax. We intend to pay the proposed final dividend for 1997/98 also as a FID which should give rise to a further tax saving of £6.8 million.

Even excluding the tax saving on the FIDs, Johnson Matthey's average tax rate fell slightly to 26%. The group benefited from an agreement between the tax authorities in the US and in the UK to roll-back licensing royalties on autocatalyst technology for prior years.

Investment

The group invested £77.2 million on capital expenditure (including two months of CMD) which was 1.7 times depreciation. Several major projects were completed in the year. In CSD our new autocatalyst facility in Argentina, a joint venture with Magneti Marelli S.p.A., went into production in February. In Pharmaceutical Materials, the first stage of our major expansion programme at West Deptford in the US was completed to meet the growing demand for organic pharmaceuticals. In EMD the semiconductor packages facility at Chippewa Falls was fully equipped and ramped up to volume production, and a new facility near Spokane was commissioned to manufacture thermal management products for the semiconductor industry.

In December 1997, following the devaluation of the Malaysian Ringgit, Johnson Matthey took the opportunity to purchase the 30% stake of one of its partners in the Malaysian autocatalyst joint venture for £0.8 million, which took the group's holding in the venture to 80%.

In January 1998 Johnson Matthey acquired the printed circuit board operations of Universal Circuits Inc. located in Buffalo, Minnesota, for £6.4 million. The business had assets of £3.9 million and the acquisition resulted in goodwill of £2.5 million.

On 6th February 1998 the group paid £65 million for the outstanding 50% of Cookson Matthey Ceramics and assumed responsibility for all of the company's bank borrowings (all short term) which totalled £71.7 million net. The acquisition gave rise to goodwill of £11.5 million after writing down assets relating to previously shared sites, which CMD is now vacating, and adjusting for accounting differences.

On 31st March 1998 Johnson Matthey sold its 87.6% share of Otavi Minen AG for net proceeds of £16.6 million.

We continue to seek a minimum pre-tax return on assets (ROA) for all our businesses of 20%. The target is based on operating profit divided by average net operating assets including goodwill. Precious Metals Division and Catalytic Systems Division both improved their ROAs in the year and were comfortably above the group target. EMD also improved its return but is still below the group target. Overall, the group improved its ROA to 16.8% in 1998.

Cash Flow

Net cash flow from operating activities rose by 26% to £156.4 million as a result of higher profits and continued tight control of working capital. Free cash flow (net cash flow from operating activities after interest, tax, dividends and capital expenditure) improved to £28.8 million.

Expenditure on acquisitions less proceeds of divestments amounted to £44.1 million which led to an overall net cash outflow of £15.3 million. Net borrowings, which include the loans acquired with CMD, rose to £225.1 million.