Report of the Directors
Business Review

Treasury Policies

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 speculative 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 2012 the group had net borrowings of £454.2 million. Some 73% of this debt was at fixed rates with an average interest rate of 4.9%. The remaining 27% of the group’s net borrowings was funded on a floating rate basis. A 1% change in all interest rates would have a 0.3% impact on underlying profit before tax. This is within the range the board regards as acceptable.

Foreign Currency Risk

Johnson Matthey’s operations are located in over 30 countries, providing global coverage. The significant amount of its profit is earned outside the UK. 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 and Europe by borrowing US dollars and euros respectively. Although much of this funding is obtained by directly borrowing the relevant currency, a part is achieved through currency swaps which can be more efficient and reduce costs. To a lesser extent the group has also financed a portion of its investment in China, Japan and South Africa using currency borrowings and swaps. 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 in a bid situation. Details of the contracts outstanding on 31st March 2012 are shown in note 25.

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.

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