Report of the Directors
Business Review

Risks and Uncertainties

The effective identification and management of risks and opportunities across the group are integral to the delivery of the group’s strategic objectives. The group’s approach to risk management is aimed at monitoring material issues to enable the early identification of key risks and the taking of action to remove or reduce the likelihood of those risks occurring and their effect.

The board has overall responsibility for ensuring that risk is effectively managed across the group. However, the board has delegated to the Audit Committee the responsibility for reviewing the effectiveness of the group’s system of internal control and procedures for the identification, assessment, management, mitigation and reporting of risk.

The group has in place a process for the continuous review of its risks. As part of that process, each business reviews its risks and its mitigation strategies and actions. Each risk is allocated an owner who has the authority and responsibility for assessing, monitoring and managing it. The most significant risks identified are collated into a Group Risk Register. The Group Risk Register is reviewed by the Chief Executive’s Committee. Each individual risk is considered and the status and progression of mitigation actions and plans are monitored. The Group Risk Register is reviewed by the board twice a year.

The table below sets out what the board believes to be the principal risks and uncertainties facing the group, the mitigating actions for each and an update on any change in the profile of each risk during the course of 2011/12.

In view of the group’s increased focus on the cost of rare earth materials and the establishment this year of a strategy to manage movement in their prices (as described in the Financial Review of Operations section), we have concluded that the risk associated with movements in raw material prices has decreased. As a result, we have removed this from our principal risks this year.

  Risk   Description   Impact   Mitigation   Changes since
2011 Annual Report
 
 

Failure to grow in the longer term, to take advantage of new opportunities or to have sufficient capacity to meet demand

 

The group’s existing activities are well placed to deliver good growth over the coming years. New business areas will help to sustain the group’s growth beyond that period.

 

Failure to identify new business areas or extend the group’s portfolio could impact the ability of the group to continue to grow in the long term.

 
  • Each business prepares a ten year strategic plan to review demand in existing markets and potential new opportunities.
  • The group continues to invest in research for new products and technologies.
  • Capacity and demand considerations are included in the strategic review and additional capacity management reviews.
 

The group invested £128.6 million in R&D in the year (2010/11 £109.8 million).

The group is targeting potential new markets and developing new businesses, both organically and through acquisition.

 
 

Inability to deliver anticipated benefits from acquisitions, capital projects and other initiatives

 

The group’s strategy is based upon organic growth. However, acquisitions and investment in capital projects will accelerate the achievement of our strategic goals.

The realisation of anticipated benefits depends on:

  • the performance of acquired businesses after acquisition and their successful integration into the group; and
  • the delivery of capital projects on cost and to plan.
 

Unsuccessful integration of an acquired business or project time or cost over-runs could result in the failure to realise the expected benefits and hence impact the group’s results.

 
  • The group has clearly defined criteria for suitable acquisition targets and substantial due diligence is carried out before any acquisition is made.
  • A dedicated team is appointed to manage the integration process and regular monitoring of the performance of newly acquired businesses is carried out.
  • Requirements of capital projects and other initiatives are strictly defined and subject to robust approvals.
 

There were no acquisitions in the year.

The integration and performance of the Additives business (formerly Intercat) during the year is discussed in the Financial Review of Operations.

Significant projects (such as expansion of capacity in Emission Control Technologies, Process Technologies and Catalysts and Chemicals) are discussed in the Financial Review of Operations.

 
 

Changes to future environmental legislation

 

Approximately 50% of the group’s revenue is driven by environmental legislation, particularly legislation over emissions from light and heavy duty vehicles. Further tightening of global emissions legislation generally requires improved technological solutions and the extension of emissions legislation to new applications can create opportunities for the group.

 

A curtailment in environmental legislation around the world could limit the group’s growth potential and undermine profit margins.

 
  • The group maintains a diverse product portfolio.
  • Forthcoming changes in emissions legislation are well understood and our products are designed to meet these increased requirements.
  • Profit margins can be maintained with continuous improvements in technology to reduce the cost and improve the effectiveness of our products.
  • Regular reviews are undertaken to monitor areas of new potential legislation.
  • Lobbying activities are undertaken where appropriate to improve the understanding of regulatory and legislative bodies.
 

No change.

 
 

Technological change

 

Johnson Matthey operates in highly competitive markets in which technology is a key to success. Constant product innovation is critical to maintain competitive advantage.

 

Failure to keep up with changes in the market place and to maintain our technology pipeline could result in a lack of competitive products and erosion of margins and / or loss of market share.

 
  • The group continues to invest in its products through R&D (including through our Technology Centres around the world) and as per our ten year technology plan.
  • There is constant innovation and development in cooperation with our key customers.
  • The group invests in its people to ensure that it maintains a high level of relevant scientific expertise.
 

No change.

 
  Risk   Description   Impact   Mitigation   Changes since
2011 Annual Report
 
 

Global political and economic conditions

 

The global nature of the group’s business exposes it to risk arising from economic, political and legislative change in the countries in which we operate.

 

A sustained period of economic weakness in our markets could have a material adverse effect on the group’s results.

The group has no influence upon changes in inflation, interest rates or other economic factors affecting its business. In addition, the possibility of political unrest and legal or regulatory changes also exist in countries in which the group operates.

 
  • The group maintains a balanced portfolio of businesses and serves a wide range of diverse customers which reduces the impact of a change to any one market.
  • Management continuously monitors the performance of our businesses across the world at both business and group level.
  • Our cost base contains a significant variable element and is flexible to changing political and economic conditions.
 

The group’s strong performance this year reflects the continuing recovery of its businesses since the recession in the group’s developed markets.

Given the continued uncertainty in Europe (offset partially by the improved outlook in the US) we have concluded that this risk has increased since last year.

 
 

Commercial relationships and reputation

 

The group has well established long term relationships with a number of customers and suppliers. Maintaining good relationships with customers and suppliers enables the group to enhance the quality of service to its customers.

 

The group has high shares in many of the markets in which it operates. The deterioration in its reputation or relationship with, or ultimately the loss of, a key customer or supplier could have a material impact on the group’s results.

 
  • Some of the group’s key relationships are supported by long term contracts, notably the group’s relationship with Anglo American Platinum.
  • A broad customer base is maintained to prevent the group from becoming unduly dependent on any single customer.
  • Industry developments and market shares are constantly monitored.
  • We actively manage our customer relationships at all levels to ensure a high quality of service.
 

No change.

 
  Risk   Description   Impact   Mitigation   Changes since
2011 Annual Report
 
 

Pension scheme funding

 

The group operates a number of defined benefit pension schemes, some of which are in deficit.

 

Actuarial deficits could be adversely affected by changes in interest rates, the market values of investments, as well as inflation and increasing longevity of the schemes’ members. This may result in greater cash contributions being required.

 
  • Where actuarial deficits exist the group has agreed deficit recovery plans.
  • The group works with the fiduciary committees and trustee boards of each of its pension schemes around the world to ensure that an appropriate investment strategy is in place. This includes de-risking the schemes as funding levels improve.
  • Where possible, appropriate pension scheme assets are held to match movements in the schemes’ liabilities.
  • We monitor and proactively manage the rate at which the pension liability grows and consider liability management exercises as appropriate.
  • The group is reviewing its options with regard to future pension provision for employees worldwide.
  • More detail of the group’s pension schemes is included in note 14 in the Accounts.
 

No change.

 
  Risk   Description   Impact   Mitigation   Changes since
2011 Annual Report
 
 

Changes to health, safety, environmental and other regulations and standards

 

In common with similar manufacturing companies, the group operates in an environment that is subject to numerous health, safety and environmental laws, regulations and standards.

 

Changes made to applicable laws, regulations or standards could adversely impact the group’s manufacturing capability or indeed, the marketability of our products.

 
  • The group carries out regular internal reviews to ensure compliance with current group policies and applicable laws, regulations and standards such as ISO 14001 and OHSAS 18001. Our quality standards are also scrutinised externally by customers, suppliers and the relevant authorities.
  • We work with external consultants to understand better our regulatory responsibilities in the territories in which we operate.
  • Changes in legislation are carefully monitored and if required, the composition of our products is amended to comply with latest legislation.
  • We are committed to proactive communication and to building open relationships with the authorities and relevant legislative bodies, both directly and through the relevant trade associations.
 

No change.

 
 

Availability of raw materials

 

The group uses many raw materials within its manufacturing processes. Several raw materials are available from only a limited number of countries and / or suppliers.

 

Disruption to the supply or a change in the group’s ability to access sufficient stocks of these raw materials, most notably platinum group metals, rare earths or narcotic raw materials, could adversely affect the group’s profit. This may be due to increased prices or because our ability to manufacture and supply product to customers may be impacted.

 
  • Although most of the world’s platinum is mined in South Africa, the group has access to world markets for platinum and other precious metals and is not dependent on any one source for obtaining supplies.
  • Appropriate sourcing arrangements are in place for other key raw materials to ensure that the group is not dependent on any one supplier.
  • Where possible the group enters into fixed price contracts for key raw materials.
  • We work closely with key suppliers to ensure availability, including through audits, benchmarking and specific risk reviews.
  • We monitor forecast requirements on a regular basis and hold buffer stocks where necessary.
  • We look to use alternative raw materials where appropriate.
 

No change.

 
 

Employees and the recruitment and retention of high quality staff

 

The group relies upon its ability to recruit, train and develop employees around the world with the necessary range of skills and experience to meet its stated objectives, including in relation to business growth.

The existing management team has many years of experience at Johnson Matthey, operating in the markets and developing the technologies in which the group maintains a presence.

 

The departure of senior management or the lack of an appropriately skilled workforce could adversely impact the group’s ability to perform in line with expectations.

 
  • Global training and management development programmes are in place, including training of manufacturing leaders to run our operations in a consistent and efficient way through the Manufacturing Excellence programme.
  • Regular reviews of management succession plans are carried out.
  • Global remuneration policies are in place to ensure appropriate rewards to motivate and retain staff.
  • We undertake a continuous assessment of the skills required within the group and action plans are put in place to address identified gaps.
  • Succession planning is closely monitored by the Nomination Committee and Management Development and Remuneration Committee (MDRC).
 

No change.

 
 

Security

 

On any given day the group has significant quantities of high value precious metals or highly regulated substances on site and in transit, the security of which is critical.

 

A material loss due to a breach in the group’s security measures, including theft or fraud, could be significant to the group’s performance.

 
  • The group has highly developed security, assay and other process controls.
  • Annual security audits are carried out across the group.
  • Insurance cover is maintained for losses from theft or fraud.
 

No change.

 
 

Intellectual property (IP)

 

The group operates in markets in which the generation and application of technology and IP allows an advantage to be maintained. Careful monitoring of competitors’ IP is required to ensure that breaches of their rights are not made by the group.

 

Failure to establish the group’s IP rights or to identify third parties’ IP rights could undermine the group’s competitive advantage particularly given the group’s expansion into new markets. Alternatively, not noting the expiration of patents held by third parties could mean the loss of potential business opportunities.

 
  • The group has established policies and procedures for registering patents and for monitoring its existing patent portfolio and those of third parties.
  • We defend infringement claims and challenge new patents where it is appropriate to do so.
  • We continuously evaluate operating restrictions and opportunities available to us through the use of our IP and know how.
  • A substantial part of the group’s IP is know how and this is protected through non-disclosure agreements and other legal measures.
  • We restrict internal and external access to IP and know how as necessary.
  • We complete security checks to safeguard both our tangible and intangible assets.
  • Our investment in technical developments mitigates the risks to our IP and know how to some degree.­­
 

No change.

 
Back to top