Report of the Directors
Business Review

Financial Review

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Return on Sales

The group’s return on sales decreased from 16.8% to 15.5% as the group was impacted by lower returns in Precious Metal Products Division, as described in the Financial Review of Operations section.

Return on Sales

  Sales excluding
precious metals
Return on sales1
  2013
£ million
2012
£ million
2013
%
2012
%
Environmental Technologies 1,904 1,876 11.9 11.3
Precious Metal Products 548 582 26.8 34.5
Fine Chemicals 277 285 25.6 24.5
Less inter-segment sales (54) (64) n/a n/a
Total group 2,676 2,679 15.5 16.8
1
Underlying operating profit divided by sales excluding precious metals.

Return on Invested Capital

After two years of significant improvement in the group’s return on invested capital (ROIC), this year ROIC fell from 22.3% to 19.7%. Although ROIC increased in Environmental Technologies Division, this was more than offset by a large reduction in our higher return on capital Precious Metal Products Division.

Underlying operating profit for the group was £35.3 million lower than last year at £414.8 million, and average invested capital was £92 million higher at £2,107 million due to the acquisition of both Axeon and Formox, but also an increase in working capital of £40.2 million.

Despite falling to 19.7%, the group’s ROIC is still well ahead of our pre-tax cost of capital, which we estimate to be 10.5% (2011/12 11.2%). Looking forward to 2013/14 and beyond, the group’s ROIC will be impacted by the new Anglo Platinum contracts from 1st January 2014. Notwithstanding this, we remain committed to our 20% ROIC target. While seeking to continually improve the group’s returns, we will not do this at the expense of the long term future of the group. We will continue to invest in our businesses across the world, both in capital expenditure and in research and development, and we will also target appropriate acquisitions that accelerate the delivery of the group’s strategy, but which, in the short term at least, may depress ROIC.

Return on Invested Capital

  Average
invested capital1
Return on
invested capital2
  2013
£ million
2012
£ million
2013
%
2012
%
Environmental Technologies 1,562 1,492 14.5 14.2
Precious Metal Products 375 341 39.2 58.9
Fine Chemicals 421 418 16.9 16.7
Corporate / other (251) (236) n/a n/a
Total group 2,107 2,015 19.7 22.3
1
Average of opening and closing segmental net assets as shown in note 1 on the accounts. For the group, the average of opening and closing equity plus net debt.
2
Underlying operating profit divided by average invested capital.

Interest

The group’s net finance costs increased by £1.5 million to £25.6 million as a result of higher borrowing costs caused primarily by the return of capital to shareholders.

Approximately 74% of the group’s net debt at 31st March 2013 has fixed interest rates averaging approximately 3.7%.

Taxation

The group’s total tax charge for the year was £79.1 million, a tax rate of 22.3% on profit before tax (2011/12 22.9%).

On underlying profit before tax of £389.2 million, the tax charge was £81.7 million, which represents an effective tax rate of 21.0%, down from 23.5% last year. This decrease was primarily due to a lower proportion of profits in jurisdictions with higher tax rates and further reductions to the headline rate of corporation tax in the UK.

The group continues to benefit from the reduction in the headline UK corporation tax rate. That rate, which was 28% for the year ended 31st March 2011, was 24% for the year ended 31st March 2013 and will reduce to 23% for the year ending 31st March 2014, to 21% for the year ending 31st March 2015 and then to 20% for years ending after 31st March 2015.

In addition, recent changes to UK tax law to reduce the corporation tax charged on profit earned from qualifying patented technologies to 10% and favourable changes to the UK Controlled Foreign Companies tax rules, both effective for the year ending 31st March 2014, should help to reduce the group’s effective tax rate further. Partly offsetting these changes, following the UK government’s recently announced rules to allow the reporting of R&D tax credits ‘above the line’, the group will first report R&D tax credits as part of operating profit for the year ending 31st March 2014. This adjustment will not materially affect the group’s profit after tax.

We can never be entirely certain of the geographic mix of profit in any given year, but going forward we anticipate that the rate of tax on the group’s underlying profit should average at least 3% lower than the headline rate for UK corporation tax.

Tax Strategy

Johnson Matthey has operations in over 30 countries across the world. For each country in which we have operations, we organise our operations to pay the correct and appropriate amount of tax at the right time according to the laws of the relevant country and ensure compliance with the group’s tax policies and guidelines. The group’s tax strategy is regularly reviewed and endorsed by the board. This strategy is executed by a global team of tax professionals, assisted by external advisers where appropriate.

Our tax strategy covers the application of all taxes, both direct and indirect, to our business including corporation tax, payroll taxes, value added tax and customs and excise duties. The tax strategy also covers our approach to any tax planning required by the business and key policy areas such as transfer pricing.

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