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 a process in place for the continuous review of its risks. As part of that process, each division reviews its risks and its mitigation strategies and actions and discusses relevant risks with each business as necessary. 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 risk is allocated an owner or owners who have the authority and responsibility for assessing, monitoring and managing it. 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 2012/13.

The board considers that the risks identified last year associated with the group’s inability to deliver anticipated benefits from acquisitions, capital projects and other initiatives, and commercial relationships and reputation have reduced. They have therefore been removed from the principal risks and uncertainties.

Risk   Impact   Mitigation   Changes since
2012 annual report

Responding to, identifying or capitalising on appropriate new or growth opportunities.

 

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 achieve its strategy and / or maintain growth and / or market share.

 
  • The group and each business prepares a strategic plan to review demand in existing markets and potential new opportunities. These plans are regularly monitored and challenged.
  • The group continues to invest in new business development and to identify and convert targets for acquisition.
 

The group is targeting potential new markets and developing new businesses, both organically and through acquisition. More detail on the acquisition of Axeon and the investment in research within Battery Technologies are described in the Our Strategy section and in the Financial Review of Operations section. The progress of our new business development activities, including our focus on air purification, advanced food packaging and water purification are outlined in the Our Strategy section. The acquisition of Formox is described in the Our Strategy section and in the Financial Review of Operations section.

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 existing and new products and technologies through R&D (including through its Technology Centres around the world) and as part of 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.

Our commitment to innovation, research and development is described throughout this annual report.

The group invested £136.0 million in R&D in the year (2011/12 £128.6 million).

Risk   Impact   Mitigation   Changes since
2012 annual report

Responding to changes in global political and economic conditions or future environmental legislation.

 

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

Failure to respond to sudden short and medium term changes in the market or economy or 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 exists in countries in which the group operates.

Over 50% of the group’s sales are 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 balanced portfolio of products and 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.
  • 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.

During the year the group effectively managed its variable cost base, particularly in Europe, to minimise the impact on the bottom line.

In order to respond to the increasingly competitive environment for active pharmaceutical ingredient (API) manufacturing, we undertook a restructuring of our global business, as discussed in the Chief Executive’s Statement and in the Financial Review of Operations section.

The group is well positioned to respond to and benefit from legislation changes in both light and heavy duty catalyst markets over the years ahead as detailed in the Financial Review of Operations section.

Risk   Impact   Mitigation   Changes since
2012 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 when market conditions make it appropriate.
  • 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 on the accounts.
 

The group has reviewed its options with regard to future pension provision for UK employees and has closed the defined benefit scheme for new entrants. The group has also implemented further de-risking by matching a greater proportion of its pension assets to its liabilities. In light of these changes we have concluded that this risk has decreased since last year.

Risk   Impact   Mitigation   Changes since
2012 annual report

Operating safely, including in line with changes in health, safety, environmental and other regulations and standards.

 

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

Failure to operate safely and respond to changes made to applicable laws, regulations or standards could adversely impact the group’s employees or other stakeholders, our manufacturing capability or the marketability of our products.

 
  • Detailed health, safety and environmental processes are documented in our operating manuals, communicated and reviewed regularly and used as the basis for continuous training and development.
  • Robust maintenance programmes are undertaken in order to ensure that our facilities and assets meet the applicable group and legislative standards.
  • 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.
  • 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.

Our health and safety and environmental performance has improved as described in the Health and Safety section and in the Environment section.

Availability of strategic 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 earth materials or narcotic raw materials, could adversely affect the group’s operations. This may be due to increased prices or because our ability to manufacture and supply products 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 identify alternative raw materials where appropriate.
 

In light of the recent announcements by Anglo American Platinum and continued labour unrest in South Africa we have concluded that this risk has increased since last year.

The effective recruitment, retention and development of high quality staff to support the growth of our business.

 

The group relies upon its ability to recruit, retain 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.

Ineffective succession on 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 employee development programmes are in place. These include training of manufacturing leaders to run our operations in a consistent and efficient way.
  • Regular reviews of management succession plans are carried out and are closely monitored by the Nomination Committee and Management Development and Remuneration Committee (MDRC).
  • 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.
 

No change.

Further details of our global employee development programmes, including our group orientation programme for graduates, are provided in the Strategy in Action Case Study and in the Social section. The activities of the MDRC are described in the Corporate Governance Report and in the Remuneration Report.

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 well developed security, assay and other process controls.
  • We complete security checks to safeguard both our tangible and intangible assets.
  • Annual security audits are carried out across the group.
  • Insurance cover is maintained for losses from theft or fraud.
 

No change.

Intellectual property (IP) and know how.

 

The group operates in markets in which the generation and application of technology know how 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. Protecting our broader know how is equally important to ensure that we maintain this advantage.

 
  • 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.
  • Know how 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 our intangible assets.
  • Our investment in technical developments mitigates the risks to our IP and know how to some degree.
 

No change.

Systems failure.

 

The group uses a significant number of complex IT systems in its operational and supporting activities some of which are starting to see the end of their useful life.

Failure of one or more of our major IT systems over an extended period could impact our ability to manufacture or to report our operational performance.

 
  • We continuously review our IT infrastructure and environment and make short and long term investments where these are deemed necessary and appropriate.
  • We identify and implement other systems based or manual work arounds where these are identified as necessary.
  • IT disaster recovery and general business continuity plans are in place and are regularly tested and reviewed.
  • A number of systems are bespoke to specific businesses or locations which reduces the impact to the group of a failure in any one system.
 

New principal risk.

Failure of significant sites.

 

While the group operates from a variety of locations, certain sites are critical to the group due to their scale or the specific nature of their production activities.

Failure of one of our critical sites could significantly impact the performance of the group.

 
  • Business continuity plans include consideration and testing of circumstances in which alternative back up locations may be required.
  • Capacity and demand planning includes consideration of the site’s significance.
  • Given the nature of the group’s operating activities, these can be replicated at other locations with reasonable ease and in a short time frame.
 

New principal risk.

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