In his first year as Chief Executive, Robert MacLeod talks about the group’s performance in 2014/15 and shares his ambitions for Johnson Matthey in 2015/16 and beyond
- Good growth this year in many areas of our business,particularly in Emission Control Technologies.
- Continued focus on health and safety; 25% reduction in lost time injury and illness rate.
- Transitioning Johnson Matthey into a 'small big company'.
- Group's 3C Strategy shared with all employees.
- Global drivers remain strong: group well placed for long term growth.
How would you sum up performance in 2014/15?
Overall, Johnson Matthey made good progress during 2014/15 by continuing what we do best – using our expertise in chemistry and its applications to create value adding sustainable technologies for our customers. We've also paid particular attention to health and safety this year and I am pleased that this is having a positive impact with a 25% reduction in our lost time injury and illness rate.
Our sales in 2014/15 were up 5% and we grew underlying operating profit by 2%. However, as you know, we felt the impact of the change in our contracts with Anglo American Platinum Limited (Anglo Platinum) this year and we also faced some currency headwinds in our first half. If I adjust for the impact of these two things, our sales were 9% ahead and underlying operating profit was 13% higher, demonstrating that our business is performing well.
What have been the main highlights and challenges across Johnson Matthey's divisions over the past year?
Emission Control Technologies' (ECT's) performance was clearly the highlight of the year. The business benefited from the introduction of new legislation in Europe and from market growth in Asia and North America, but the team also delivered some excellent operational improvements through a lot of hard work across the business.
I am also pleased with the good progress that Fine Chemicals and New Businesses have made. The process efficiency enhancements in our API Manufacturing business and the purchase of additional manufacturing capacity in Scotland will both support continued growth. I am also delighted with the two bolt-on acquisitions in Battery Technologies and the most recent acquisition in our Atmosphere Control Technologies business. I am optimistic that these new businesses can develop into our next engines of growth.
Precious Metal Products faced the biggest challenge in 2014/15 as its performance was hit hard by the change in our Anglo Platinum contracts. However, we completed the sale of our Gold and Silver Refining business towards the end of the year which will enable the division to focus on its higher technology markets. The slowdown of new licensing activity in China impacted Process Technologies but despite this, it is a credit to the team that they still managed to grow.
What makes Johnson Matthey Britain's Most Admired Company?
We were awarded this accolade in December and it was a great privilege for me to accept it on behalf of all of our employees. It is, of course, down to many different things but there are three areas that stand out for me.
Firstly, it is our technical expertise where we focus upon solving difficult problems using our chemistry skills. It is essential that we continue to invest in these and we are doing just that; indeed last year we spent £170 million on R&D, a 12% increase on the prior year.
Secondly, it's about having the right culture and values so we build strong relationships with our customers and other stakeholders. At Johnson Matthey these relationships are based on trust and integrity – a very powerful element of our success when combined with the enthusiasm and expertise of our people.
Finally, it's about what we do. Some 89% of our sales are from sustainable products that enhance the quality of life of people globally, conserve the world's natural resources and protect the environment. Who wouldn't admire that?
You mentioned Johnson Matthey's culture and values. How do these support the business strategy?
Our culture and values outline the way we work together to deliver the promises that we make. I see, from my experience at Johnson Matthey, that our staff take real pride in delivering what they say they will and in acting with integrity.
As we grow in new and emerging markets, we must maintain our focus on ensuring that our employees act responsibly and ethically, living our values. In evolving our culture, I think it is hugely important that our employees understand our ambitions and during the summer I shared our vision and 3C Strategy with all of our staff. Now our focus is on delivery! In it we place our customers at the heart of what we do and we have a culture that supports collaboration with them.
This year we also added a new value – 'health and safety is our priority' – to support our drive for operational excellence in everything we do. Health and safety has always been important at Johnson Matthey and our past record has been good, but we accept that we could, and indeed should, do better. It's our obligation to look after our people and also safeguard our business for the future.
What do you see as the key areas of development for the business over the next few years?
There are several areas but one I would highlight is the transition we must make to evolve Johnson Matthey from a 'big small company' to a 'small big company' – achieving our goal to capture what we call 'the best of big and small'. Johnson Matthey has always evolved, yet managing this transition is going to be tough and we need to make sure it works for everyone. Whilst it is a challenge, it is also an exciting opportunity – one that I am looking forward to leading and in which I believe everyone has a part to play. That's why understanding our vision and strategy is so important. The leadership team has agreed that our 3C Strategy is the right route to follow and we are now working on how we support employees in delivering it in their everyday work.
Are there any risks involved in pursuing the ambition to deliver the best of big and small?
With any transition comes some level of risk, yet to stand still poses more of a hazard. Our customers are challenging us to continually improve what we do and the products that we deliver to them. At the same time, our competitors are always moving forward – so we have to keep moving forward too. As we grow, the business landscape in which we operate is also becoming more complex. Improving our systems and processes is essential to help us manage the risk and enhance the efficiency of the business, creating value for our customers and our shareholders. At the same time, we need to protect the values that we believe in and keep the good things that make us unique and successful.
What are your priorities for 2015/16?
My first priority is to continue to enhance our health and safety culture and performance, building on the programmes we have introduced this year. Talent management is another major area of focus for me. Making sure we have a pipeline of talent in place to support our growing business is crucial to the future success of Johnson Matthey. It is my job to ensure we continue to embed and develop our talent management and development programmes across the group.
I've already talked about the best of big and small and our evolution from being a 'big small company' to a 'small big company'. In 2015/16 I will develop a roadmap for this transition that builds on our 3C Strategy and core values.
Finally, we need to keep pursuing growth opportunities within our current businesses and in new areas. I see these as a combination of technology opportunities, organic growth opportunities and targeted acquisitions, all aligned to our vision of building our 3rd century through value adding sustainable technologies.
How do you see the long term prospects for the company?
Overall, I am confident that we are well placed to benefit from major global sustainability drivers such as the continued drive to improve air quality, energy security, urbanisation and the increasing need for healthcare. We will continue to invest in R&D, our infrastructure and our people, working closely with our customers to provide them with innovative and improved solutions.
As you'll see in the Annual Report, we have a clear purpose and strategy and, consequently, I believe that the company is well positioned to deliver growth for our shareholders for many years to come.
Outlook for 2015/16
On a reported currency basis and including the £15 million, mainly non-cash, increase in the post-employment benefits cost, the outlook for the divisions is as follows:
Emission Control Technologies
We expect ECT to continue its strong performance, in line with the medium term targets of high single digit growth in sales at stable margins, as outlined at our Investor Day in January 2015. The division should benefit from the full introduction of Euro 6b legislation from September 2015 and from continued growth in vehicle production in China. Good demand for HDD catalysts for the large (Class 8) trucks in North America is expected to continue throughout 2015 which will also support the division's sales.
After making progress this year, 2015/16 is likely to be more challenging for Process Technologies, particularly in the first half of the year. We expect continued good demand for catalysts across the division, the timing of which can be difficult to predict on a quarter by quarter basis. However, the division's performance will be held back by lower income from licensing, particularly in China. Whilst we believe the long term drivers for Process Technologies remain in place, its performance in 2015/16 is expected to be broadly in line with 2014/15.
Precious Metal Products
Performance in Precious Metal Products will be significantly down as a result of the sale of its Gold and Silver Refining business and due to difficult trading conditions in Platinum group metal (Pgm) Refining and Recycling. We expect sales in the first quarter to be impacted by the lower refining intake volumes in the final quarter of 2014/15. In addition, with current pgm prices well below those at the start of 2014/15, these could adversely affect performance if sustained throughout 2015/16. We also expect higher costs in pgm refining this year, and consequently an impact on margins, as we see a shift towards a more complex intake product mix. Our Manufacturing businesses, which represent around two thirds of the division's sales, should remain broadly stable as we continue our investment in new products to drive medium term growth.
Fine Chemicals is expected to make good progress in 2015/16 (adjusted for the sale of Research Chemicals, which we anticipate will be completed before the end of the calendar year). Global drivers, such as an ageing population and a shift towards lower cost healthcare, should drive demand from our API customers and longer term we expect to see increasing benefit from the investments we are making to enhance our product offering.
In 2015/16 New Businesses will benefit from the two acquisitions in its Battery Technologies business which were completed in 2014/15. We will continue our ongoing investment of around £5 million to £7 million p.a. in new opportunities. Overall, we expect the underlying operating loss in New Businesses to reduce modestly in 2015/16 and reach breakeven in 2017/18.
In 2015/16, Johnson Matthey's continuing operations are expected to deliver good underlying growth. A strong performance in Emission Control Technologies and good progress in Fine Chemicals are likely to be partially offset by a weaker year for Precious Metal Products. We anticipate that Process Technologies' performance will be broadly stable and that the operating loss in New Businesses will reduce modestly.
In line with our strategy, we have divested our Gold and Silver Refining business and are in advanced negotiations on the sale of Research Chemicals. Given the absence of these two businesses, we expect the group's performance in 2015/16 to be slightly ahead of 2014/15.