Chief Executive Robert MacLeod gives an overview of the group's performance in 2015/16 and outlines the progress made in delivering the 3C Strategy

Robert MacLeod, Chief Executive of Johnson Matthey

Summary

  • Robust performance overall in challenging markets, supported by strong growth in Emission Control Technologies.
  • Ongoing investment in R&D and capex to position the group for future growth opportunities.
  • Good progress in embedding our culture and values.
  • Continued focus on making health and safety our priority.
  • Overall, Johnson Matthey remains in great shape to deliver long term growth through the creation of value adding sustainable technologies.
How would you describe the group’s progress in 2015/16?

I am pleased with the overall performance this year given the tough macroeconomic environment we have faced. On a continuing basis, our sales were up 3% before tax and our underlying profit before tax was flat, which is testament to the great effort by everyone in the company. We benefited from our continued focus on sustainable technologies, particularly in Emission Control Technologies, which had another strong year boosted by the introduction of tighter legislation in Europe. We also made good progress in New Businesses and recent investments in our Battery Technologies business have started to generate good early momentum.

On the other hand, trading conditions in some of our markets were particularly challenging this year due to external headwinds, most notably the low oil and platinum group metal (pgm) prices, plus the slowdown in China. These all had an adverse impact on the group's performance, especially in Process Technologies and Precious Metal Products. We have therefore had to make some difficult decisions which unfortunately resulted in a number of job losses.

This was a particularly unsettling time for our staff and we made every effort to minimise the negative impact on them wherever possible. The positive way the business and our people responded is a reflection of what I think is a unique workplace culture. This right sizing of our business was necessary to ensure we remain in good shape and our results in 2016/17 will benefit from the actions we have taken.

We continued to focus on health and safety throughout the year and the figures are moving in the right direction as demonstrated by the 43% reduction in our lost time injury and illness rate over the last two years. But it is not just about the numbers; it's about changing people's day to day behaviours which, of course, is a more difficult challenge to address. Whilst we have made some positive steps, our progress this year was tragically overshadowed by the fatality at our Riverside site in the US, which shocked and saddened all of us.

What progress has been made in delivering the strategy?

The focus of our 3C Strategy, which is to build our 3rd century through value adding sustainable technologies, remains strong and we have driven this forward in 2015/16. Despite the external headwinds I've mentioned, we have continued to invest across the business this year to position the group for medium term growth. We have increased our R&D spend again in 2015/16 to almost £190 million. This investment is key in ensuring we can deliver the sustainable technologies of the future. Our capital expenditure has also increased, by 21% to £257 million, as we have expanded our manufacturing facilities to meet future demand and continued our programme of investment to upgrade our core business systems.

Work in our New Businesses Division, where we are focusing on developing opportunities for medium to long term growth, is going well and we remain on track to break even in this division in 2017/18. We have continued to make a number of smaller scale acquisitions to provide us with the technology and / or market access we need to grow our positions, particularly in the areas of atmosphere control and water purification.

To ensure we continue to focus on our core strengths in chemistry and its applications, we have adjusted our portfolio through the divestment of our Research Chemicals (Alfa Aesar) business. This was sold in September 2015 for £255 million and its proceeds, together with those from the sale in March 2015 of our Gold and Silver Refining business, were returned to shareholders by way of a special dividend in February of 150 pence per share.

I am pleased to say that even with this, our balance sheet remains strong, giving us the capacity we need to invest in future growth.

All of these developments are underpinned by further achievements in operational excellence and sustainability which we estimate have delivered around an additional £27 million of savings this year, taking the total saved to around £117 million since the launch of Sustainability 2017 in 2007.

How close is the group to meeting its Sustainability 2017 Vision and targets?

Our Sustainability 2017 programme will come to a close at the end of March 2017 and we are getting very close to achieving our targets. However, more important is the way we've really embedded and embraced a culture of sustainability throughout the company over the past nine years. Internally we have made huge strides in improving the environmental footprint of our operations which has helped support our business during several market downturns experienced since 2007. Furthermore, I am proud to say that today, some 92% of our sales are generated by products that enhance people's quality of life, conserve the world's natural resources and protect the environment.

But Sustainability 2017 is just the beginning. We are now working on the next phase of our strategy which will extend our sustainable business activities more widely throughout our value chain to include strong collaborative partnerships with a broader range of stakeholders, including suppliers, employees and customers.

You highlight customer focus as one area of your 3C Strategy. Can you update us on what you are doing in that area?

Johnson Matthey's future profit will come from our customers, not from our offices, labs or factories. So customer focus is all about driving profitable growth by looking at ways in which we can create more value for our customers.

There are many ways in which we do this; for example through reducing their capital and operating expenditure, helping them achieve a faster time to market or enabling them to comply with legislation. So the value is created in our customers' applications, not in Johnson Matthey itself, and doesn't come from the product itself, it comes when the product is actually used.

This year, we've continued to partner with our customers to understand their changing requirements and deliver new products which create value for them in their operations. This has supported top line growth and you can read more about some examples in the Strategy in Action section of this report.

Johnson Matthey has a number of commercial assets – customer relationships, our market insight, our commercial skills and processes and our brand. Like other assets in our business, they are hard to acquire, valuable and, if used effectively, are a real source of competitive advantage. So there is an opportunity for us to optimise these assets and we have a number of projects we are starting over the coming year to target particular areas and leverage the strengths of the whole of Johnson Matthey to drive further commercial success and top line growth over the longer term.

Last year you told us that the ‘best of big and small’ company transition was a key area for you. Is that still the case?

Absolutely. Our transition from a 'big small company' to a 'small big company' is an important step for Johnson Matthey as it approaches and moves into its 3rd century of operation. As with any transition, it will take time and involves a number of aspects but success will come from engaging with our people to embed different ways of working across the organisation.

The work we are doing on health and safety is one example of this. In addition, we have also made good progress this year in helping employees understand their responsibilities to conduct Johnson Matthey's business legally, ethically and responsibly. In September we launched our code of ethics, called 'Doing the right thing', which was accompanied by training for all employees, and work continues to embed this across the organisation. Doing the right thing is all about doing good business, not business at any cost. It is essential that everyone takes responsibility for upholding the highest ethical standards to ensure we protect Johnson Matthey's strong and hard earned reputation.

We have also continued to introduce and develop a global human resources strategy to provide us with the right talent management frameworks to support our growing organisation. These are vital in giving employees the skills and career development they demand and that we need to grow our business, and to make us an attractive proposition to high calibre recruits.

In addition, we are making good progress on several other projects that underpin efficiencies, such as the upgrades to our core business systems. The work on customer focus, which I described above, will complement these other projects well, by driving further top line growth.

Inevitably, the transition to a small big company is creating some different ways of working for us all. However, these are vital in ensuring that the organisation operates such that the performance of the group as a whole is greater than the sum of its parts. That's how we will unlock further opportunities for growth and create more value as a group in the future.

What are your priorities in 2016/17?

My first priority is embedding the aspects of our small to big company transition that we have initiated over the past couple of years. This includes the work to date on health and safety, talent management and on building a culture of doing the right thing so that we make these an intrinsic part of the way we do business.

Second is to continue to drive growth across all areas of the business, supplemented with targeted acquisitions that will accelerate our progress. 2015/16 was a challenging year but we continued to invest across the group and took action where necessary to reduce our costs. So, as you will see from our 'Outlook' statement to the right, 2016/17 is very much about building on this and moving forward.

Thirdly, to continue to drive efforts in operational excellence, optimising our investments and increasing our focus on adding value for our customers to underpin future growth.

And finally, what are your longer term expectations for Johnson Matthey?

Johnson Matthey is a great company with great people. It is important to me that our unique culture, with strong values at our core, continues to be our foundation. It is my ambition to make Johnson Matthey 'THE' place to work through being an inclusive and highly attractive company that encourages anyone from anywhere to excel.

All of this means that Johnson Matthey continues to be well placed for the future. We will continue to be a company that uses its strong expertise in chemistry and its applications with high efficiency to benefit our customers and the planet.

So overall, I am pleased to say that the group remains well positioned in markets with strong growth drivers. Our strong cash generation and balance sheet provide a platform for investment, and we continue to increase R&D and capital expenditure to support future growth. As you'll see in this report, we have a clear purpose and strategy, and I am confident that Johnson Matthey is in great shape to deliver long term growth for our shareholders through the creation of value adding sustainable technologies.

Outlook

The structural drivers for the group's technologies remain robust despite the challenging macroeconomic conditions which are expected to continue in 2016/17.

Increased investment in R&D and capital expenditure, together with the restructuring actions taken in 2015/16, provide strong foundations for future growth. At current exchange rates, the outlook for our five divisions is as follows:

Emission Control Technologies (ECT)

ECT's performance in 2016/17 is expected to be slightly ahead of 2015/16. The division should benefit from continued growth in vehicle production in Asia and Europe, and robust demand for trucks in Western Europe. However, this will be partially offset by significantly lower demand for heavy duty diesel catalysts for large (Class 8) trucks in North America which will result in a weaker first half performance for the division. ECT remains well positioned to benefit from the strong growth opportunities provided by continued tightening of legislation around the world, including the introduction of Euro 6c and real world driving standards in Europe, which should positively impact the business from 2018.

Process Technologies

We expect challenging trading conditions to continue and that many of Process Technologies' markets will remain subdued. However, the division's performance is expected to be ahead in 2016/17 as a result of recent actions taken to reduce costs. The order book for catalysts indicates stable demand but income from licensing is likely to remain at current low levels and the low oil price will continue to negatively impact the Diagnostic Services business.

Precious Metal Products

Although pgm prices have stabilised since our year end, they remain low, relative to the same time last year. Consequently, we expect the performance of our Pgm Refining and Recycling business in 2016/17 will be lower than in 2015/16, if prices remain at current levels. Our Manufacturing businesses, which represent around three quarters of the division's sales, should see good demand and we expect performance will be slightly ahead of last year. Taken together, at current pgm prices, we expect performance in Precious Metal Products will be slightly lower than in 2015/16.

Fine Chemicals

Fine Chemicals is expected to make progress in 2016/17 on a continuing basis. We anticipate growth in the Active Pharmaceutical Ingredient (API) Manufacturing business in North America and our business in Europe will benefit from increased capacity once the refurbishment of the Annan facility in Scotland is completed in late 2016. Catalysis and Chiral Technologies is expected to maintain its good performance.

New Businesses

In 2016/17 New Businesses will continue to reduce its underlying operating loss supported by a profitable contribution from our Battery Technologies and Atmosphere Control Technologies businesses and benefiting from lower costs in Fuel Cells following its restructure. The division remains on track to reach breakeven in 2017/18.

Overall

In 2016/17 the group will benefit from good progress in Fine Chemicals and New Businesses. ECT's performance for the year as a whole is expected to be stable, albeit with a weaker performance in the first half, and whilst market conditions in Process Technologies remain challenging, its performance should improve as a result of the reduced cost base. At current pgm prices, performance in Precious Metal Products is expected to be slightly lower. Overall, at current exchange rates,we expect the group's performance in 2016/17 to be ahead of 2015/16, in line with current market expectations.

Robert MacLeod
Chief Executive