Finance
Exchange Rates
The main impact of exchange rates on the group’s results comes from the translation of foreign subsidiaries’ profits into sterling. The group’s largest overseas investment is in the USA. The average rate for the US dollar for the six months to 30th September 2006 was $1.855/£ compared with $1.820/£ for the first half of last year. The South African rand also weakened from R11.74/£ to R12.69/£. However, the catalysts manufactured by our South African business are ultimately for export and the benefit of a weaker rand on margins more than offsets the translation effect. Excluding the rand, exchange translation reduced group profits by £0.8 million compared with the first half of last year, with nearly all the adverse impact attributable to the weaker US dollar.

Interest
In the six months to 30th September 2006 the group’s interest charge increased by £4.5 million to £12.2 million. Average borrowings were significantly higher than the same period last year, reflecting the impact on borrowings of the acquisition of DPT, share purchases and higher precious metal prices. Interest rates also rose significantly, particularly short term rates in the USA. Despite the increase in the interest charge, interest cover (operating profit / interest) for the half year remained strong at 10.4 times.

Taxation
The group’s tax charge rose by £2.4 million to £33.5 million reflecting the higher profits made in the period. The average rate was very similar to the first half of last year at 29.1%. Tax paid of £41.9 million was greater than tax payable following a below average payment in the second half of last year. In the first half of last year the group had a cash inflow on tax reflecting the benefit of a favourable settlement with the UK Revenue.

Cash Flow
In the six months to 30th September 2006 the group had a net cash outflow of £83.8 million. This included expenditure of £7.5 million on acquisitions and a net £12.2 million on share buy-backs. Free cash flow, before acquisitions and share purchases, was an outflow of £64.1 million.
Working capital increased by £73.0 million in the period. The biggest factor in this rise was significantly higher precious metal prices which impacted both inventories and receivables. Physical metal stocks were actually lower than on 30th September 2005 and average customer payment terms were unchanged. Additional working capital was also taken on to support the growth of our catalyst business.
The cash outflow on capital expenditure in the half year was £56.0 million which was 1.5 times depreciation. We are planning to spend more on capital expenditure in the second half with most of the investment in Catalysts Division. For the year as a whole we expect to spend at a rate of 1.6 times depreciation with most of the investment in new capacity to meet expected volume growth. Major projects include: expansion of our diesel products factory at Royston, UK; completion of the investment at our new factory in Philadelphia, USA to make similar products for the US market; construction of our new autocatalyst factories in South Korea and the Russian Federation; and additional production facilities for AMOG.
Net borrowings rose by £66.3 million to £478.3 million at 30th September 2006. Equity was £1,041.4 million taking gearing (net debt / equity) to 45.9%. With continued investment in organic growth, bolt-on acquisitions and some further share purchases we expect gearing to rise to 50% over the next eighteen months.

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Outlook
The group has made a good start to the year with operating profit up 11% and earnings per share 9% higher in the first six months.
In the second half of the year we expect increased sales of catalysts for heavy duty diesel vehicles, as the new legislation on emissions now applies to all new vehicles sold in Europe and similar legislation will come into operation in North America from 1st January 2007. Although we expect that pre-buying of trucks in 2006 ahead of the introduction of the new emission standards will reduce truck sales in 2007, this new market will still generate significant incremental sales for Johnson Matthey. We should then benefit from further growth in 2008 as truck sales return to normal levels. Overall we expect Environmental Catalysts and Technologies to achieve double digit growth in sales and profits this year.
The high oil price creates favourable market conditions for Process Catalysts and Technologies. This, in conjunction with economic development in Asia, is generating increased demand for synthesis gas catalysts and good prospects for Davy Process Technology. Demand for platinum group metals also remains strong which should benefit Precious Metal Products Division. Pharmaceutical Materials Division should continue its recovery in the second half of the year with further sales growth in the USA. Ceramics Division’s performance in the second half of the year is likely to be below last year but the division should remain highly cash generative.
Compared with the second half of last year exchange translation is likely to be negative. The average rate for the US dollar for the second half of last year was $1.75/£. Each one cent movement in the rate impacts the group’s results by £0.4 million in a full year.
Overall, despite adverse exchange translation, we expect the group to achieve slightly higher earnings growth in the second half of the year than in the first.