HIGHLIGHTS
Results
- Profits
before tax excluding exceptionals up 10% to £61.6
million
- Earnings
per share excluding exceptionals up 10% to 20.4
pence
- Interim
dividend increased by 10% to 5.7 pence
- New
segmental structure
- New
Catalysts and Chemicals Division profits up 24%
to £35.1 million
- Profits
in restructured Precious Metals Division up 12%
to £16.6 million
- Ceramic
Materials' profits up 29% to £11.1 million
benefiting from 100% ownership and rationalisation
programme
- Electronic
Materials' profits down by 29% to £12.7 million
reflecting difficult conditions in global semiconductor
markets
- Major
cost reductions continue
- Cash
flow from operations up 13% to £73.1 million.
Gearing down from 45% to 40%
Strategy
- Group
structure has been changed to deliver focus and
value
- New
Catalysts and Chemicals Division formed comprising
former Catalytic Systems Division and Chemicals
(transferred from Precious Metals). This will be
the primary focus for growth
- Precious
Metals, with world-leading market positions in
platinum and gold, remains the principal cash generator
- Electronic
Materials Division to become a stand alone legal
entity as a first step to releasing value
Commenting
on the results, Chris Clark, Chief Executive of Johnson
Matthey, said:
"Johnson Matthey
achieved a 10% growth in profits in the first half
with three out of four divisions well ahead of last
year.
Our Board is determined
to improve shareholder value. To do this we have
refocused the group's strategy. There will be a high
priority on the growth opportunities in Catalysts
and Chemicals - the group's core speciality chemicals
business which now represents almost half of group
trading profits. Electronic Materials will be brought
together in a single legal entity which will allow
the group to exploit fully opportunities for releasing
value for shareholders."
Report
to Shareholders
Introduction
The
first half of 1998/99 has seen variable conditions
in our global markets. Despite this, three of our
four divisions have reported good growth in the six
months to 30th September 1998. Only Electronic Materials,
which supplies the depressed semiconductor industry,
was down.
With
considerable uncertainty surrounding the world's
economies we have placed renewed emphasis on cutting
costs to maintain margins and protect profits. Group
headcount, which peaked at 13,200 in February, has
already been reduced by 10%.
Review
of Results
In
the six months to 30th September 1998, the company
earned profits before tax and exceptionals of £61.6
million, an increase of 10% on the previous year.
Turnover rose by 24% and operating profit was 15%
up at £70.0 million. These results were achieved
despite an adverse exchange translation effect of £1.8
million.
Earnings
per share before exceptional items rose by 10% to
20.4 pence. Including exceptional items, earnings
per share increased by 4% to 23.0 pence.
The
interim dividend has been increased by 10% to 5.7
pence and will be paid as a Foreign Income Dividend
(FID).
Operations
A new
segmental analysis has been introduced in this report.
Our chemicals business, previously reported in Precious
Metals, has been brought together with Catalytic
Systems to create Catalysts and Chemicals. Electronic
Materials and Ceramic Materials remain unchanged.
The
new Catalysts and Chemicals Division achieved
a 27% increase in sales over the first half of last
year to £331.2 million. Operating profits were
24% up at £35.1 million. All three of the businesses
that make up Catalysts and Chemicals performed well. Autocatalysts benefited
from continued growth in both the US and European
car markets. Unit sales in Europe were up significantly
due to the increased use of starter catalysts, resulting
in more catalysts per vehicle. In North America unit
sales also increased, helped by continued strong
sales of light trucks, a market in which our customers
are leaders, and the use of more catalysts per vehicle
to meet stricter emission standards. New high technology
catalysts are now delivering significant benefits
to our customers and are commanding higher prices. Pharmaceutical
Materials had a very good first half with strong
growth in organic pharmaceuticals, led by methylphenidate.
Both sales and operating profits in the Chemicals business
were well ahead on the back of strong demand from
the pharmaceutical and chemicals industries for platinum
group metal (PGM) compounds and the related refining.
Precious
Metals Division, which now represents our Platinum
marketing and fabrication and Gold businesses,
increased sales in the first half by 23% to £1,086.1
million. Operating profits were up 12% at £16.6
million. The division's Platinum business
benefited from strong demand for PGMs in both pure
and fabricated form. Gold achieved continued
growth in its core primary businesses and gained
additional benefits from refining secondary gold
dishoarded in the Far East.
Electronic
Materials Division's sales were up 5% at £215.6
million. The division's operating profits were
29% down on the first half of last year at £12.7
million. This is a result of the very difficult
conditions in the worldwide semiconductor industry
and strong pressure on margins. Profits in Wafer
Fabrication Materials were affected by customer
destocking and increased price competition arising
out of the devaluation of Asian currencies. Assembly
Products also experienced volume erosion and
price competition. The Laminate Products Group succeeded
in keeping its facilities full, although this was
achieved at the expense of reduced margins in the
first half. The Semiconductor Packages facility
at Chippewa Falls is now running at capacity, producing
around 1.6 million semiconductor packages per month.
It was the only business in the division to report
a significant increase in profits. This was achieved
despite considerable pressure from Japanese competitors.
Yields are over 80% and continuing to improve.
Ceramic
Materials Division's (CMD) sales from continuing
operations declined by 9% to £128.2 million.
However, operating profits increased by 29% to £11.1
million. Conditions in the division's major markets
were mixed during the first half with a continuation
of depressed conditions in the UK tableware and
Asian tile markets. Our European automotive glass
business had a better first half and there was
some recovery in the European tile market. Nonetheless,
growth in operating profit is mainly due to cost
reduction. Good progress has been made on the rationalisation
of CMD since we announced our intention to take
action at the time of last year's interim results.
Between September 1997 and September this year
headcount has been reduced by 20% with the majority
of this reduction being in continuing operations.
The closure of the research centre at Oxford and
the head office have also benefited costs.
Finance
Exceptional
Profits
On
1st June 1998 the group disposed of the UK Minerals
business of CMD which gave rise to an exceptional
profit of £1.6 million. In the first half of
1997 the group made a profit of £2.0 million
on the disposal of part of its holding in Ballard
Power Systems, Inc. which is shown as an exceptional
item within operating profit for last year.
Interest
The
group interest charge rose by £3.5 million in
1998 largely as a result of the increase in borrowings
following the acquisition of 100% ownership of CMD
in February 1998. The purchase of the outstanding
stake was earnings enhancing adding in excess of £2
million to group profit before tax in the first half
after taking into account the additional interest
charge.
Taxation
The
group's tax charge once again shows the benefit of
paying dividends as FIDs. Part of the benefit of
the FID has been added to deferred tax to reflect
the change in the offset rules for surplus Advance
Corporation Tax (ACT) after April 1999. Excluding
the ACT savings on the FIDs and other exceptional
items, the group's average tax rate rose slightly
to 28.4%.
Cash
Flow
Cash
flow from operations increased by 13% to £73.1
million. In April, the group completed the sale of
its former head office site in Hatton Garden for £21
million. Overall net cash flow was positive at £5.6
million. Borrowings fell to £214.7 million and
gearing to 40% compared with 45% at year end. Despite
the increase in the interest charge, interest cover
remained strong at 8.3 times.
Strategy
The
Board continues to pay close attention to the strategic
direction of the group and, in particular, to the
delivery of value to shareholders. Over the last
few months we have been conducting a strategic review
of the business. The principal conclusions of this
review are as follows:
- Johnson
Matthey has traditional strengths in the chemistry
of precious metals and in catalysis. The creation
of a new Catalysts and Chemicals Division will
bring together all our core chemicals operations
under a single heading. This reflects our intention
to build on the many opportunities offered by the
technological strengths of these businesses. Over
the past five years growth in this segment has
averaged some 13% per annum and returns on both
assets and sales are good. We plan to grow this
business organically, building on our technical
expertise in complex chemistry such as pharmaceutical
materials and in emerging applications such as
fuel cells, and by acquisition.
- Precious
Metals Division, with its close links to Amplats,
the world's largest producer of platinum group
metals, continues as a core cash generating activity.
It has world leading market positions in the marketing
and fabrication of platinum group metals and in
gold refining.
- Ceramic
Materials with its focus on decorative colours
and coatings will invest in improvements in productivity
which will enable it to improve its margins further.
- Growth
in Electronic Materials over the past five years
has taken Johnson Matthey to a market leading position
with the inevitable consequence that the division
is now predominantly a North American business.
The Board has therefore judged that the time is
right to establish the division as a separate entity
under a new US holding company. This will give
the business the option of raising its own capital
in future and should lead to other opportunities
for releasing value for shareholders.
Outlook
Most
of Johnson Matthey's businesses are still performing
well in mixed market conditions. The group will continue
to benefit from early attention to costs and manufacturing
efficiency.
Overall,
we expect to see continued growth in three of our
divisions in the second half. In Electronic Materials,
despite the first tentative signs of recovery in
the industry, our expectation is that profits in
the second half will be broadly similar to those
of the first half.
Johnson
Matthey Plc
25th November 1998
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