2005 Annual ReportAnnual & Accounts Johnson Matthey Annual Report & Accounts 2005 2-4 Cockspur Street, Trafalgar Square, Trafalgar Street, Cockspur 2-4 SW1Y 5BQ London 8400 7269 8433 020 Tel 7269 020 Fax www.matthey.com Cautionary Statement The operating and financial review and certain other sections of this annual report contain forward looking statements that are subject to risk factors associated with, amongst other things, the economic and business circumstances occurring from time to time in the countries and sectors in which the group operates. It is believed that the expectations reflected in these statements are reasonable but they may be affected by a wide range of variables which could cause actual results to differ materially from those currently anticipated. Contents 1 Financial Highlights 2005 2 Chairman’s Statement 4 Operating and Financial Review 4 Strategy and Objectives 5 Review of Results 2004/05 5 Outlook 6 Operations 16 Financial Review 21 Risks and Uncertainties 23 Resources 24 Corporate Social Responsibility 34 Board of Directors 35 Other Senior Management 36 Directors’ Report 38 Corporate Governance 41 Audit Committee Report 42 Nomination Committee Report 43 Remuneration Report 49 Responsibility of Directors 50 Consolidated Profit and Loss Account 51 Consolidated and Parent Company Balance Sheets 52 Consolidated Cash Flow Statement 53 Total Recognised Gains and Losses 53 Movement in Shareholders’ Funds 54 Report of the Independent Auditors 55 Accounting Policies 57 Notes on the Accounts 79 Principal Subsidiary Undertakings and Associates 80 IFRS Restatement 85 Shareholder Information 86 Ten Year Record 88 Company Details Front cover: SCRT® technology, which combines our benchmark Continuously Regenerating Trap (CRT®) system with selective catalytic reduction (SCR) to reduce emissions of hydrocarbons (HC), carbon monoxide (CO), particulate matter (PM) and oxides of nitrogen (NOx) from heavy duty diesel (HDD) vehicles. The SCRT® system is part of Johnson Matthey’s ‘tool box’ of HDD emission control technologies which will enable our customers to meet continuously tightening emissions standards around the world (see pages 32 and 33). Image copyright Johnson Matthey Plc 2005 Financial Highlights 2005 Summary Results Year to 31st March % 2005 2004 change Statutory Basis: Turnover £4,639m £4,493m +3 Profit before tax £131.0m £178.0m -26 Earnings per share 40.6p 56.0p -28 Before Exceptional Items and Goodwill Amortisation: Profit before tax £204.0m £195.7m +4 Earnings per share 67.1p 64.0p +5 Dividend per share 27.7p 26.4p +5 Divisional Earnings per Share Before Exceptional Operating Profit1 Items and Goodwill Amortisation Dividend per Share 67.1p 64.0p Catalysts 60.4p 61.8p 57.2p £109.2m £111.5m Precious Metal Products £44.2m £45.4m Pharmaceutical 27.7p 25.5p 26.4p Materials 23.3p 24.6p £42.3m £40.0m Colours & Coatings £24.2m £27.4m 2004 2005 2001 2002 2003 2004 2005 1 Excluding discontinued operations, exceptional items and goodwill amortisation Annual Report and Accounts 2005 1 Chairman’s Statement Michael Miles OBE Chairman Johnson Matthey performed well in 2004/05. We have continued the strategic development of the group, particularly our investment in new product development which will support the growth of our businesses in the years to come. Major investment programmes include heavy duty diesel (HDD) catalysts, where we are working in collaboration with leading HDD engine manufacturers to help them meet continuously tightening emissions legislation around the world. We are also investing in the expansion of our production facilities to manufacture catalysed soot filters (CSFs) for light duty diesel vehicles. In our Pharmaceutical Materials Division we are investing in our opiates business and in the development of our portfolio of prostaglandin products, both of which have good growth prospects over the next few years. Catalysts for the production of hydrogen and for the gas to liquids process are the focus of investment in our process catalysts business. Fuel cells represent an important long term growth opportunity for Johnson Matthey and we are currently investing in the development of the next generation of materials and products for automotive fuel cell applications. The board appointed Neil Carson Chief Executive of the company in July last year following the retirement of Chris Clark. He has had a good first year, providing strong leadership and successfully executing our strategy for the continued profitable growth of Johnson Matthey. This, and the strength of our team of executive directors, clearly illustrates the success of our commitment to developing management talent and appointing senior positions from within the company. Johnson Matthey is also fortunate to have a strong group of independent directors who bring to your board a wealth of experience of international business from a wide cross section of industrial sectors. I would like to thank them for their wise counsel and the valuable contribution that they have made during the year. 2 Johnson Matthey In this year’s annual report we have included an Operating Johnson Matthey continues to make excellent progress and Financial Review (OFR) to provide shareholders with more towards delivering superior value to its shareholders. The information on the drivers of our businesses, operating company is in good shape and I am confident that it is very performance and developments during the year. well positioned to achieve strong growth over the years ahead. The OFR includes a detailed review of the group’s research and development activities on pages 13 to 15.Your board is fully committed to investing in R&D to ensure that Johnson Matthey remains at the leading edge of the high technology industries that it serves. The board also has a longstanding commitment to report on Johnson Matthey’s performance in matters of corporate social responsibility. Michael Miles OBE The OFR features a detailed review of the company’s policies Chairman and performance in this important area which can be found on pages 24 to 33 of this annual report. This year also sees the publication of the third edition of our comprehensive web report on corporate social responsibility. This continues to be well received and generates a good deal of useful feedback from shareholders; it can be accessed on Johnson Matthey’s corporate website at www.matthey.com. After seven years as Chairman of Johnson Matthey I will be retiring from the board during the coming year when we have appointed a successor. This process is underway, an important part of which has been consultations with our major shareholders. I have much enjoyed my time as Chairman of Johnson Matthey. Good progress has been made since my appointment in June 1998. Over this period both earnings per share and the dividend have grown significantly and the group has evolved into a leading speciality chemicals company with strong positions in catalysis, precious metals, pharmaceutical materials and other specialist chemicals markets. I am most grateful for the excellent support that I have received from Johnson Matthey staff at all levels of the organisation.The skill and professionalism of our staff is a reflection of the most important investment that the company makes; that which we make in our people. We place an absolute priority on the continuing development of our management talent and the skills of all our employees to enable them to meet the challenges of the future. On behalf of the board, I would like to thank all of our employees around the world for their hard work and dedication during 2004/05 and for the support that they have given me during my years as Chairman. Annual Report and Accounts 2005 3 Operating and Financial Review Neil Carson Chief Executive Strategy and Objectives The board’s strategies to achieve these financial objectives are: • Focus the business on the group’s core skills in catalysis, Johnson Matthey’s strategic intent is to achieve consistent precious metals and fine chemicals. growth in earnings by concentrating on the development of • Position the group in growth markets where our core high added value products and services in areas where our skills are applicable. Catalysis is a key technology in many expertise provides a competitive edge, particularly in catalysis, developing markets for the 21st century, particularly those precious metals, fine chemicals and materials technology. concerned with protecting the environment such as in emission control, cleaner fuel and the hydrogen economy. The group’s financial objectives are: Catalysis is also important in the manufacture of active pharmaceutical ingredients where Johnson Matthey has a • To achieve consistent and above average growth in strong niche position in the growing markets for generic earnings per share. Over the last ten years Johnson pain killers and other controlled drugs, as well as platinum Matthey has increased its earnings per share before based anticancer compounds. Johnson Matthey’s expertise exceptional items and goodwill amortisation at a and international strength in precious metals, particularly compound annual growth rate of 8.4% p.a. (see pages platinum group metals, was the starting point for many of 86 and 87). our businesses. The market for platinum has grown steadily • To grow dividends in line with earnings while maintaining for many decades and demand is expected to grow dividend cover at about two and a half times to ensure significantly over the next ten years. sufficient funds are retained to support organic growth. • Differentiate ourselves by using our world class technology. Over the last ten years Johnson Matthey has increased its We will continue to invest significantly in research and dividend at a compound annual growth rate of 7.5% p.a. development to develop new products and manufacturing Dividend cover for 2004/05 was 2.4 times (see page 19). processes. Technology is the key driver for most of our • To deliver a return on investment above the group’s cost businesses and Johnson Matthey has a strong science base of capital.