Johnson Matthey PLC – Preliminary results for year ended 31st March 2018

Preliminary results for the year ended 31^st March 2018

A year of significant progress against our strategy with performance in line with expectations

 

Robert MacLeod, Chief Executive, commented:

“We had a good year. We have made significant progress in executing our strategy and delivered a financial performance in line with our expectations at the start of the year.

 

Clean Air had another strong year, delivering strong top and bottom line growth. We improved the quality of our Efficient Natural Resources business and in Health we continued to progress our substantial API pipeline and are better positioned as we optimise our manufacturing footprint. The further development of eLNO^TM, our next generation battery material, was a highlight of the year and I am excited about the speed of progress we are making and the plans we have to commercialise this product.

 

We have taken significant steps in running our businesses more effectively, delivering cost savings and becoming more agile and responsive to our customers. Our strong balance sheet continues to give us the flexibility to invest in our business, to maintain and extend our science and technology leadership supported by an optimised manufacturing footprint.

 

We are proposing an increase in the final dividend of 7%, reflecting our confidence in the prospects of Johnson Matthey.

 

In the coming year we expect mid to high single digit growth in operating performance. The changes we are making as we continue to develop our business give me confidence in our strategy to deliver, over the medium term, mid to high single digit EPS CAGR, expanding ROIC to 20% and, as a result, a progressive dividend.”

 

Reported results		Year ended 31st March		% change
		2018	2017
Revenue	£ million	14,122	12,031	+17
Operating profit	£ million	359	493	-27
Profit before tax (PBT)	£ million	320	462	-31
Earnings per share (EPS)	pence	155.2	201.2	-23
Ordinary dividend per share	pence	80.0	75.0	+7

 

Underlying1 performance		Year ended 31st March			% change	% change, constant rates2
		2018		2017
Sales excluding precious metals (Sales)	£ million		3,846	3,578	+8	+7
Operating profit	£ million		525	513	+2	–
Profit before tax	£ million		486	482	+1	-1
Earnings per share	pence		208.4	209.1	–

 

Underlying performance

·      Sales grew 7% at constant rates², slightly ahead of our expectations with 8% growth in the second half

·     Underlying operating profit was flat at constant rates, impacted by the US post-retirement medical plan credit in the prior period. Excluding this, operating profit grew 4%³

·    Underlying EPS was flat as translational FX benefits were offset by higher net finance charges and a higher underlying tax rate

·   Free cash flow of £136 million (2016/17: £230 million) was impacted by the expected working capital outflow

·      Average working capital days excluding precious metals reduced by 7 days for the year to 62 days

·   Return on invested capital (ROIC) decreased from 18.2% to 16.4%, mainly due to an increase in the UK pension fund asset and higher precious metal working capital through the year

·   Strong balance sheet with net debt of £679 million; net debt (including post tax pension deficits) to EBITDA of 1.1 times

 

By sector

·     In Clean Air we delivered strong sales growth (+9%) as both Heavy Duty Diesel (HDD) sales and Light Duty sales were ahead of global vehicle production; we held margin flat

·    Good sales growth (+4%) in Efficient Natural Resources. Operating profit was lower, as anticipated, due to lower licensing income and destocking to make our business more efficient

·    Good sales growth (+6%) in Health. We are implementing our strategy to optimise our manufacturing footprint, although the associated costs led to lower operating profit in the year

·     New Markets made significant progress in developing our market leading enhanced lithium nickel oxide ('eLNO') product and our strategy to commercialise this product

 

Reported results

·      Reported revenue was up 17% primarily driven by higher precious metal prices

·     Reported operating profit of £359 million. This includes major impairment and restructuring charges of £90 million (see page 17 for details) and a £50 million charge relating to a legal settlement as announced in February 2018

·    Reported EPS was therefore down 23%, reflecting the lower operating profit, partly offset by a £24 million tax credit in relation to the change in US tax legislation

·      Cash inflow from operating activities of £386 million

·      Recommended final dividend up 7% to 58.25 pence reflecting continued confidence in our prospects

 

Outlook for the year ending 31^st March 2019

·    We expect growth in operating performance at constant rates to be in line with our medium term guidance of mid to high single digit growth

·     We expect the second half performance to be stronger mainly reflecting our normal seasonality

·    At current foreign exchange rates (£:$ 1.354, £:€ 1.143, £:RMB 8.62), translational foreign exchange movements for the year ending 31^st March 2019 are expected to adversely impact sales and underlying operating profit by £41 million and £6 million respectively

 

Progress on our strategy

 

Our strategy will deliver sustained growth and value creation through the application of our science to solve customers' complex problems for a cleaner, healthier world. This is underpinned by:

·      Sustained leadership in growing, high margin technology driven markets

·      Targeted investment in R&D which accelerates growth

·      Relentless focus on operational excellence

 

This strategy will deliver sustained growth in Clean Air, market leading growth in Efficient Natural Resources and break out growth in Health and Battery Materials. Over the medium term, it will deliver:

·      Mid to high single digit EPS CAGR

·      Expanding group ROIC to 20%

·      Progressive dividend  

 

Sustained growth in Clean Air

Our strategy in Clean Air provides clear visibility of sustained growth over the next decade, as we help solve the challenges of air quality across the world. Share gains in Europe and tighter legislation across the world, particularly in Europe and China, will deliver mid single digit sales CAGR.

In the year our progress against this strategy includes:

·      Remaining on track to move to c.65% share of Light Duty diesel in Europe 

·    Increased efficiency of our manufacturing footprint and processes to deliver a broadly stable margin in 2018/19, overcoming additional costs from serving the significant share gains

·   Already secured the majority of expected platform wins in China to help customers meet China 6/VI legislation and approved a new plant to meet this demand

 

Market leading growth in Efficient Natural Resources

Our strategy for Efficient Natural Resources is to leverage our market leading technology through focused resource allocation to outperform in selected, higher growth segments. Increased operational efficiency will enhance performance to deliver profit growth ahead of sales growth.

In the year our progress against this strategy includes:

·   Completing a review and starting to simplify our product and customer portfolio to help deliver profit growth above sales growth

·      Destocking to reduce inventory levels to improve working capital management

·      Restructuring programme delivering cost savings

 

Break out growth in Health

Our Health strategy will deliver break out growth as we benefit from the commercialisation of our pipeline of new generic products. This pipeline is expected to deliver operating profit of around £100 million by 2025 driving margin for the sector to the high 20%s.

In the year our progress against this strategy includes:

·      Jason Apter appointed Sector Chief Executive in March 2018 to execute our strategy

·      Announced the closure of our bulk quantity manufacturing plant in Riverside, US as we focus on complex, high value, low volume APIs

·      Continued development of our plant in Annan, UK as we optimise our manufacturing footprint

·    R&D investment in our pipeline of new generic API products. This pipeline remains on track and has progressed well in the year

 

Break out growth in Battery Materials

Our strategy in Battery Materials will deliver break out growth as we commercialise our eLNO battery materials. eLNO is a leading ultra-high energy density next generation material, competing with future materials such as NMC 811. It enables the rapid development of pure battery electric vehicles.

In the year our progress against this strategy includes:

·      Stepped up R&D investment to continue eLNO's technology leadership

·      Further testing of our material by customers with continued positive feedback. Our focus is on targeting large, multinational automotive and cell OEMs who will play an active role in specifying cathode materials and will benefit most from the material's leading characteristics

·    Developed plans to build a demonstration scale plant in the UK, with an increased capacity of 1,000 tonnes compared to our original plans for 500 tonnes of capacity

·      Developed plans to build our first customer application centre

·     On track for the design and construction of our first commercial plant to start production in 2021/22. This plant will be located in Europe in line with the development of its supply chain

 

Relentless focus on operational excellence

Growth from our sector strategies is supported by a relentless focus on operational excellence across the whole group.

In the year our progress against this strategy includes:

·      £12 million of cost savings from our restructuring programme in 2017/18 with a further £13 million to benefit 2018/19

·     The optimisation of our manufacturing footprint in Health which will deliver a small net benefit in 2018/19

·      Accelerated the roll out of our global procurement process. We have identified new opportunities to now deliver £60 million of savings (previously £50 million), of which three quarters will benefit the income statement, over the next three years. We are progressing ahead of schedule, having already secured our first £13 million of savings to benefit 2018/19

·    Started our Commercial Excellence programme which will focus on improving commercial capability across the group, enhancing our ability to make value based data driven decisions

·      Continued investment in upgrading our core IT systems, a key enabler of reduced complexity across the group and making us more agile and responsive to our customers

·      Reduced average working capital days excluding precious metals by 7 days for the year to 62 days

 

Summary of operating results

Unless otherwise stated, commentary refers to performance at constant rates. Percentage changes in the tables are calculated on unrounded numbers

 

Sales (£ million)	Year ended 31st March		% change	% change,  constant rates
	2018	2017 restated
Clean Air	2,454	2,224	+10	+9
Efficient Natural Resources	956	919	+4	+4
Health	247	236	+5	+6
New Markets	312	308	+1	-2
Eliminations	(123)	(109)
Sales	3,846	3,578	+8	+7

 

Underlying operating profit (£ million)	Year ended 31st March		% change	% change,  constant rates
	2018	2017 restated
Clean Air	349	318	+10	+7
Efficient Natural Resources	158	163	-3	-4
Health	44	52	-14	-13
New Markets	17	12	+37	+34
Corporate	(43)	(32)
Underlying operating profit	525	513	+2	–

 

The underlying operating profit growth for the year was impacted by the comparison against a one-off gain of £17 million mainly following the implementation of an inflation cap on the US post-retirement medical benefit (PRMB) plan. See page 18 for further detail.

 

Reconciliation of underlying operating	Year ended 31st March
profit to operating profit (£ million)	2018	2017
Underlying operating profit	525	513
Amortisation of acquired intangibles	(19)	(20)
Major impairment and restructuring charges1	(90)	–
Loss on disposal of businesses1	(7)	–
Loss on significant legal proceedings1	(50)	–
Operating profit	359	493

¹For further detail on these items please see pages 16 and 17

 

Second half performance

Sales (£ million)	H2		% change	% change,  constant rates
	2017/18	2016/17 restated
Clean Air	1,260	1,170	+8	+11
Efficient Natural Resources	498	499	–	+3
Health	128	126	+1	+6
New Markets	169	164	+3	+4
Eliminations	(62)	(57)
Sales	1,993	1,902	+5	+8

 

Higher sales growth in the second half was led by stronger growth in Clean Air and New Markets. In Clean Air, Light Duty Europe grew by 3% in the second half following a small decline in the first half. New Markets returned to growth in the second half led by the phasing of orders for Battery Systems. Sales growth in Efficient Natural Resources and Health was broadly the same in both halves of the year.

 

Underlying Operating Profit (£ million)	H2		% change	% change,  constant rates
	2017/18	2016/17 restated
Clean Air	182	167	+9	+11
Efficient Natural Resources	88	90	-2	–
Health	22	31	-27	-23
New Markets	8	7	+3	+16
Corporate	(25)	(18)
Underlying Operating Profit	275	277	-1	+2

 

As expected, operating profit was slightly up in the second half. This was lower than sales growth mainly due to a decline in profitability in Health and higher corporate costs. In Health, we incurred costs associated with the optimisation of our manufacturing footprint. As expected, corporate costs increased due to higher legal costs and additional spend on central programmes to deliver operational excellence and efficiency across the group.