Johnson Matthey
Annual Report 2018

Plain-text annual report

J o h n s o n M a t t h e y A n n u a l R e p o r t a n d A c c o u n t s 2 0 1 8 2018 Annual Report and Accounts www.matthey.com/AR18 Johnson Matthey Plc 5th Floor 25 Farringdon Street London EC4A 4AB UK Tel: +44 20 7269 8400 Our vision is for a world that’s cleaner and healthier; today and for future generations Johnson Matthey As a global leader in sustainable technologies we apply our cutting edge science to create solutions with our customers that make a real difference to the world around us. Delivering solutions today: Creating solutions for the future: Catalysts that prevent 40 tonnes of pollutants entering our air every minute Class leading battery materials technology to enable zero emission vehicles Active pharmaceutical ingredients that relieve symptoms for millions of people each year Recycling technologies that conserve millions of tonnes of platinum group metals every year Our strategy will deliver sustained growth Cutting edge science and technology is our competitive advantage. Delivery of our strategy requires us to: Invest in our science and technology in order to; Maintain and build our leadership in high growth markets by solving complex problems for our customers. Operate our business efficiently, safely and sustainably. Develop and grow our great people. The outcome is sustained value over the long term, characterised by: Strong return on invested capital of 20% Attractive earnings – mid to high single digit growth in underlying earnings per share A progressive dividend for our shareholders And a cleaner, healthier world for everyone. We have five values: Protecting people and the planet Acting with integrity Working together Innovating and improving Owning what we do They guide how we do things in JM and shape the right culture to achieve our strategy. 2017/18 was a good year for JM We delivered what we said we would. We built foundations for future growth. Investing in our science Gross R&D spend £193m Underlying operating profit flat3 £525m 3 At constant rates (see note 2 on page 61). Carbon footprint (’000 tonnes CO2 equivalent) 445 Progressive dividend – up 7% to 80.0p Delighting our customers Revenue up 17% to £14,122m Running our business better Average working capital days4 62 4 Excluding precious metals. Sales1 up 7%2 to £3,846m 1 Sales excluding precious metals. 2 At constant rates (see note 2 on page 61). Free cash flow 5 of £136m 5 For definition see page 191. Supporting our people Lost time injury and illness rate flat Employee engagement 61% Creating value for our shareholders Attractive return on invested capital6 16.4% 6 For definition see note 31g on page 181. 208.4p Underlying earnings per share flat Building a sustainable business for the future A new sustainable business framework to 2025 Aligned to our brand, vision and strategy Driving sustainable business practices throughout JM’s value chain Comprising six new goals Health and safety Our people Low carbon operations Responsible sourcing Sustainable products Community engagement 1 2 3 4 5 6 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Contents Strategic Report 4 JM in profile 6 Chairman’s statement 8 Strategic progress and priorities 9 Chief Executive’s statement 13 Group Management Committee 14 Group strategy 16 Sustainable business framework 18 How we create value 20 Our stakeholders 22 Key performance indicators 25 Science 32 Customers About this report Our integrated report for 2018 combines all aspects of the group’s performance into one document and reflects how we are addressing areas which we believe have the potential to have a material impact on our business. Unless otherwise stated, performance data is for the year ended 31st March 2018. 36 Technologies for clean transportation Navigation 38 Operations 44 48 People Environmental performance 51 Health and safety performance 56 58 JM’s 200th anniversary People performance data 60 Financial performance review Group performance review Sector performance review Clean Air Efficient Natural Resources 61 62 64 66 67 Health 68 New Markets 70 74 Financial review Treasury policies, going concern and viability 76 Risks and uncertainties Governance 84 Board of Directors 86 Letter from the Chairman 87 Corporate Governance Report 99 Nomination Committee Report 103 Audit Committee Report 111 Remuneration Report 131 Directors’ Report 135 Responsibility of Directors Accounts 138 Consolidated Income Statement 138 Consolidated Statement of Total Comprehensive Income 139 Consolidated and Parent Company Balance Sheets 140 Consolidated and Parent Company Cash Flow Statements 141 Consolidated Statement of Changes in Equity 142 Parent Company Statement of Changes in Equity 143 Accounting policies 150 Notes on the accounts 191 Reconciliation of non-GAAP measures to GAAP measures 192 Independent auditor’s report Other Information 200 Basis of reporting – non-financial data 203 Verification of non-financial data 204 GRI Standard Content Index 206 Shareholder information 208 Glossary of terms 209 Index 210 Financial calendar 2018/19 IBC Company details Throughout this report you will find a series of easy to identify icons to help you find further information about the group. Read more Principal risk Go online Key performance indicator (KPI) Sustainability reporting This report is written to the GRI reporting standard. We report against GRI in line with the issues that are important and / or material to our business. Stay updated You can find this report and additional information about Johnson Matthey, including the latest news, investor updates and sustainability, on our website: www.matthey.com Cautionary statement The Strategic Report 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. 1 Contents 4 JM in profile 6 Chairman’s statement 8 Strategic progress and priorities 9 Chief Executive’s statement 13 Group Management Committee 14 Group strategy 16 Sustainable business framework 18 How we create value 20 Our stakeholders 22 Key performance indicators 25 Science 32 Customers 36 Technologies for clean transportation 38 Operations 44 48 People Environmental performance 51 Health and safety performance 56 58 JM’s 200th anniversary People performance data 60 Financial performance review Group performance review Sector performance review Clean Air Efficient Natural Resources 61 62 64 66 67 Health 68 New Markets 70 74 Financial review Treasury policies, going concern and viability 76 Risks and uncertainties Strategic Report 2 Johnson Matthey / Annual Report and Accounts 2018 Here we explain how we use our inspiring science to enhance life. t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O The Strategic Report from page 2 to page 81 was approved by the board on 30th May 2018 and is signed on its behalf by: Robert MacLeod Chief Executive 3 Johnson Matthey / Annual Report and Accounts 2018 Strategic Report JM in profile Johnson Matthey is a global leader in science that makes the world cleaner and healthier. With over 200 years of sustained innovation and technological breakthroughs, our solutions improve the performance, function and safety of our customers’ products. 14,000 people More than 30locations Our science has a global impact in areas such as low emission transport, pharmaceuticals, chemical processing and making the most efficient use of the planet’s natural resources. Our strategy to deliver sustained growth and value creation for shareholders drives attractive returns over the medium term: mid to high single digit compound annual growth in earnings per share, ROIC expanding to 20% and, as a result, a progressive dividend. Today more than 14,000 Johnson Matthey professionals collaborate with our network of customers and partners to make a real difference to the world around us. North America 12 major manufacturing facilities 33% of group sales 24% of employees Europe 14 major manufacturing facilities 39% of group sales 53% of employees China 5 major manufacturing facilities 10% of group sales 8% of employees Rest of World 5 major manufacturing facilities 9% of group sales 5% of employees 4 Rest of Asia 6 major manufacturing facilities 9% of group sales 10% of employees Johnson Matthey Clean Air • A global leader in catalysts and catalyst systems for vehicles and industry • Creating value from high technology catalyst formulations and systems to meet legislated limits for emissions around the world • 13 manufacturing facilities in 12 countries • Nine technical centres in eight countries • Strategy to deliver sustained growth Efficient Natural Resources • Creating value from efficient use and transformation of critical natural resources including oil, gas, biomass and platinum group metals (pgms) • Leading positions across four global businesses: Catalyst Technologies, Pgm Services, Advanced Glass Technologies and Diagnostic Services • 18 manufacturing facilities in eight countries Health New Markets Group Functions • Accessing new areas of potential growth aligned to global priorities of cleaner air, improved health and more efficient use of natural resources • Strategy to deliver break out growth in battery materials, with market leading cathode material technology • Provide common standards to leverage efficiency and create value across the group’s sectors • Includes global science and technology function which drives innovation and leads R&D in core science and business areas. Supports technology development in sectors • Leading provider of complex chemistry solutions to generic and innovator pharmaceutical companies • Develops and manufactures active pharmaceutical ingredients (APIs) for a range of treatments • Operates in the large and growing outsourced small molecule API market • Five manufacturing facilities in two countries • Two technical centres in the UK • Strategy to deliver market leading growth • Three technical centres in three countries • Strategy to deliver break out growth t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Sales excluding precious metals Operating profit underlying £3.8bn £525m Sales by sector excluding precious metals Operating profit excluding corporate underlying New Markets 8% Health 6% Efficient Natural Resources 24% New Markets 3% Health 8% Efficient Natural Resources 28% Clean Air 62% Clean Air 61% 5 Johnson Matthey / Annual Report and Accounts 2018 Strategic Report Chairman’s statement This is my last statement to shareholders after seven years as your Chairman. I must start by saying what a pleasure and privilege it has been to chair the board of a company as special as Johnson Matthey. I leave in the knowledge that with a strong management team, a sound strategy and a very experienced new Chairman to take over running the board, the company is set for further growth and success in the years ahead. During the last year, Robert and the management team set out a clear strategy for sustained growth and value creation. Together with JM’s 14,000 people they have successfully embarked on delivering that strategy, applying world class science to solve complex problems for our customers. As a result, the company has continued to make an important contribution to making the world a cleaner and healthier place, enhancing the lives of millions of people around the world. With the aim of achieving more effective focus, the group was reorganised in the year into four sectors: Clean Air, Efficient Natural Resources, Health and New Markets, which includes our Battery Materials business. Air quality has remained an intensifying global issue. Our Clean Air Sector continues to work closely with our customers to enable the current generations of internal combustion engines to respond to changing legislation and consumer demand. Our strategy is delivering the capacity, technology and efficiency improvements that will enable us to sustain growth in this key group business for at least the next decade. At the same time, and in response to the concern about air quality, the automotive market has accelerated its long term plans for replacement of the internal combustion engine. JM has put itself at the forefront of this process, developing a leading battery chemicals technology needed to make it happen. A key focus for the board is now ensuring that we manage investment in capacity and commercialisation to ensure we deliver our next generation technology to our customers as the market for battery electric vehicles begins significantly to grow. Elsewhere, our Efficient Natural Resources and Health Sectors bring diversity and added fire power to the group’s portfolio. Both serve growing markets in which they hold technology leadership positions and have made solid progress on deploying our strategy during the year. Alongside the development and implementation of strategy sector by sector, we have continued the process of making JM a more agile, flexible and efficient company, ready and able to cope with the demands of the growth we expect to deliver. 6 Tim Stevenson Chairman t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O JM has continued to make an important contribution to making the world a cleaner, healthier place Committed to sustainable business Ever since our business was founded in 1817, JM has made a significant contribution to sustainability: long before the word ‘sustainability’ became common in corporate language, it was an intrinsic part of JM’s culture. Our Sustainability 2017 programme came to an end on 31st March 2017 and, as we reported last year, we achieved our specific goals in relation to embedding sustainability into the way we do business. This is now exemplified in our vision and brand, through the focus of our sectors and is explicit in the delivery of our group strategy. I am delighted that we are now able, in this annual report, to share our sustainable business ambitions for the period to 2025. Aligned to our business strategy and framed as a series of six challenging goals, it will drive us towards sustainability leadership across our whole value chain. Great people and the right culture Since I joined the business seven years ago I have always been struck by the pride and commitment that our people bring to their work; they are proud of the positive impact the company has on the world and are deeply committed to making sure JM continues to be successful. In this context, the board has had particular focus on a number of key areas over the course of the last year. First, on a redoubling of our effort to drive the right health and safety behaviours; our performance this year was unchanged and so there is more work for us to do in this area. Second, on training and development of our people and effective succession planning. Third, on the reinforcement of a healthy and positive culture across the business, with particular focus on the board’s key theme of ‘doing the right thing’. In the latter, we have expanded and further embedded our ethics and compliance programme to ensure we are a responsible partner for our customers and that we stand up well to the increasing external scrutiny on corporations. Our board and senior team are clear about the role they play in all this; we are setting the right tone from the top to create a culture that drives success on all fronts. An effective board We operate in an increasingly complex world of operational, commercial, geopolitical, environmental and financial opportunities and risks. A key job for the board is to ensure that the executive is enabled to manage the group’s businesses effectively through the challenge that this difficult mix can create. With an appropriate balance of skills, diversity and experience, the board has become increasingly effective in carrying out this role. We make sure our Non-Executive Directors have a thorough understanding of JM’s strategic priorities, in particular through focused teach-ins on specific areas of our business and markets. A very positive external review, this year, of the work of the board underlined the board’s open and collegiate way of working. In November 2017, after five years on our board, Colin Matthews stepped down as a Non-Executive Director and Chairman of our Remuneration Committee. Colin contributed significantly during his time on the board; his wise counsel will be missed. Following his retirement, the board appointed Chris Mottershead as Chairman of the Remuneration Committee. In November we were delighted to welcome John O’Higgins as a Non-Executive Director. He brings a combination of strong business credentials and deep industrial experience. A new Chairman In July 2018, at the close of this year’s annual general meeting, I will step down after seven years as your Chairman and hand over to Patrick Thomas. Patrick joins the board as Non-Executive Director and Chairman Designate on 1st June 2018. I am delighted that my colleagues have chosen him to succeed me. He has substantial experience in leading international speciality chemicals businesses and an impressive track record of driving growth through science and innovation across global markets. His extensive board experience and recent executive leadership of major global organisations means he will be a great asset to JM. I wish him every success in his role. Shareholder returns Underlying earnings per share were flat this year as translational foreign exchange benefits were offset by higher net finance charges and a higher underlying tax rate. Nevertheless, confident in our prospects, the board is recommending a 7% increase in the final dividend. JM is well set for the future Johnson Matthey is a great business with a proud history. Our 200th anniversary in 2017 was a remarkable achievement. World class science and a sure ability to spot opportunities have been at the base of the company’s consistent delivery and success. I am confident that can continue long into the future. Tim Stevenson Chairman 7 Johnson Matthey / Annual Report and Accounts 2018 Strategic Report Delivering our strategy – progress and priorities Strategy Strategic outcome Progress in 2017/18 Priorities for 2018/19 Sustained growth in Clean Air Market leading growth in Efficient Natural Resources Break out growth in Health Break out growth in New Markets from battery materials Market share gains. Expanded, enhanced capacity to meet growing demand. Growth ahead of market and enhanced margin. Be development partner of choice for innovator and generic companies and deliver £100 million additional operating profit by 2025. Focus on next generation high energy density market. Deliver leading product to gain share of next generation high energy density battery electric vehicle market. • On track to move to circa 65% share of Light Duty • Continue to enhance efficiency through diesel in Europe. • Increased efficiency of manufacturing footprint and processes. procurement and automation in order to deliver broadly stable operating margin in 2018/19. • Continued capital investment to deliver against • Secured majority of expected platform wins in China customer needs. and approved new plant to meet demand. • Secure new business wins in Light Duty Europe and in China. • Managed the business more efficiently through: – Simplifying product and customer portfolio. – Improved working capital management. • Continue to grow sales ahead of market. • Leverage efficiency actions to deliver enhanced margin (before restructuring benefits). • In addition, delivered cost savings from restructuring programme. • Jason Apter appointed Sector Chief Executive in • Deliver value from manufacturing footprint March 2018. optimisation. • R&D investment in new generic API product pipeline • Continue to mature our generics pipeline. on track. • Optimising manufacturing footprint. • Stepped up R&D investment to continue eLNO™’s • Progress technology development and technology leadership. • Further testing of eLNO by customers with continued infrastructure build out in order to commence sales of product for ‘A cycle’ testing with customers. positive feedback. • Building out infrastructure: – Approved plans to build demonstration scale plant in the UK and first customer application centre. – Design underway of first commercial plant, located in Europe and due to start production in 2021/22. Relentless focus on operational efficiency Deliver £60 million savings through procurement. • £12 million of cost savings from our restructuring • Deliver additional £13 million restructuring savings programme in 2017/18. • Continued focus on efficiency through: – Accelerated roll out of global procurement function. – Continued investment in core IT systems upgrade. – Improved average non-precious metal working capital days to 62 days (2016/17: 69 days). to benefit 2018/19. • Deliver savings from procurement. • Roll out first and second waves of IT core systems. Science and technology Sustain market leading positions. Increased visibility across our R&D portfolio and polarised investment process. Further targeting of investments to high growth opportunities. Developed eLNO market leading battery material product. Continued development of eLNO. Sustainable business Sustainability leadership. Developed and launched new sustainable business framework and six goals to 2025. Investing in our people and creating the right culture Peer group leading health and safety performance. Engaged and enabled workforce. Continued emphasis on behavioural health and safety programmes although health and safety performance was flat. Engaged employees in strategy and priorities. Refreshed values. Make progress towards achieving sustainable business goals throughout our businesses globally (see pages 16 and 17). Shape culture through: • Continued emphasis on health and safety, including process safety, to drive improved performance. • Engaging our people. Roll out new values and behaviours and carry out second global opinion survey. 8 Chief Executive’s statement Q&A with Robert MacLeod JM refreshed its strategy over the last 12 months. What has stayed the same and what has changed? The core of our strategy is largely unchanged: applying our science to solve our customers’ complex and challenging problems. In refreshing it, we have sharpened its focus and set out clear plans that will deliver sustained growth and value creation for shareholders. Our strategy stems from our vision for a cleaner, healthier world. So, we are investing in areas where our inspiring science enhances life: through cleaner air, improving people’s health and by conserving our planet’s critical natural resources. These are areas that will help us continue to build a sustainable business and accelerate our growth. Today our science is world class and we will continue to invest in our science and technology to ensure that we maintain and enhance our world class capabilities. By applying it to the complex problems faced by our customers, we sustain leading positions in markets that are growing, driven by technology and therefore attract high margins. This is the source of the attractive return profile we generate in our business. In refreshing our strategy, we have identified the areas where our technology will drive growth. Linked to this, we have also dialled up our efforts to operate more effectively across the group. These programmes will help us realise benefits across the whole group, enabling us to run the business more effectively and making us more agile and responsive to our customers. The enthusiasm and contribution of JM’s people are central across all aspects of our strategy, so no change there. But we are placing much more emphasis on helping them connect their contribution to our goals, on developing their capabilities and on developing the right culture; one that encourages us all to work together safely, sustainably, ethically and with respect for each other. t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Robert MacLeod Chief Executive 9 Johnson Matthey / Annual Report and Accounts 2018 Strategic Report Would you say you’ve delivered operational performance in 2017/18 in line with your plans for the group? Yes, we absolutely have. It has been a good year where we have achieved our short term objectives and have made significant progress in building the platform that enables us to execute our strategy through 2018/19 and beyond. We started the year by reorganising into four new sectors: Clean Air, Efficient Natural Resources, Health and New Markets. These are aligned to the global challenges we tackle. Having developed the long term strategies for each of our sectors, we have moved swiftly into execution mode and are making good early progress. We also have made significant strides forward on our groupwide enablers. We have accelerated the roll out of a global procurement function which is well on track to deliver around £60 million of savings over the next three years. We have initiated our Commercial Excellence programme and progressed our upgrade of IT systems. In addition, we have realised cost savings from our group restructuring programme. Numbers wise, we have delivered sales and underlying operating profit in line with our expectations at the start of the year, and I am especially pleased with our disciplined management of working capital. Together, this demonstrates the sound running and management of the business. If I look across our four sectors, once again Clean Air had a strong year. We improved the quality of our Efficient Natural Resources business and in Health we are better positioned as we optimise our manufacturing footprint and continue to progress our substantial active pharmaceutical ingredient (API) pipeline. The further development of our next generation battery material was a highlight this year and I am really excited about the speed of progress we are making and the plans we have to commercialise this product. Building on your last point, one can’t escape headlines about air quality, vehicle emissions and how electric cars are the future. This clearly has implications for Johnson Matthey so can you explain your strategic priorities in this context? When it comes to air quality, JM is part of the solution. We are working with our customers to meet the ever tighter emissions legislation as legislators push to improve air quality in cities. In Europe, we have developed products that enable emissions from diesel cars to be the same as those from petrol cars and, of course, that are lower than ever before. We have been working alongside customers in the automotive supply chain for almost 50 years and are a trusted partner on technology. So as their markets and products are changing, we are expanding our portfolio with technologies to reduce and eliminate emissions that span the full range of powertrain options. In our Clean Air Sector, our technology leadership, investments and focus on efficiency mean we have secured significant market share gains in Europe. These will deliver growth in the short to medium term, even as consumers’ preferences move away from diesel powered cars. At the same time, we are actioning our strategic plans that will drive strong growth in the medium to longer term in Asia when the tighter emissions legislation comes into force in India and China. Our progress in developing our Battery Materials business this year has been tremendous. This is JM science at its best. We have harnessed the full JM science and technology arsenal and our expert people across the whole company. In doing so, we have moved rapidly this year to become a technology leader. Our class leading material, which we call eLNO™, is delighting our customers in qualification tests and we announced our plans to significantly ramp up our investment to commercialise our eLNO technology. eLNO is not a product for today’s market which focuses on hybrid vehicles; it is designed to enable large scale adoption of pure battery electric vehicles with greater range and lifetime. Our strategic plans are timed to deliver the very best performing technology to our customers as the market moves into high growth. 10 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Clear strategy and plans for growth; delivery underway and on track What investments are required in these areas, and across JM as a whole, to support your future growth? Investment in our science and technology across all of JM, of course. I can’t emphasise enough how good we are at translating our world class science expertise into solutions across the group and through our sectors. It is how we differentiate ourselves in our markets, and our refreshed strategy is providing us with increased focus and discipline in investing our R&D spend into areas of higher potential future growth. One such area is in our Health Sector where we are investing in our pipeline of new generic API products. In addition to investments in battery materials manufacturing, we are making important investments in Efficient Natural Resources’ facilities and have major capacity expansions in Poland and China for Clean Air. We also continue to invest in strengthening the core of JM to simplify the way we do things, bring consistency to common processes and generate savings which we can reinvest in the business. Our investments will enable us to capture growth in our markets and ensure we run our business as safely and effectively as possible. And underpinning all this is the investment we are making in our people. Can you tell us more about your people and the JM culture? Great people are the force behind JM and so it is really important we get this right. Our employee survey, which we ran in November 2016, gave us a valuable steer on how well we are doing and over the last year we have done a lot of work in response to what we heard from our people. There were a lot of positives, but they also said they wanted to be clearer about our strategy so we are spending time not only to help them understand it, but to provide a clear line of sight between our strategy and their individual goals, helping them connect their contribution directly to JM’s achievements and vision. At the same time, we are creating a more consistent approach across all areas relating to talent. There is more for us to do, but we are well on our way. Beyond putting the right processes in place, we are doing a lot to make sure we have the right culture. Alongside our strategy refresh we have also refreshed our company values. That’s not a decision we took lightly. But in doing so we now have a stronger set of values, and the behaviours that put them into action, that are true to our vision, will guide us to act ethically and support us in delivering our strategy. Our culture and values must also drive the right behaviours when it comes to health and safety; it is a major priority for us and our performance this year was unchanged. I am determined that we must do better. Now that your Sustainability 2017 programme has come to a close, have you put anything else in its place? Yes, we have. We have much to contribute to a more sustainable future. Sustainability 2017 engaged our people and transformed our sustainability performance. It laid the foundations for our new brand and our vision; our refreshed business strategy has stemmed from these. And now we have put in place our new sustainable business framework which, through its six challenging goals, continues our sustainability commitment but is more outward looking – towards our customers, communities and supply chains. It drives sustainable business practices for internal and external stakeholders, throughout JM’s value chain. It also includes an important ambition: to make JM a truly diverse and inclusive organisation. JM celebrated its 200th anniversary in 2017. With the celebrations now drawn to a close, what would you call out as the highlights? Reaching 200 is a rare achievement for a company and we were determined to recognise and engage our people and look to the future. In May 2017 we launched our new brand – inspiring science, enhancing life – which encapsulates what we do best and the positive impact we have on the world. It is already helping us build a stronger presence in our markets, connect with our customers and attract and retain great people. Then on 19th July, the 200th day of our 200th year, everyone in JM around the world joined together for our global celebration during which we ‘followed the sun’, from Melbourne, Australia to San Diego, USA, with a broadcast live to staff for 24 hours. It was a really amazing day. We closed events with our JM200 Awards which recognised the incredible work and contribution of our people. We announced our winners at a ceremony held at the Royal Institution in London, which made for a memorable and fitting end to our anniversary year. 11 Johnson Matthey / Annual Report and Accounts 2018 Strategic Report Finally, your thoughts on 2018/19 and beyond? In July, at our AGM we will say goodbye to Tim Stevenson, our Chairman of seven years. It has been a huge privilege and pleasure for me to work with Tim during that time, including over the last four years in my role as Chief Executive. I’d like to offer him my personal thanks, and extend those of everyone associated with JM, for all that he has done for the company. We will miss him and wish him the all very best for the future. We welcome Patrick Thomas as our new Chairman who brings a wealth of experience which I know will be extremely valuable to JM at this stage in its development. I am really looking forward to working with Patrick to take the business forward. Our key priorities for 2018/19 are to deliver in line with our strategic plans for each of our sectors, continue to develop our technology and meet the milestones for our groupwide enabler programmes, as outlined on page 8. And we must focus our people: embedding our values to create a safer and ethical culture, acting on what they have said through our survey and ensuring everyone understands how they contribute to Johnson Matthey’s success. So, 2018/19 should see us continue to build our stronger business platform for the future. JM is a great company with strong opportunities for growth and a strategy that I am confident we will deliver. In doing so we will achieve our potential as a business, make our mark and leave the world a cleaner, healthier place. Outlook for the year ending 31st 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 31st March 2019 are expected to adversely impact sales and underlying operating profit by £41 million and £6 million respectively. Pages 65 to 69 for the outlook for our four sectors Robert MacLeod Chief Executive 12 Group Management Committee (GMC) From left to right Matthew Harwood, Chief Strategy and Corporate Development Officer Joined the GMC: August 2017 Jane Toogood, Sector Chief Executive, Efficient Natural Resources Joined the GMC: March 2016 Matthew joined JM in August 2017. Prior to JM he was at Petrofac. Matthew leads the group’s strategic planning and corporate development activities and works with the Sector Chief Executives to develop the strategy for our sectors. Jane joined JM from Borealis in March 2016 and leads the Efficient Natural Resources Sector, directing the strategy to deliver market leading growth. Jane also chairs the Brexit working group. Jason Apter, Sector Chief Executive, Health Joined the GMC: March 2018 Jason joined JM in March of this year to lead the Health Sector. Bringing experience from the healthcare and life science industry from MilliporeSigma, Jason leads the strategy to deliver complex chemistry solutions for our customers. Alan Nelson, Chief Technology Officer and Sector Chief Executive, New Markets Joined the GMC: June 2015 Alan joined JM in June 2015 as Chief Technology Officer and now also leads our Battery Materials business and the rest of our New Markets Sector. Previously with The Dow Chemical Company, he leads our innovation portfolio, directs global research efforts and leads the implementation of business plans into new markets. He is also responsible for our sustainable business framework. Annette Kelleher, Chief HR Officer Joined the GMC: May 2013 Annette is our Chief HR Officer, leading the group’s people strategy. Joining from Pilkington Glass in May 2013, Annette is responsible for the programmes to build talent and capabilities across JM in line with our group strategy. Robert MacLeod, Chief Executive Joined the GMC and the board: June 2009 Having joined JM as Group Finance Director in 2009, Robert has been leading JM since June 2014 when he became Chief Executive. Anna Manz, Chief Financial Officer Joined the GMC and the board: October 2016 Anna joined JM as Chief Financial Officer in October 2016 to lead the group’s finance activities, risks and controls. Joining from Diageo, Anna also leads our efforts to drive excellence and efficiency across JM’s business. Simon Farrant, General Counsel and Company Secretary Joined the GMC: July 2007 Simon joined JM in 1994 as Senior Legal Adviser and became Company Secretary in 2001. Simon heads up our company secretarial and legal activities, including on ethics and compliance. He also acts as secretary to the board and its committees. John Walker, Sector Chief Executive, Clean Air Joined the GMC and board: October 2013 John joined JM in 1984 and has led our Clean Air Sector since 2009 after heading up its Asian business for many years. John also has board level responsibility for environment, health and safety. t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O 13 Johnson Matthey / Annual Report and Accounts 2018 Strategic Report Our strategy for sustained growth and value creation JM’s competitive advantage is our world class science and technology. We use it to create long term value for our shareholders and a cleaner, healthier planet for everyone. A cleaner, healthier world, today and for future generations Sustained growth and value creation from science, customers, operations and people Delivered through four global sectors Clean Air Sustained growth Efficient Natural Resources Market leading growth Health Break out growth New Markets Break out growth in battery materials Enabled by Science and technology Rigorous resource allocation Efficiency and excellence Creating the right culture and licence to operate By 2025 we will: Enhance technology leadership in our targeted markets Have three substantial and growing sectors with sizeable new opportunities realised through New Markets Sector Have excellence in everything we do Driving attractive returns: Expanding return on invested capital (ROIC) to 20% Mid to high single digit EPS CAGR Progressive dividend Have made the world a cleaner and healthier place Groupwide enablers Support strategic delivery and generate savings to reinvest and drive growth in the business Science and technology Investment in world class science that delivers market leading positions Rigorous resource allocation Targeting the highest growth opportunities that deliver the most attractive returns in areas where our inspiring science enhances life Efficiency and excellence Common standards and processes, enabled by IT Developing future talent Improving working capital management Savings from procurement Optimising JM’s value share from commercial relationships Creating the right culture and licence to operate Delivering our brand promise No compromise on health and safety ‘Doing the right thing’ without question Engaged and enabled people, ready to play their part 14 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Clean Air Sustained growth from: • Market share gains (already secured) in Europe • • • • Tighter legislation in Europe requiring higher value products Tighter legislation in Asia (China and India) Consistent growth in light duty catalyst market in North America Operational efficiency activities that support margin and ROIC Efficient Natural Resources Market leading growth from: • • • • Focused investment in R&D to maintain and extend technology leadership Outperforming in selected, high growth segments Increased efficiency to enhance performance Extending capabilities into adjacent markets, geographies and technologies Health Break out growth from: • • • Enhancing our position as a technology partner of choice with innovator customers Driving value from existing generics business Commercialising our pipeline of new generic products New Markets Break out growth in battery materials from: • • • • Commercialising our leading eLNO high energy cathode material Scale up through demo, pilot and full production scale; investment of more than £200 million from mid 2018 Continued investment in next generation, best in class high energy battery materials Continuing to position other new businesses for growth Our strategy directs investment choices across the group so that our people can translate our world class science and technology as efficiently as possible to solve our customers’ complex problems and tackle major global challenges: the need for clean air, improved healthcare and the most efficient use of our planet’s natural resources. Our strategy will deliver sustained growth and value creation through: • • Investment in science and technology which accelerates growth and creates leadership Serving customers in growing, high margin, technology driven markets, aligned to global challenges and delivered through our four sectors • Operating with a relentless focus on efficiency and excellence; maximising synergies and driving standard processes and ways of working where it makes sense to do so • Attracting and retaining the best people into a culture that is true to our vision and that breeds success View the presentation and transcript from our Capital Markets Day in September 2017 15 Johnson Matthey / Annual Report and Accounts 2018 Strategic Report A new sustainable business framework to support value creation With our science, understanding and vision, we believe we have much to contribute to a more sustainable future. In March 2017 we came to the end of our Sustainability 2017 programme. In realising our Sustainability 2017 Vision, we engaged our people, made Johnson Matthey a safer place to work and built our reputation as a world leading manufacturer of sustainable technologies. Over ten years we transformed our business and our sustainability performance, halving our operational carbon footprint and our use of energy and water per unit of sales. Sustainability 2017 laid the foundations for our new brand: inspiring science, enhancing life; and our vision for a cleaner, healthier world. Our refreshed business strategy has stemmed from these. All of this provided a powerful impetus for rethinking our business and how we wanted to further embed and integrate sustainability. It was time to move forward and increase our ambition for building a sustainable business. Several inputs steered our new sustainable business framework In developing the next phase of our sustainable business framework, we recognised that the world had moved on. External stakeholder expectations had increased, and customers and investors now are looking increasingly for evidence of sustainable practices. Regulation has also increased in our field. And in the bottom line savings of £142 million that we achieved during Sustainability 2017, we knew that a new framework would once again provide business benefits. We also considered the UN Sustainable Development Goals (UN SDGs) and identified six of the UN SDGs where we can make the biggest positive impact. The six are: How can sustainability support our vision? What goals are our peers setting? Sustainability 2017 Sustainable business goals to 2025 UN Sustainable Development Goals What new legislation is coming? What are our stakeholders concerned about? Our sustainable business goals – what have we continued and what’s new? Health and safety Our people Low carbon operations 1 2 3 Goal 1: For health and safety, aspire to zero harm. This goal continues our Sustainability 2017 target. It is the same goal with the same ambitious KPIs and target. We measure our lost time injury and illness rate (LTIIR) and total recordable injury and illness rate (TRIIR). Goal 2: Ensure JM is a truly inclusive organisation that fosters employee engagement and development within a diverse and global workforce. This is a new goal which acknowledges the crucial role our people play in delivering our vision and strategy. Goal 3: Reduce our greenhouse gas (GHG) emissions per unit of production output by 25%. This goal continues our commitment to reducing the environmental impact we have through GHG emissions from our operations. Whilst similar to our 2017 target (where we measured GHG emissions relative to sales), in our goal to 2025 we are measuring relative to production output to drive operational improvements further and reduce the impact of our business on climate change. 16 Our framework and our six new sustainable business goals The outcome is a new sustainable business framework aligned to our brand, vision and strategy. It continues our sustainability commitment but is more outward looking – towards our customers, communities and supply chains. It drives sustainable business practices for internal and external stakeholders, throughout JM’s value chain. The framework comprises six new goals: Sustainable business goal Sustainable business KPIs Baseline 2016/17 2017/18 Health and safety 1 Our people 2 For health and safety, aspire to zero harm Annual TRIIR TRIIR in 2016/17 Annual LTIIR LTIIR in 2016/17 Annual OSHA severity rate Rate in 2016/17 Ensure JM is truly inclusive, fostering employee engagement and development within a diverse global workforce Employee engagement index score (%) Employee enablement index score (%) Diversity and inclusion plan implementation (%) 2016/17 2016/17 2016/17 1.00 0.48 11.2 61% 62% 0% Low carbon operations 3 Reduce our greenhouse gas (GHG) emissions per unit of production output by 25% Annual GHG emissions (Scope 1+2) / tonnes manufactured product sold Responsible sourcing 4 Improve sustainable business practices in our supply chains Tier 1 strategic suppliers assessed and compliant with Supplier Code of Conduct % of Tier 1 strategic suppliers assessed in 2017/18 Not measured % of these compliant with the code Not measured Annual sales giving contribution to UN SDGs 2017/18 sales data against UN SDG indicators (% of group sales) Not measured CO2 eq emissions intensity for 2016/17 3.8 3.4 2.8 2025 target 0.6 0.2 6.0 73% 72% 0.93 0.48 12.2 – – 13% 100% 11% 100% 73% 100% 85.8% >90% t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Sustainable products 5 Double the positive impact that JM’s products make to a cleaner, healthier world Annual aggregation of product sustainability benefits in key areas 2017/18 data relating to: Tonnes of pollutants removed Number of lives positively impacted Tonnes of GHGs removed (CO2 eq) Community engagement 6 Increase our volunteer work within our local communities Cumulative number of volunteer days across JM Number of employee volunteer days across JM in 2017/18 Not measured Not measured Not measured Not measured 3.31m 6.62m 138,000 920,000 10.6m 21.2m 678 50,000 Responsible sourcing Sustainable products Community engagement 4 5 6 Goal 4: Improve sustainable business practices in our supply chains and, through collaboration, ensure full compliance with our minimum standards from strategic suppliers. Goal 4 is new. Through our Supplier Code of Conduct (in place since 2017) and other responsible sourcing policies, goal 4 will bring about a new standard of transparency and vigilance. Goal 5: Double the positive impact that JM’s products, services and technologies make to a cleaner, healthier world. Goal 5 is also new. Here we aim to double the impact that our products, services and technologies can make on a cleaner, healthier world. It drives us towards our JM vision. Supported by our new sustainable business framework of six goals, we believe we can achieve our vision through our inspiring science; our collaboration with customers; our operations and their commitment to sustainable practices; and our great people. Goal 6: Increase the use of volunteer hours to support our community and charity partners through the JM employee volunteering programme. Goal 6 is new and continues our community involvement with a formal target. Through this target we aim to support our communities and also provide personal development opportunities for our people. 17 Johnson Matthey / Annual Report and Accounts 2018 Strategic Report How we create value What we use Knowhow and intellectual capital JM’s competitive advantage is its science and technology. We use our industry leading capabilities across our sectors. We own patents covering our science, technology and processes. Financial We invest for growth using equity from our shareholders, raised debt and cash flow delivered by our sectors. Customer relationships We draw on our deep relationships with customers to understand how best to apply our science to solve their problems. Natural resources We source raw materials responsibly and use them as efficiently as possible. We also recycle platinum group metals (pgms). Manufacturing operations We have a global network of manufacturing plants, application centres and laboratories. People Our 14,000 people bring the talent, expertise and innovative thinking needed to drive growth and efficiency in JM. We create sustained value and growth through the effective use of our resources and our relationships. We act in line with our core values which, together with our sustainable business goals, drive us towards our vision for a cleaner, healthier world. Sustainable business f Operations Science Customers How we use it Science Our science has been established over many years. We invest in it and in our scientific talent. Our skill and knowledge is acknowledged across the scientific community and amongst customers. We have a set of nine core science capabilities (see page 26) which we use across JM. They provide us with fundamental insights about materials, their design and then the control of their activity through chemical and functional manipulation. Our competitive advantage is in combining knowledge of the fundamental science with commercial and scalable solutions, potentially customised for each and every customer. This combination enables us to outperform in our target markets, and creates high barriers to entry. Our customers choose us because of our technology. Pages 25 to 31 18 Customers Our science directs where we play. We apply it in technology driven markets and generate high margins from it. This drives high returns. Our customers are mostly other industrial companies, operating in the transport, energy, chemicals and healthcare segments. We work closely with them to develop solutions which enable them to bring their products to market faster, improve the performance of their products and reduce their environmental impact. We provide them with functional components that help them create more sustainable products and solutions. We also provide specialist services such as the refining and recycling of pgms and process technology used to design chemical plants. Collaboration and strong relationships with our customers are crucial in providing a high quality tailored service. Together, we put our inspiring science to work to enhance life. Pages 32 to 37 ramework The value we create How we measure value Outcomes For society Cleaner, healthier world For shareholders and other stakeholders Attractive returns Taxes paid to authorities Key performance indicators Pages 22 to 24 Operational carbon footprint Positive impact of JM’s products Sales growth Underlying operating profit margin growth Underlying earnings per share ROIC Average working capital (excluding precious metals) For our people Strong culture Employment and opportunities Health and safety Employee engagement For our company Cash to reinvest in our science, infrastructure and people Technology leadership through R&D investment People t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Operations People We continue to improve our global standards and systems to enable us to operate every aspect of our business efficiently: from strategy to supply chain, from innovation to IT. Our global manufacturing operations create highly specified physical products for our customers. We manufacture efficiently and responsibly to drive economic and environmental performance and have programmes in place to optimise our manufacturing assets. We invest in our manufacturing capacity to meet customers’ future demand and have the ability to flex our cost base if our markets slow. We demand high returns from our investments, with a target of at least 20%, which drives continued improvement in operational efficiency. Pages 38 to 47 Everyone in JM plays their part in taking ideas from the lab to full scale commercial success. We hire the best people with the right skills and support them in an innovative culture that encourages them to develop and grow. We are driven by values which means we always keep each other safe, work with clear intentions and respect, and do the right thing for our people and our planet. They are supporting us as we are evolving to take decisions more quickly, to be more open-minded to new possibilities, to share more and stay confident through times of uncertainty. Our values provide the strong foundation from which we are creating a cleaner, healthier world. Our people are motivated by working for a company that is ‘making a difference’ and this is an important differentiator in attracting and retaining the very best. Pages 48 to 59 19 Johnson Matthey / Annual Report and Accounts 2018 Strategic Report Shaping our strategy with our stakeholders Our vision is for a world that’s cleaner and healthier, today and for future generations and our strategy is designed to achieve it. Our stakeholders are crucial to our long term success. Their views inform and help shape our strategy. We work together with them as we execute it; they input into it and benefit from the value it creates. Pages 18 and 19: How we create value We always seek to engage with and listen to our stakeholders to understand their views. We tailor this in different ways for our different stakeholders so that it encourages them to share with us what they expect or need from us, or tell us about any concerns. Customers Investors By working closely with our customers, we aim to provide them with the best solutions and excellent service. JM is listed on the London Stock Exchange and is a constituent of the FTSE 100. We provide investors with fair, balanced and understandable information about the company, its performance and prospects. We encourage two way conversation and regularly seek their feedback. Why we engage Understanding customers’ complex problems helps us research, develop and apply our science to give them the best solution to their challenges. By providing open and transparent information and engaging in two way dialogue, investors are able to make informed investment decisions. Our impact We provide class leading scientific solutions that contribute to a cleaner, healthier world. Feedback from investors forms part of the board’s strategic discussions. Governments and trade associations We inform and contribute to debate, mostly in areas where our science and technology expertise can have a positive impact. We see our role as being a technical expert. Policy and regulatory changes affect many aspects of our business. They create a framework in which we must operate and their impact on our customers can provide opportunities for growth. By sharing information about what is technically possible, we have provided useful insight for policymakers in areas such as vehicle emissions legislation. Pages 32 to 37 Page 55 Page 55 Page 23 3 5 20 Pages 97 and 98 Pages 22 to 24 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O What matters most Materiality map The map below highlights the areas of focus for JM which we have identified as key to our business and most important to our stakeholders. Our regular materiality assessment helps us to focus on the areas that matter most to our stakeholders and where we make the greatest positive or negative contribution to society. From it we define our material areas. We review them every year, either by engaging with our stakeholders through an external consultancy or by conducting our own internal review. In 2017/18 we carried out an internal review which considered feedback from stakeholders gained through our interactions with them during the year. Pages 204 and 205: GRI Standard Content Index Air quality Governance Sustainability leadership Ethical business practices and compliance Climate change risk Our operations Financial sustainability Greenhouse gas emissions Water use Health and safety Supply chain Community engagement Diversity and inclusion JM’s ability to impact Wider society Environmental Resource scarcity Employee recruitment and retention Responsible sourcing Modern slavery and child labour Social Product lifecycle management Suppliers and other partners Our people Communities We work closely with our core suppliers. We also participate in collaborative scientific programmes with other companies and academic experts. Our people drive our business. We want them to be engaged with our vision and to feel confident that they are coming to work in a safe, ethical and inclusive environment. Our operations are part of local communities around the world. We strive to be a good citizen and provide high quality employment opportunities. Dialogue with suppliers is essential to mitigate risks in the value chain and ensure a responsible approach. Collaborative relationships with other science experts in industry and academia furthers our technical expertise. High levels of engagement and enablement in a safe, sustainable and supportive culture contributes directly to JM’s success. We engage with communities to understand how we can make a positive impact, in line with our vision for a cleaner, healthier world. Our Supplier Code of Conduct aims to ensure responsible behaviours in our value chains. Our scientific collaborations create mutually beneficial outcomes for JM and our partners. Our employee engagement survey helps us to focus on the areas that matter most to our people. Our community investments around the world support local projects through provision of cash and through volunteering. Pages 28 and 29 Pages 40 to 42 4 Pages 48 to 59 Pages 54 and 55 Page 24 1 2 6 21 Johnson Matthey / Annual Report and Accounts 2018 Strategic Report How we measure performance We have ten key performance indicators (KPIs) which we use to measure our financial and non-financial performance. Our KPIs measure progress against our strategy. Our performance against our KPIs is explained below. Group financial objectives Growth in sales excluding precious metals (sales) Monitoring sales growth at constant currency is a measure of the growth of the business. In many cases, variations in the value of the precious metals contained within our products are passed directly on to our customers. Therefore to measure the growth of the group, we use sales excluding the value of precious metals. Underlying operating profit margin Underlying operating profit margin is a measure of how we convert our sales into underlying operating profit and a measure of efficiency in our business. We aim to increase our operating margin year on year as we: improve our efficiency to take costs out, improve our effectiveness as we focus on higher value add products for our customers, and as we introduce new products through innovation to serve our customers’ changing needs. Underlying earnings per share Underlying earnings per share is the principal measure used to assess the overall profitability of the group. The following items are excluded from underlying earnings as they do not allow for a consistent comparison of performance between financial years: • Amortisation and impairment of intangible assets arising on acquisition of businesses (acquired intangibles). • Major impairment and restructuring charges. • Profit or loss on disposal of businesses. • Gain or loss on significant legal proceedings together with associated legal costs. • Tax on the above and major tax items arising from changes in legislation. Return on invested capital (ROIC) JM’s business model of applying world class science efficiently to solve customers’ complex problems generates high returns. We define ROIC as underlying operating profit divided by the monthly average capital employed, defined as equity plus net debt. ROIC for individual sectors is calculated using average monthly segmental net assets as the denominator. Performance in 2017/18 In 2017/18, sales grew by 8% to £3,846 million including a translational foreign exchange benefit of £33 million. Excluding this, sales grew by 7% (2016/17: 3%), with good growth in Clean Air, Efficient Natural Resources and Health partially offset by lower sales in New Markets. Pages 60 to 73 In 2017/18, underlying operating margin declined to 13.6% (2016/17: 14.3%). This was due in part to lower margin in Efficient Natural Resources, impacted by reduced licensing income year on year and where we invested in the business to improve its effectiveness and efficiency. Margin also declined in Health as we took actions, with associated costs, to optimise our manufacturing footprint. Pages 60 to 73 This year, underlying earnings per share decreased to 208.4 pence due to underlying operating profit growth of 2% offset by higher net finance charges and a higher underlying tax rate. A reconciliation from underlying profit for the year to profit for the year attributable to equity shareholders is given in note 4 on page 153. Page 153 3,018 3,164 3,177 3,578 3,846 15.5% 15.1% 14.2% 14.3% 13.6% 170.6 180.6 178.7 209.1 208.4 The group’s 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. Cost of capital Page 73 £ million % pence 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 % Target 24 22 20 18 16 14 12 10 8 6 2014 2015 2016 2017 2018 Average working capital (excluding precious metals) Average working capital days (as defined on page 191) is a measure of efficiency in the business with lower days driving higher returns and a healthier liquidity position for the group. We exclude precious metals as our precious metal working capital is a function of our customers’ choices and therefore not fully under our control. It can have a material effect on the group’s working capital days. 62 days Our average working capital days (excluding precious metal) improved by 7 days. This reflects our continued focus on, and disciplined management of, working capital across JM. Page 73 22 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Group non-financial objectives Science Gross research and development expenditure Johnson Matthey’s strategy delivers sustainable growth through applying science and technology to meet the global challenges and opportunities from clean air, improved health and efficient use of natural resources. To maintain our competitive advantage and enable future growth, we invest in research and development. £ million 2014 2015 2016 2017 2018 Performance in 2017/18 152 170 188 201 193 The group’s research and development expenditure decreased this year by 4% to £193 million, although our output was maintained, as we increased our focus and discipline in investing into areas of higher potential future growth. Pages 25 to 31 Customers Positive impact of JM’s products JM uses its science and technology expertise to create products that have a positive impact on the planet. We track progress towards our vision for a cleaner, healthier world by measuring the percentage of our sales that come from products that make a positive contribution to the UN’s sustainable development goals (UN SDGs). % sales from products contributing to UN SDGs 85.8% In 2017/18 the percentage of sales from products that positively contributed to the UN SDGs was 85.8%. Our sustainable business goal is to increase this to >90% by 2025. Pages 17, 35 and 202 5 We are developing a KPI relating to a common, groupwide customer satisfaction measure (see page 35). We aim to report this KPI next year. Operations Operational carbon footprint per unit of production output Our operational carbon footprint, reported in tonnes of carbon dioxide equivalent (CO2 eq), includes Scope 1 and Scope 2 emissions. We normalise our carbon emissions based on production output. The denominator is defined as ‘tonnes of manufactured product sold externally’ and only sold products manufactured on JM premises are included. A detailed definition of this KPI is provided on pages 201 and 202. CO2 eq emissions intensity 3.4 This year the group’s operational carbon footprint per unit of production output reduced from 3.8 to 3.4 tonnes CO2 equivalent per tonnes of output. This is due to concerted action across our operations as described on pages 39 and 40. Pages 39, 40, 47, 201 and 202 3 We are developing a KPI relating to the Overall Equipment Effectiveness (OEE) of our manufacturing operations. This measures the percentage of manufacturing time that is truly productive. We aim to report this KPI next year. 23 Johnson Matthey / Annual Report and Accounts 2018 Strategic Report People Health and safety Making sure our people go home in the same, or better, state than when they came to work is everyone’s responsibility in JM. That’s why we place huge emphasis on health and safety. We drive the right behaviours through our values and through health and safety programmes across the group. Rigorous health and safety systems apply across all facilities and we actively manage our safety performance through monitoring the incidence and causes of accidents that result in lost time. Lost time injury and illness rate (LTIIR) is defined as the number of lost workday cases per 200,000 hours worked in a rolling year. A detailed definition of this KPI is provided on page 201. 2014 2015 2016 2017 2018 Lost time injury and illness rate 0.63 0.45 0.37 0.48 0.48 The group’s LTIIR was unchanged this year at 0.48 although we continued to focus on improving behavioural safety across JM. We continue to build a world class health and safety culture. However, this year we saw our performance plateau. Actions have been taken and new measures put in place to ensure that we improve our performance. Pages 49 to 51: Our approach to health and safety 1 Employee engagement An engaged workforce is a key driver of performance. Our global yourSay survey, carried out every two years, looks at the key drivers of employee engagement. Further details are provided on pages 52 to 55. We use employee engagement as a measure of how committed and motivated our people are to give their best to Johnson Matthey. % 61% Our employee engagement score in November 2016 was 61%. This was our first ever survey and we will carry out our second in September 2018. Pages 52 to 57: Further details of what we’ve been doing to engage our people over the last year 2 Sustainable business goals Progress towards four of our six sustainable business goals is described in the above KPIs. Our progress towards the remaining two goals is as follows: Our responsible sourcing goal measures improvements in sustainable business practices in our supply chains. We track the percentage of Tier 1 strategic suppliers assessed and compliant with JM’s Supplier Code of Conduct. 2017/18 is our first year of measurement. In the year, 11% of Tier 1 strategic suppliers were assessed and of those 11%, 73% were compliant with the JM code. Our community engagement goal measures the cumulative number of volunteer days undertaken by JM’s employees. Our target is 50,000 days by 2025. In 2017/18, the first year of our goal, our employees undertook 678 volunteer days. 4 6 24 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O 25 Science World class science and technology is at our core. We have world class scientists and we use our world class expertise to solve complex problems for our customers, drive growth for JM and help make the world cleaner and healthier. In a world which is becoming increasingly challenging, our expertise in science and our ability to scale it up, is a competitive advantage. That competitive advantage enables us to build close collaborative relationships with current and future customers. Johnson Matthey / Annual Report and Accounts 2018 Strategic Report We apply our science and technology expertise in high margin, technology driven growth markets. We choose markets where the combination of our broad expertise and our customer focus gives us leadership. We then sustain our leadership positions through a virtuous circle of investment in research and development. Our science and technology is our source of competitive advantage We invest in it and in our talent. Our skill and knowledge are acknowledged across the academic and commercial scientific community and amongst our customers. We have nine core areas of world class scientific capability, developed over many years. Together they give us the ability to provide fundamental insights about materials, their design and then the control of their activity through chemical and functional manipulation. But it is not just about these scientific capabilities alone. Our competitive advantage is in combining knowledge of the fundamental science and technology, with commercial and scalable solutions, potentially customised for each and every customer. This combination allows us to outperform in our target markets and creates high barriers to entry. We focus on the complex and the difficult. And we don’t compete on price – we win based on our technology. Our scientific capabilities give us the opportunities to drive growth. World class science capabilities Cleverly applied Value for JM Characterisation and modelling Chemical synthesis Material design and engineering Provision of customised solutions Product formulation Process optimisation Surface chemistry and coatings Development of new and next generation products Solutions for customers Pgm chemistry and metallurgy Catalysis and advanced materials Electrochemistry Scale up of complex manufacturing 26 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O eLNO: solving complex problems for the automotive battery market Enabling people to breathe cleaner air is close to our heart and evident in many of our current markets and products. As alternative powertrains, such as battery powered vehicles, become more mainstream and governments legislate to support their adoption, our researchers are at the forefront of technological advances and development of materials – providing customers with the performance and consumers with the confidence required of battery powered vehicles. Adoption of battery powered vehicles will have a positive impact on cleaner air, and that’s important to us. Last September, we announced our investment in automotive battery materials and the new cathode material – eLNO™. We developed this material through a truly collaborative programme, from nine locations across the UK, Germany and North America, applying our knowledge of base metal chemistry, formulation and testing, modelling and electrochemistry across the materials supply chain. Our relationship with the automotive industry, and understanding their requirements for energy density, power, lifetime and security of supply for materials, have focused our effort on the key enablers for this technology. Our innovation delivers a step change in energy density that, in the end, improves both performance and cost to drive mass electric vehicle adoption across vehicle platforms. More than a materials manufacturer, we are committed to using our core competencies to understand electrode structure and applications testing to further drive up energy density of our cathode materials. Together, our knowledge of materials engineering, coatings science and electrochemistry span all aspects important to battery material performance. This deep appreciation of how the cathode material operates and the structure and function of the materials at an atomic scale means we can model and predict how changes to the material affect performance. Combined with applications testing we understand how our materials perform under different operating conditions which enables us to deliver the material’s performance, lifetime and safety specifications required by our customers. We use this expertise to optimise our materials for different automotive customers and platforms. Working with our teams on formulation, scale up, applications testing, and manufacturing means we can translate these insights into a deliverable product. In 2016, the battery market represented 50% of the global cobalt demand, compared to 36% of the global lithium demand. With the recent increase in cobalt prices, our ability to thrift cobalt, much like we've done in platinum group metals in autocatalysts for well over 40 years, is a key market differentiator for JM. 27 Johnson Matthey / Annual Report and Accounts 2018 Strategic Report Innovating to realise value Innovation is realising value from knowledge. We do this by identifying a customer need and understanding the value that can be delivered through applying our science. This could be a new technology in a new area or a next generation product developed through refining and optimising. We focus on solutions for cleaner air, improving people’s health and the most efficient use of our planet’s natural resources. Our strength comes from the interrelationship of our world class science capabilities and the value they deliver when applied to a solution to a customer’s complex, difficult problem. We do not innovate in isolation and it's our strength of understanding across the value chain that accelerates our progress. We work closely with universities around the world to supplement our knowledge. We also sponsor students through their PhDs which allows us to access a stream of talented young scientists and engineers at the forefront of scientific discovery. We are proud of our science and technology. Success comes from combining our core capabilities with smart manufacturing to develop new products and processes. This approach is important from initial R&D right through to customer support and collaboration. Our broad science capabilities enable us to design new materials. Our deep expertise in characterisation and modelling underpins everything. We use this capability to understand processes and chemistry at atomic level. Then, by combining it with our access to world class capabilities in computational modelling, we can predict how materials and catalysts will behave, deliver results faster and supply better performing, longer lasting, more cost effective products. Opening innovation with a new approach to collaboration We believe that collaboration and diversity are central to effective innovation. Bringing in new skills, fresh thinking and different perspectives is crucial. If you can combine and apply that breadth of knowledge and knowhow, you can create exponential value. Among the many industry verticals in which we operate, the agricultural sector is familiar to us. We bring our world leading catalytic science to the manufacture of fertilisers and other agrochemical intermediates. Now we are exploring ways to use our broader capabilities, from formulations and coatings to advanced manufacturing techniques, to help develop new opportunities and address critical market challenges in the agriculture market. There is no monopoly on great ideas. That's why, alongside the work we do within JM, we're building external partnerships with activities like our AgTech pilot programme with Cranfield University. Earlier this year, we sought applications from entrepreneurs, start-ups or businesses especially working in certain specific agricultural areas. Three companies were chosen and given an opportunity to develop their product or idea within an intense programme of collaboration and scientific and management support. Investing in the ares of highest potential growth Science lies at the heart of our company. We invested £193 million in R&D in 2017/18, including £18 million of capitalised R&D, which represents 5% of sales. Our spend was 4% lower than last year, although our output was maintained, as we invested with greater discipline and efficiency into areas of higher potential return. To ensure our R&D investment is accelerating revenue growth opportunities as effectively as possible, we apply a high level of rigour to manage and prioritise our R&D programmes. Delivery of our vision for a cleaner, healthier world requires an innovation strategy to prioritise and manage our technology investments. By looking at our strategic aims as an organisation, we can map the technologies, areas of expertise and investment we need. R&D employees Distribution of R&D expenditure Gross R&D expenditure Central Research 20% Central Research 16% Clean Air 41% New Markets 9% Health 13% £ million 201 193 188 170 152 Clean Air 41% 210 175 140 105 70 35 0 % 10 8 6 4 2 0 Efficient Natural Resources 22% Efficient Natural Resources 21% 2014 2015 2016 2017 2018 R&D expenditure / sales New Markets 11% Health 6% 28 The commercial and technical leadership teams work closely to ensure objectives are aligned. We apply active R&D portfolio management with stage gating processes and a cross cutting approach for discovering new innovations and customer solutions. This ensures we're creating new sources of growth through innovation and aligning our investments to drive higher returns. This requires a strong relationship between R&D and new business development to drive opportunity assessment in new technologies and new markets, in line with our group strategy. Our Chief Technology Officer ensures that we have the right expertise and the right oversight to investigate the opportunities in our businesses and deliver customer focused technology. The project portfolio is underpinned The research we undertake covers development of the next generation of products in close liaison with our customers, through to supporting the advancement of our underpinning capabilities and fundamental research to keep us at the forefront of our fields. Externally, we partner with other organisations in funded programmes supported by the UK, EU and USA, giving us access to a wider talent pool of exceptional scientists, and allowing us to explore new opportunities through collaboration whilst sharing risk. by a robust New Product Introduction (NPI) process, and is reviewed to ensure it will deliver our growth ambitions from the next generation of products, to step-out technology. Having this visibility of our R&D investments means we can make sure the balance of projects is right to meet our strategic growth plans. The majority of our 1,450 science and technology employees are based in our businesses, developing products and processes for our customers. They are supported with fundamental science from our corporate research facilities in the UK, USA and South Africa (as detailed on the map below). Together we collaborate to deliver world class science that our businesses can convert to customer solutions. t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Savannah, USA • Zeolite design and Billingham, UK • Manufacturing science manufacturing support centre • Analytical chemistry • Zeolite powder R&D Sonning, UK • Catalysts and materials • Advanced materials characterisation Pretoria, South Africa • Computational modelling • Materials design • Reactor engineering • Refining 29 Johnson Matthey / Annual Report and Accounts 2018 Strategic Report Applying our science to new areas Platinum group metal (pgm) chemistry is an area of deep and longstanding expertise for JM and we look for new areas where our experience can bring benefit. One such example is an escape hood used by first responders to protect them from carbon monoxide (CO) poisoning. The problem with conventional solutions was that the catalyst for removing the CO gas was deactivated by components in the carbon adsorbent used in the masks. 30 Through accessing our breadth of science capabilities and collaboration with our customer, Avon Protection, a novel pgm catalyst on a specially designed support was developed. Begun as a project funded by Anglo Platinum, our scientists screened a wide range of established and innovative materials for ambient temperature CO oxidation to find the best catalyst for use under these challenging conditions. Our analytical experts were called in to extensively characterise the catalyst to evaluate its behaviour under different conditions. This enabled our scientists to understand the interactions between the pgm and the support and then optimise the pgm concentration whilst maintaining activity for CO reduction, which led to reduce costs. For manufacture and scale up, our pgm and materials experts collaborated with their JM colleagues with expertise in process optimisation and powder forming to meet the customer’s requirements. The outcome was a route to scale up and manufacture established in line with customer specifications and expected customer demand. Using our catalysts, Avon Protection were able to develop the award winning Avon Protection NH15 Combo Escape Hood, a stable and lightweight hood which provides portable protection from chemical, biological, radiological and nuclear (CBRN) poisoning. In addition, and uniquely in such a small and lightweight device, it provides protection from CO poisoning. To date, JM has provided enough catalyst for 40,000 respiratory protection devices, providing reassurance to emergency personnel who find themselves in dangerous situations daily. Thanks to JM’s catalyst, these front-line people have at least 15 minutes of breathable air, providing time to get themselves to safety. Clever science is not all we do. At JM we develop technology solutions to complex problems which involve engineering and design of processes and reactors. Being able to do this alongside our knowledge of materials and reactions means we can gather the insight needed to make innovative changes. We applied this approach to the development of a new reactor for Fischer Tropsch technology to economically produce sustainable fuels from feedstock sources such as renewable biomass, municipal solid waste (MSW) and flared associated natural gas. In collaboration with BP we combined expertise in catalyst development, catalyst manufacture, plant design, process development, process design and modelling to develop an optimised Fischer Tropsch catalyst with a unique reaction enhancement device (which we call a CAN) inserted into a multi tubular fixed bed reactor. The reactor was designed to carefully manage heat transfer and pressure drop. The catalyst particle size was optimised to give excellent activity and selectivity without compromising the functionality of the reactor. This work took many years to come to fruition, but has resulted in a system that delivers three times the productivity of a conventional multi tubular fixed bed reactor. This reduces capital expenditure by half and reduces ongoing plant operating costs. This also makes the technology more attractive and economical from small scale suitable for MSW based projects, to world scale natural gas based projects. We are proud to have been double award winners with our partner BP, landing the Research Project Award and the Oil and Gas Award at the prestigious IChemE Awards in November 2017. We are now progressing to build commercial size units and to licence the technology from small to large units worldwide. Chemical reactors: innovation by design t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O 31 Johnson Matthey / Annual Report and Accounts 2018 Strategic Report Customers Collaboration and strong relationships with our customers are crucial in providing a high quality tailored service. Together, we put our inspiring science to work to enhance life. We work closely with them, applying our science and technology to develop solutions which enable them to bring their products to market faster, improve the performance of their products and reduce their environmental impact. This creates value for them; and it creates value for JM – through high margin products from which we generate strong returns. Our Commercial Excellence programme (page 35), launched in 2017/18, is a key enabler of our strategy. Through it we will deliver an enhanced experience all round for our customers and at the same time, create more value for JM. In serving our customers, we also contribute to making the world a cleaner, healthier place. Through our new sustainable business goal 5, we are quantifying the positive impact our products and services have and aim to double that between now and 2025. 32 Sustainable business goals Sustainable products 5 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Putting our inspiring science to work for our customers The markets we serve are directed by our science and are driven by our technology. As a result, we create leading technology positions, often in niche global sub-markets that form part of larger markets. The markets we serve aggregate into four main global economic segments, each crucial to the development of prosperity and wellbeing. They are: • • • Transport (principally automotive, with some marine and aerospace). Energy (fuels and electricity generation). Chemicals (including agrochemicals, food and beverage). • Healthcare (both pharmaceuticals and medical). Beyond these we also think about the critical raw materials and commodities used in these spaces. Segment trends and dynamics Transport The automotive industry continues to grow. Light duty vehicle (LDV) production reached almost 95 million units in 2017/181 and is expected to pass 100 million units in the early 2020s (~2.4% compound annual growth (CAGR))1. Asia is fuelling this expansion, with Europe and America growing at a more subdued pace. Heavy duty vehicle (HDV) production was 3.3 million units in 2017/181. This remains a cyclical market with growth in Asia underpinning current expansion. Whilst vehicle production is a growth driver for JM, next generation, tighter emission control legislation in the European, North American and Asian markets is an additional, more significant opportunity for us. Beyond current evolution pathways, the emergence of new powertrain technologies, innovative vehicle ownership and access models, along with a rising degree of connectedness and automation, is transforming the mobility landscape. Analysts expect a move away from pure internal combustion engine (ICE) vehicles over time, with hybrid, battery electric and / or fuel cell vehicles becoming more common. This transition is not expected to be quick, with most market evolution studies showing a gradual uptake of alternative powertrains in LDVs through the 2020s. The transition for HDVs is expected to be more gradual. Alternative powertrains are also starting to appear in other forms of transport (e.g. trains) and industrial applications (e.g. fork-lift trucks). For JM, this means expanding our offering, applying our science to develop solutions to enable and deal with the expected uptick in demand and a potential shift into new applications. Energy Fossil fuels remain the dominant global energy source today (~85% of primary energy2), but the rise of renewables, the drive for energy efficiency, along with the possibility of cost effective energy storage is changing that dynamic. Most analysts expect natural gas to become the fastest growing fossil fuel (~1.5% CAGR for piped gas and ~3.0% CAGR for liquefied natural gas2), with the share of coal and oil in the world’s energy mix falling. This implies growth in renewables and other low carbon fuels (including nuclear). For JM, this evolution touches our applications in the stationary energy space across several other products and services. We remain focused on this market as it will also potentially inform us about changes in the interconnected transport and chemicals markets. Chemicals Oil demand is predicted to grow by around 0.7% between 2015 and 20352, with production rising from ~96 million barrels per day (mmbbls/d) to ~106mmbbls/d in 20352. Growth in natural gas is expected to be stronger, rising at around 1.6%2. This would take gas demand from 336 billion cubic feet per day (Bcf/d) in 2015 to around 462 Bcf/d in 20352. Downstream products have benefited from these low input prices, but those advantages are beginning to pass and the perception about overcapacity / low utilisation rates remain. Petrochemical end markets are expected to grow over the coming years with compound annual growth rates of between 2% (fertilisers) and 7% (engineered polymers)3. New capacity additions in the US (gas price advantage), Middle East and Asia are expected over the coming years. Associated pricing changes linked to demand shifts may also impact the chemicals markets in which we play (e.g. methanol, ammonia). These evolutions impact the profitable pathways and catalytic transformation routes that we try to serve. As a business, we will continue to target the highest growth and most profitable segments to ensure that critical raw materials are used and transformed in the most efficient manner possible. Sources 1 LMC Automotive. 2 BP Energy Outlook, 2018 (www.bp.com/en/global/corporate/energy-economics/energy-outlook.html). 3 IHS Chemicals. 33 Johnson Matthey / Annual Report and Accounts 2018 Strategic Report Healthcare The global population continues to rise with people living to an older age. To service this trend, a range of interventions are being requested. Additional medications are required to keep people healthy for longer, additional pressure is put on scarce food and water resources, more devices are being used to improve quality of life. However, the pressure to deliver these interventions at a low cost is growing. The global pharmaceuticals market is expected to grow at 6% per annum, from $650 billion today to more than $820 billion by 20204 and with growth in that market outstripping global GDP growth (of ~3% per annum over the period5). The largest markets remain the US and Europe, which together account for about two thirds of the global market. The market for generic pharmaceuticals accounts for about one third of the total pharma market today and is forecast to experience equivalent or higher growth rates than the pharma industry overall (ranging from 5 to 9% between forecasts4). JM will continue to focus on how we can serve this growing market through our differentiated science and technology, helping to deliver the products that our growing population requires. Critical raw materials Within the evolving market dynamics described above, commodity prices will play an important role. We already see the commodity cycle starting to turn with higher metal prices seen during the 2017 calendar year. Oil prices are starting to rise (moving beyond $70 per barrel for the first time since late 2014), while gas prices, especially in North America have remained subdued at around $3/mmbtu (US Henry Hub). Beyond these traditional commodities we are also seeing upward pressure on the key inputs to battery cathode materials (e.g. lithium in 2017, cobalt and nickel more recently). These prices and their movements will impact decisions about how our key end markets evolve and which technologies / pathways come to dominate over time. JM will continue to focus on the most efficient use and transformation of critical raw materials and we will position our business (including our refining expertise) to respond and react to these trends. Sources 4 EvaluatePharma. 5 BP Energy Outlook, 2018 (www.bp.com/en/global/corporate/energy-economics/energy-outlook.html). The breadth of JM is a source of strength The four economic segments we serve are undergoing major change; change that is driven and enabled by technology. We apply our scientific skills, via our sectors, into markets within these segments to create new products and services that improve lives, improve efficiency and reduce environmental impact. Glass Automotive Energy generation and storage Oil and gas Food and beverage Chemicals Agrochem- icals and fertilisers Other industrial Pharmaceutical and medical Transport Energy Chemicals Healthcare Clean Air Health New Markets (Battery Materials) New Markets Efficient Natural Resources Major markets served by JM Global economic sectors JM’s sectors • • Our Clean Air Sector abates emissions from the transport, energy and chemicals segments. Our Efficient Natural Resources Sector has businesses supplying products and processes that conserve scarce resources, enabling the manufacture of chemicals, fertilisers, fuels and glass using less energy and fewer raw materials. It also has our platinum group metal recycling business. • • Our Health Sector draws on core capabilities in complex chemistry, manufacturing and scale up to create solutions for niche areas within the pharmaceutical industry. Our New Markets Sector applies our science into emerging opportunities across all segments. This breadth is a source of strength for JM. The markets and segments we serve are amongst the most important in the world economy, are universal and supported by strong macro drivers. Maintaining this broad market exposure and managing the balance of our business across these segments of the world economy is part of our strategy. 34 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O The four segments are complementary. Many of the customers we serve operate in two adjacent segments: for example, fuel companies also have chemical operations; chemical companies manufacture pharmaceutical ingredients. We bring market, technical and regulatory insights from each segment and apply it to the adjacent segments. These insights drive business development. What we sell and how we work with our customers Across all our markets, we have two fundamental customer offerings. 1. Functional components that our customers incorporate into the products they manufacture. These components are fundamental to the performance of our customer’s product. Examples are: electrode tips for cardiac oblation, emission control catalysts for engines, active pharmaceutical ingredients for pain treatment, protective coatings for automotive glass, cathode materials for batteries. For these types of product, most of what we sell we have developed and formulated specifically for an individual customer’s application, in collaboration with our customer. 2. Process technologies that our customers use to enhance the efficiency, economics and sustainability of their manufacturing processes. In these cases, our technology is used to make the customer’s product rather than being part of the finished product. We develop manufacturing processes, including the catalysts that enable them, both for customer-proprietary products (e.g. pharmaceutical actives) and for chemicals and fuels (e.g. methanol, ethylene glycol). For processes we develop ourselves, we either licence to our customers or operate them ourselves in our own facilities. When we develop processes for customer-proprietary products we work under contract development agreements. Our Pgm Refining and Recycling business uses a JM-developed and operated process. We provide a service for our customers (including other JM businesses) where we transform their materials to produce high value product. Across these offerings, our customers, in the most part, value the performance of our technology in their applications. The performance of our products delivers different advantages to our customers by: • • • • Translating directly into the performance of their product. Enhancing the reliability of their production. Increasing their efficiency. Enabling them to reduce the overall cost of their product. Maximising this performance advantage through codevelopment is the basis of the way we work with our customers. This collaborative development requires strong, long term relationships based on mutual commitment, risk sharing and trust. In addition to performance, customers also come to JM for additional sources of value: speed and efficiency in development, reliability, responsiveness in problem solving, security and flexibility. We work with our customers across a range of markets, understanding the needs of each sector and customer. This approach gives us a business that is balanced and robust. Through serving broad markets, the opportunities to apply our science and technology are greater and our contribution to a cleaner, healthier world is increased. Driving commercial excellence We have distinctive scientific and technical capabilities which we translate into solutions for our customers. It is important that, together with providing them high quality products and service, we capture our fair share of the value we create for customers. Our Commercial Excellence programme is focused on doing just that. It is a key enabler of our strategy and was launched in 2017/18. The overall objective of the programme is to deliver value by building the commercial capability across JM; enhancing our ability to make value based data driven decisions; measuring and responding to customer satisfaction; improving our sales and marketing processes and leveraging digital technology where appropriate. The programme has made good early progress. We are investing in growing our people and our commercial function. We will be launching our commercial academy this coming year to support the development of our commercial people across JM. We are also improving the consistency of our data analytics to inform our commercial decisions. We have started work to establish a consistent measure of customer satisfaction across JM so that we can enhance the experience our customers have when buying from us. The programme is on track to deliver benefits over the coming year. Measuring our impact beyond customer value The value we create for our customers drives growth in our business and returns for our shareholders. But our products and services have a much broader positive impact, making our air cleaner, improving people’s health and conserving the world’s natural resources. We want that positive contribution to grow. As part of our new sustainable business framework we have set a goal to double the positive contribution of our products by 2025. This, our sustainable business goal 5, has two streams by which we will track our progress. The first shows our global impact by measuring the absolute and percentage of JM’s sales that have a direct contribution to the UN Sustainable Development Goals. The percentage measure is a key performance indicator for the group as detailed on page 23. The second relates to JM’s vision for a cleaner, healthier world. Our goal is to at least double: 1. 2. 3. The tonnes of pollutants (oxides of nitrogen, carbon monoxide, hydrocarbons, particulate matter) removed by our products, thereby making the world cleaner. The number of lives impacted by our pharmaceutical products, thereby making the world healthier. The quantity of greenhouse gases removed or reduced (CO2 equivalent) by our products, thereby taking climate action. Our baseline measures are outlined on page 17. We are excited to introduce our sustainable business goal 5. It will be a positive driver for our business performance and, crucially, provides a tangible measure of progress towards our vision for a cleaner, healthier world. 35 Johnson Matthey / Annual Report and Accounts 2018 Strategic Report Long term view Technologies for clean transportation – JM brings insight as the powertrain evolves Automotive powertrain technology has seen many developments in the 50 years that Johnson Matthey has been involved in, shaped largely by societal requirements for cleaner vehicles. The coming decades will see even bigger changes. JM is in a uniquely powerful position to understand these changes and to grow our business further by providing new technologies to enable them. Our insights into these new demands are broad and deep. We understand the big trends in regulations, in driver expectations, in the strategies of vehicle manufacturers and in the capabilities of the new technologies available to the manufacturers. These trends determine the demand for our technologies. 36 Understanding our customers and their value chains Johnson Matthey brings deep insight into how these market trends translate into performance requirements for all our automotive powertrain-enabling products and the technical support our customers need. We work from market needs, through system performance requirements and into the design of materials at the atomic scale. We can then scale our science from the lab, through vehicle testing, to production processes for millions of engines a year – which itself requires intimate understanding of our customers’ preferences and their ways of working. A key JM strength is our relationship with vehicle manufacturers, built on 50 years of collaboration at all stages of technology development from design, through application, scale up, testing and into mass production. We understand how they work, their time cycles and their technology needs. Our relationships up the supply chain are equally important. Securing and managing reliable, ethical supplies of metals and other raw materials will be just as important for batteries as it is for our emission control catalyst and fuel cell businesses. The automotive supply chain is highly integrated, but is evolving, with more emphasis on lifetime stewardship and circular supply chains. JM has the experience and structures for this way of working from our precious metal businesses, including recycling emission control catalysts. As the supply chain evolves, we stay aware of who is making the critical decisions and on what basis. Decisions on required performance standards, technology selection, supplier selection and system optimisation are made between different functions within companies and between companies and different stages in the supply chain. We maintain a broad set of contacts in order to participate fully in this decision making process. An ‘all options’ approach to technology As we plan for success in future powertrain markets, the experience that JM applies to technology road mapping is very broad. We supply all the transport applications currently using internal combustion engines, everything from scooters to the largest container ships. Thus, we know the performance demands and design cycles for the full range of land and water based transport. We combine this with our practical experience of all the options for clean energy storage and powertrains, across combustion engines, batteries and fuel cells. We believe that over time, everything will become electrified but in different ways, at different speeds and to different degrees. Internal combustion engines will remain important in all transport sectors for decades, increasingly in hybrid systems, and fuel cells will come in too – particularly for heavy and long haul vehicles. The world will need all options and all options represent opportunities for JM. This ‘all options’ view shapes our strategic planning process. It determines the portfolio of technologies and businesses that we develop. It determines the way that we use our understanding of the various alternative technologies to develop and market the technologies. It determines the flexibility we maintain in resource planning to place bets on the most promising technologies and retain the options we need to maintain our strong position in the market regardless of the shape of future demand. t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Following policy and regulation In looking at where JM’s scientific and manufacturing capabilities can create most value as powertrain technologies evolve, a vital perspective for us is regulations. Standards are set for new vehicles and limits on pollutant emissions have been the primary driver for JM. They will be in the future, too, but other regulatory and policy areas are becoming equally important. There are four aspects of policy that we follow and interpret: 1. Although our catalyst technology has enabled a 100-fold reduction in emissions from vehicles since the 1970s, many cities around the world still suffer from poor air quality caused in part by vehicle exhaust gases. Therefore, new vehicle emissions regulations will continue to tighten and will be a significant driver of demand for our products. The most important trend for the future is not the further reduction of the headline emissions limits, although this will continue, but in the shift to testing and compliance regimes that better reflect emissions in ‘real world’ use. These new tests require higher system performance across a wider range of conditions and as a result, demand more JM technology. In recent years, regulations on the efficiency of new vehicles, as measured by CO2 emissions, have become an equally important factor in powertrain design. More efficient engines demand more efficient emissions control – for example, exhaust gas temperatures are lower on more fuel efficient vehicles, so the catalysts need to work at these lower temperatures. Hybrid powertrains place new demands on the after-treatment system. Electric vehicle investment and introduction is being driven by fleet CO2 limits, creating new demand for battery materials and fuel cells. 2. 3. As well as the regulations on new vehicles, the market is shaped by incentives for drivers to buy low or zero emission vehicles. These may be financial, in the form of purchase grants or preferential tax rates. In some countries, drivers of low emission vehicles are granted perks such as access to bus lanes. These incentives shape demand in local markets and can be important in the early adoption of new technologies. 4. For the future, we see cities as increasingly important in driving and shaping demand for clean vehicles. In most parts of the world, city authorities are responsible for ensuring air quality. To meet legal requirements and the expectations of their citizens, they are increasingly offering incentives for cleaner vehicles and applying penalties or even bans to dirtier ones. We’ve been working with cities for decades to improve their air quality, retrofitting emissions control to buses and supporting Low Emission Zones. Knowing where the greatest air quality problems are, where the political will to solve them is strongest and what the practical technologies are to address the problems efficiently, enables JM to see where the next market demand will be. Total cost of ownership is key We assess the regulatory landscape but we are careful not to lose sight of what technology can be practically and profitably incorporated in a vehicle and what the people who buy the vehicles most value. The market is constrained by two simple and related principles: people can’t buy it if the manufacturers aren’t offering it and manufacturers can’t sell it if people don’t want it. Consequently, we believe that the total cost of ownership will continue to be the primary criterion in vehicle purchases. As such, we assess the effect of each new technology on the cost of developing, manufacturing, fuelling and maintaining each class of vehicle. When it comes to zero emission vehicles, we consider a third constraint: people won’t buy it if they can’t recharge or refuel it. As such, we are monitoring and participating in projects to develop infrastructure for charging battery electric vehicles and for refuelling fuel cell electric vehicles. Seeing the whole system, from well to wheel Our market view on transport trends is not confined to vehicle technology. JM has fuels related businesses and technologies too. These have an important part to play in reducing emissions from transport and, at the same time, give a perspective on the environmental impact of transport that greatly strengthens the view we have on vehicle technology. JM has fuel processing expertise and our process catalyst technology is important for making the hydrogen that removes sulphur from fuel. By combining the views we gain from the fuels value chain with our vehicles knowledge, we understand the full impact – environmental, economic, consumer – of all the potential technical solutions. JM has technology for the manufacture of synthetic fuels, bio fuels, gaseous fuels and, particularly importantly, hydrogen. Uniquely, we have technology for all the major manufacturing paths for hydrogen. Being able to see the whole system, ‘well to wheel’, we can assess costs and trade-offs and we can see how these translate into the potential demand for our technologies. Future mobility models Finally, we make sure that we pay attention to the way that vehicles will be used in the future because this will affect the way they are bought and the way they are designed. Cars bought to be used in fleets of shared vehicles may be designed with the same considerations that now apply to commercial vehicles – cost per mile, durability, availability / up-time. It is important that we understand which aspects of our very successful heavy duty business we will need to apply to light duty. Autonomy will be an enabler of shared mobility and will also lead to a change in drive cycles and vehicle design, so autonomous vehicles will have different power requirements. Connectivity, as well as being an enabler of vehicle autonomy, provides new opportunities for monitoring and regulating vehicles and their emissions in use. In turn, this is likely to promote the adoption of more low emission technologies. Our automotive facing businesses have been designed from inception to anticipate and respond to change. Change brings continuous demand for new technology, and it is in the development and application of new technology that JM creates value. We cannot accurately predict the rate of growth in electric drivetrains but we foresee a period of fundamental transformation in the automotive market. It brings opportunities for us to advance our business and our vision for a cleaner, healthier world. And JM is embracing it, knowing that we are uniquely well placed to understand and deliver the technologies the market will require. 37 Johnson Matthey / Annual Report and Accounts 2018 Strategic Report Operations Our vision for a cleaner, healthier world demands us to operate our business responsibly and with a relentless focus on efficiency and excellence. This cuts across everything we do: from common systems and core processes to the way we manage and drive the environmental performance of our assets. Sustainable business goals Low carbon operations Responsible sourcing 3 4 38 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Driving responsible and effective operations As a global group, we seek to maximise synergies across our businesses so we put in place standard processes and ways of working where it makes sense for us to do so. Our focus is end-to-end operational efficiency; it’s not cost-cutting and it’s not a project. Through this we are driving sustained improvements across every aspect of how we run our business, and therefore the benefits are broader than cost. This approach has two main themes. Firstly, we’re simplifying and automating common processes. It doesn’t deliver monetary savings per se, but it frees up our people to target them against our biggest business opportunities. Secondly, we are ensuring common standards and ways of working across JM. This will improve our performance by accelerating the best of JM around the group rapidly. Simplifying and automating This year we have continued to invest in upgrading our core IT systems to reduce complexity across the group and make us more agile and responsive to our customers. We are introducing a global business solution to standardise and simplify business processes, data and systems across JM. The single groupwide platform supports all our global operations, giving us a full view of all our businesses. Implementation is on track and we will start our roll out during 2018/19. We expect to be complete by end 2021/22. Common standards and ways of working Group led excellence programmes are in place to target specific areas where we see an opportunity to rapidly make efficiency gains by ensuring common standards and ways of working across JM. A group led approach enables us to deploy best practice quickly and effectively across our operations. Manufacturing Excellence, which has been in place since 2012, encourages a continuous improvement culture to enhance the efficiency and long term profitability of our manufacturing operations. Progress is measured against ten criteria. The highest performing sites can work towards Silver, Gold or Platinum levels of status. Since 2012, over £100 million in savings have been delivered collectively by sites that have achieved those levels. Procurement is a key global activity and by managing it with a strategic and category led approach, significant savings can be achieved. Professionalising procurement within JM not only reduces cost, but it also means that we manage our suppliers better, which has many additional benefits, including reducing supply chain risk. We purchase state of the art equipment which meets the latest environmental, health and safety standards. We have activated a Procurement Excellence programme with the goal of saving more than £60 million over the next three years. Our annual purchases, excluding precious metal and substrate, are about £1.5 billion. These purchases are made across 118 sites, historically with each site accountable, for the most part, for its own purchases. This has, in the past, limited our ability to consolidate our understanding of purchases across the group. Over the last year we have begun to move to a global procurement strategy and have started to capture this data on a consistent basis to fully understand where the procurement opportunity lies. We have begun to execute against this opportunity and have made excellent early progress in bringing together our existing procurement community and in building new capability to ensure that we capture it in full. We will continue to roll out our global procurement function during 2018/19 to realise savings and enhance our supply chain performance. Responsible operations Our technology is used by customers every day to create products that have a direct benefit on the environment, preventing millions of tonnes of pollutants from entering the atmosphere. We also have a responsibility to ensure the way we make these technologies is responsible and environmentally conscious too. In the course of our now completed ten-year strategy, Sustainability 2017, we halved our operational carbon footprint and our use of energy and water per unit of sales. These efforts, combined with those in our Manufacturing Excellence programme, delivered bottom line savings of £142 million. But now we want to go further. Building on the impressive achievements of Sustainability 2017, we have set ourselves more stringent targets to 2025 and are incorporating a stronger external focus. In developing our six goals for sustainable business to 2025, we defined two goals that are linked to our operations, both at group and site level. One is our goal to reduce our greenhouse gas emissions by 25% per unit of production output (goal 3), an ambition that forms part of our approach to low carbon operations. The second is to improve sustainable business practices in our supply chains (goal 4). Three of our four other goals – covering health and safety (goal 1), employee engagement (goal 2) and volunteering in the community (goal 6) – are explained in the People section of this report on pages 48 to 59. Goal 5, which aims to increase the positive contribution of our products to a cleaner, healthier world, is explained in the Customers section of this report on page 35. 3 Climate change action through reducing greenhouse gas emissions We have set ourselves a new carbon intensity goal in which we aim to reduce our greenhouse gas (GHG) emissions per unit of production output by 25% (sustainable business goal 3). Monitoring our emissions as a function of production output, rather than sales, will allow us to capture any operational efficiency improvements more authentically. The new carbon intensity goal also reflects the type that companies are setting in order to qualify as a Science Based Target using the Sectoral Decarbonisation Approach. 39 Johnson Matthey / Annual Report and Accounts 2018 Strategic Report Our ambitious target was based on an assessment of potential installations and energy procurement opportunities across our sites and a consideration of the targets being set by peer companies. We are including Scope 1 and 2 (direct and indirect) emissions in our goal, which covers our entire use of fossil fuels, electricity from all sources and emissions of all major GHGs. To improve our data collection and help drive improvements, we have installed a groupwide environmental data reporting tool to our sustainability management platform, Enablon. The tool was operational from 1st April 2018 and enables us to increase the frequency of our internal reporting. In recent years, we have increased our use of renewable energy on our sites. For example, at our pgm refinery and chemicals plant at West Deptford, New Jersey, USA, we source 17% of our electricity from an adjacent photovoltaic plant, saving 861 tonnes of GHG emissions in 2017/18. Also in the US, all our sites in the Philadelphia region will be purchasing zero carbon electricity from grid suppliers from April 2018; this is expected to reduce the group’s carbon footprint by 7% over the next year. And five of our UK sites (Royston, Brimsdown, Sonning, Swindon and Edinburgh) have been purchasing renewable electricity (wind power) from the National Grid since April 2016, making CO2 equivalent emissions savings of over 40,000 tonnes in 2017/18. This has been achieved through an agreement with Ørsted, who supply Renewable Energy Guarantee of Origin (REGO) certified wind power from the West of Duddon Sands Offshore Wind Farm near Blackpool and the London Array Offshore Windfarm in the River Thames estuary. In Skopje, Macedonia, our site installed a new waste water treatment plant in 2017. The factory first opened in November 2013 and had been growing. Consequently, the previous waste water treatment plant was unable to meet the demands of the site in terms of quantity and type of waste water handled – it could only treat sanitary water. This left the site having to send over 300 m3 of effluent to neighbouring Serbia every month – a distance of 450 km. The Skopje site worked with waste water specialist EnviroChemie to create a treatment facility specific to the site’s needs. In the first year of operation (July 2017 to March 2018), the new plant has achieved 162 tonnes of CO2 savings and cost savings of over €900,000. 40 Other examples of our work to reduce energy use and emissions include our platinum group metal fabricated products plant in Royston, UK, where we have made a 655 MWh reduction in energy use. This was achieved through a comprehensive package of measures including installing solar photovoltaic panels, replacing a furnace and upgrading the lighting and pump scheduling. We are also making good use of solar energy at five sites, while at our Royston, UK site we are linking solar panels to our air conditioning systems to reduce energy consumption. One of our sites has a wind turbine and we have also refurbished office buildings increasing insulation, installing LED lighting and replacing the windows to improve working conditions whilst saving energy. Page 45: More on our greenhouse gas performance Understanding potential impacts of climate change on our business We disclose our environment, social and governance (ESG) performance through the CDP climate change programme, which looks at risks and opportunities of climate from the world’s largest companies on behalf of institutional investors. matthey.com/cpd-investor We also participate in benchmarking studies to deepen our knowledge and compare our progress against our peers. A changing global climate brings with it a number of risks and opportunities for Johnson Matthey, which we continually consider and review annually as part of our CDP disclosure. The most significant of these continue to be environmental legislation and water availability. Johnson Matthey is also a signatory of L’Appel de Paris (the Paris Pledge for Action), committing us to play our part in delivering the agreement’s ambition to limit global temperature rise to 2°C. Our sustainable business goal 3 supports this. Water risk Water is an essential resource. The World Resource Institute (WRI) reported in June 2016 that in the industrialised world, fresh water is becoming scarcer due to increased demand and higher pollution levels. Availability is often transient, dependent on changing weather patterns. A reliable supply of fresh water is required by all our manufacturing sites and, often in considerably greater quantities, by our strategic suppliers. To examine our exposure, we periodically undertake water stress surveys of our business. We also report our principal water risk publicly through the annual CDP Water survey. matthey.com/cdp-water In 2016/17 we conducted a survey using the World Business Council for Sustainable Development (WBCSD) Global Water Tool™ (version 1.3). Of the 66 principal sites surveyed, 15 were identified as being in regions of extreme water stress. Our water usage in most of these locations is very low. However, there are four where we are close to using the locally available freshwater supply per capita: Taloja, India; Yantai, China; New Mexico, USA; Brimsdown, UK. We are using the data from the survey to prioritise water conservation projects for the sites that are at the greatest risk of an interruption to supply. Our facility in Taloja, India was assessed by the WBCSD Water Tool survey to be our highest water stressed manufacturing plant. To meet the ever increasing demands of the local waste water treatment facility that treats all waste water on the industrial park in which our facility is located, we are in the early stages of installing a water treatment / recycling plant with the aim of making the plant ‘zero liquid discharge’ (ZLD). Our largest risk to water is in our supply chain, where we are exposed to industries that are significant water users, such as mining and agriculture. The next step is to gather the exact locations of our strategic suppliers’ facilities and evaluate them with the WBCSD tool. 4 Responsible sourcing The second part of our operational sustainable business goals concerns responsible sourcing. Under goal 4, we aim to improve sustainable business practices in our supply chains. Through collaboration, we will ensure full compliance with our minimum standards from strategic Tier 1 suppliers. This due diligence is not new to us but it is the first time we have framed it as a formal sustainability goal, with clear measures to show our progress. Our goal is to achieve compliance among 100% of our Tier 1 strategic suppliers by 2025. t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Where we source strategic raw materials We procure goods and services globally and our supply chains are multi-tiered. Sourcing of strategic materials is a principal risk (see page 79) and monitoring and understanding the risk is challenging but essential. Some of our strategic raw materials are available from only a limited number of countries. The countries we rely on for these materials are highlighted in the map below. Precious metals Narcotic raw materials / agricultural feedstocks Chemical intermediates Base metals and compounds Zeolites Rare earth metals Ceramic supports and substrates Several factors have led us to select responsible sourcing as a goal. Regulation of supply chains is increasing, for example in the areas of conflict minerals and modern slavery. And we are aware that some of our suppliers are located in high risk countries. We launched our Supplier Code of Conduct in September 2017; it is available on our website in English, German, Japanese, Polish and Mandarin. We will report annually on the numbers of strategic Tier 1 suppliers assessed and of those, how many meet our responsible supplier compliance criteria. We have put in place a Supplier Sustainable Development Programme (SSDP). This business tool enables us to classify risk in our suppliers, determine what level of due diligence is required, identify corrective actions and follow up on progress. We will track the number of suppliers that have signed up to the code and the number assessed during the last three years. In 2017/18, 97 supplier sustainability assessments were undertaken across our sectors. These comprised formal on-site audits, desktop assessments and supplier self-assessments. These assessments represent approximately 30% of JM’s direct materials spend with suppliers. The table below represents the responses from JM’s sectors. We have not identified any incidences of child labour or forced labour in our value chain. In 2017/18, 26 strategic Tier 1 supplier assessments were undertaken to check compliance against the JM Supplier Code of Conduct. This represents approximately 11% of suppliers classified in this way. Of those assessed, 73% were in compliance with the expectations of JM’s code. Modern slavery Research from the Walk Free Foundation shows that over 40 million people worldwide are trapped in some form of modern slavery, including forced labour. This is an important social issue and JM is proactively taking steps to ensure high ethical standards throughout our value chain, including through our sustainable business goal 4 on responsible sourcing. Number of new Total number of Sustainable business Number of suppliers non-conformances non-conformances topic of concern assessed for this concern identified in 2017/18 open at 31st March 2018 Child labour 97 – – Forced labour 97 – – Wages and working hours 97 3 3 Discrimination 97 – – Freedom of association 82 – – Health and safety 97 45 25 Environmental 82 5 2 Other – anti-bribery and corruption, supply chain standards 35 5 2 We support the principles set out in the UN Universal Declaration of Human Rights and the International Labour Organisation Core Conventions, including the conventions on child labour, forced labour, non-discrimination, freedom of association and collective bargaining. We also support the principles endorsed under the UN Global Compact and the UN Guiding Principles on Business and Human Rights (the ‘Ruggie’ Principles). We are working to embed them throughout our operations and whenever we enter into business in a new territory, make an acquisition or enter a joint venture. There were no human rights grievance reports made against Johnson Matthey during the year. The UK Modern Slavery Act 2015 requires UK listed companies to make an annual statement describing the steps they have taken during the year to ensure that slavery and human trafficking are not taking place, either in their businesses or their supply chains. Our annual statement is posted on our website and details the steps we are taking. They include our policies and codes (including our code of ethics and confidential ‘speak up’ line), details of our supply chain governance team and the Supplier Sustainable Development Programme. In order to improve standards in our supply chains, in 2017/18, we have undertaken a risk mapping exercise and identified suppliers where we need to focus our attention. matthey.com/modern-slavery 41 Johnson Matthey / Annual Report and Accounts 2018 Strategic Report The criteria considered in the assessment included industries that are considered high risk, country corruption risk and country modern slavery risk. By undertaking this due diligence, we can understand and address potential impacts on human rights and ensure that there is no enslaved labour within our supply chains. A number of voluntary responsible supply chain schemes for cobalt are springing up but they are not yet harmonised or universally applied; we are currently evaluating participating actively in the Responsible Cobalt Initiative. matthey.com/conflict-minerals Conflict minerals The pgm supply chain The term ‘conflict minerals’ refers to tin, tungsten, tantalum and gold which originated from the Democratic Republic of Congo (DRC) and surrounding countries, in particular from areas of military conflict where most mining is artisanal and linked to serious human rights abuses. We have established a process for due diligence of all conflict minerals based on the Organisation for Economic Co-operation and Development (OECD) Guidelines which includes keeping records that enable us to track the suppliers of all the raw materials we use and identify which smelter the conflict minerals came from. We are working towards being compliant with the new European Union Conflict mineral regulation, which was enacted in July 2017, ahead of the January 2021 deadline. Of the smelters identified throughout all tiers of our supply chain, 89% are listed as conformant with the Responsible Minerals Assurance Process (RMAP) assessment protocols on the RMI (Responsible Minerals Initiative) database and we expect this to increase as more refiners and smelters join the programme and become RMAP-conformant. We use our in-house database to respond to customer requests for information on conflict minerals in our products and to provide them with a tailored answer to any query they have. This year we have responded to around 70 customer requests for information. We are also extending our minerals supply chain due diligence activity to include cobalt. Cobalt is used in a range of applications from battery technology, industrial catalyst to health care. At present the Democratic Republic of the Congo (DRC) holds about 50% of the global reserves of cobalt. Although there are some mining companies which are operating ethically in the country, there is a significant amount of illegal artisanal mining in uncontrolled conditions leading to a number of human rights concerns. 42 One example where we are taking a proactive approach is in the platinum group metal (pgm) supply chain. We have worked closely with some of our automotive customers to address concerns that they raised relating to the pgm supply chain in South Africa. A collaborative visit facilitated by JM, resulted in direct dialogue between the pgm mining companies, JM and these key customers. This allowed our customers to see and hear first hand the challenges of operating within that industry and in the complex South African economic, social and political context. A clear action plan has been agreed. In addition, we have worked with peer pgm fabricator companies to develop a single consistent due diligence approach to be taken by all when assessing pgm supply from South Africa. This fabricator working group, liaising through the International Platinum Group Metals Association (IPA), is establishing a systemic ‘one mine, one audit’ approach from late 2018. This will ensure supply chain partners are assessed and audited in a more consistent, efficient and effective manner. Ultimately, this will lead to improvements in standards of business conduct throughout the value chain. Our business is highly diverse, both in the range of our manufactured products and the markets we serve. Our supply chains are correspondingly complex and we are aware that we still have a significant amount of work to do in improving sustainable business practices in those supply chains. Our supply chain governance team, which is integrated into our Procurement Excellence programme, is driving this forward. Product lifecycle management The products we sell to our customers often form an important part of the end product supplied to the user. For example, we supply catalytic coated substrate as a component for engine emission control systems for car manufacturers. The catalyst is incorporated into the catalytic converter in the exhaust system of a car which is bought by the end user who drives it. We do not manufacture the car, but we are concerned with the whole life of the catalyst until the end of its life, and beyond, e.g. to recovery of components for subsequent reuse. This ‘whole life’ responsibility is what we call product lifecycle management, also known as product stewardship. We set ourselves high standards: our customers want to see evidence that we understand any hazards inherent in our products and that, through understanding their uses, we can, in turn, help them manage any consequent risks. Equally, our external stakeholders want assurance that the potential impacts – on the environment, our employees and downstream users – are well managed. Some stakeholders are starting to demand that chemical companies like ourselves move towards safer chemistries. Internally, our product lifecycle management supports our value of protecting people and the planet. More pragmatically, it is essential to our business that we identify and mitigate any risk to our portfolio. Our social licence to operate depends on our compliance with safety regulations and, of powerful importance, our voluntary stewardship of our products all the way down the value chain. It is important we design in green chemistries at the start of a product’s life. Recently we have developed a sustainability checklist as part of our New Product Introduction (NPI) process. The checklist contains a series of questions about health and safety, environmental, social and financial issues which must be answered before the project can progress to the next stage of the NPI process. The checklist is now being evaluated by teams in JM’s sectors. Our management systems We implement our product lifecycle management through well established systems to ensure the sound management of our products throughout their lifecycle. We have groupwide policies and guidance which align our approach with the global framework set by the Strategic Approach to International Chemicals Management (SAICM) to promote chemical safety around the world. The Strategic Approach, begun in 2006, is hosted by the UN Environment Programme. t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O We have procedures in place at group and sector level to identify regulatory obligations, both future and current, and create the documentation necessary to ensure compliance. Our internal committees assess hazard and exposure data to identify opportunities for risk reduction in our operations. Potential new products are assessed at an early stage of their development against safety and regulatory criteria, with higher hazard products being put through more detailed assessments. Finally, business compliance with lifecycle management policies forms part of our environment, health and safety (EHS) audit. Our three areas of focus As part of our work on product lifecycle management, we have three current areas of focus. The first is active horizon scanning which identifies proposed regulatory developments that could impact our sites and products and the raw materials we use. Linked to this is our second area of focus: early identification of new regulatory pressures for our customers that our existing or new technologies may be able to overcome. Our third area of focus is ‘high hazard’ substances – chemicals with significant potential to harm human health or the environment and how we ensure appropriate investment in researching less hazardous alternatives. On the basis of elevated concern on a substance’s hazards, regulators may require companies to generate extensive data packages to underpin detailed risk assessments. If a true risk is identified they could take action that effectively eliminates use of the substances in that market. All of our businesses could be affected by these changes and we follow developments closely. Our policies, especially on NPI, emphasise the expectation that we actively investigate the availability of safer alternatives to our use of high hazard substances. For example, our Finnish business identified a risk to its portfolio as a critical component of its resin bead manufacturing process would face severe restriction in Europe due to it being considered a substance of very high concern (SVHC). Unlike our key competitors, rather than apply for authorisation to continue use of this hazardous substance, which would be an expensive and time consuming process with an uncertain and time-limited authorisation outcome, we decided to alter our manufacturing process. The development work took time and money, but the project to move to a safer process gained financial support from the Finnish authorities. Customers were fully informed of the rationale for the change; we retained their orders and they in turn retained theirs. Pgm user guide During the year JM provided significant input into a comprehensive user guide to pgms. ‘Safe Use of Platinum Group Metals in the Workplace’ was published by the IPA in December 2017 and is intended to advance awareness of the hazards and risks associated with occupational exposure to pgms and how to manage them effectively. This is an important and directly relevant piece of work, as many JM sites handle pgms, and one of the eight occupational illnesses reported in 2017/18 related to pgm exposure. The user guide provides practical advice on workplace monitoring, the medical surveillance of workers, control measures, training and regulatory controls. It is available on the IPA website and we have advised our sites to consider the new guidance in their pgm management programmes, subject to local law. The IPA guide is the most visible of our recent efforts in this area, but we continue to work with peer companies in trade associations and consortia to develop best practice on stewardship. Priority substance management We have set up a committee to review certain high hazard substances of relevance to JM in order to ensure there is appropriate recognition of the risks from developing new products using these substances. The PARS (Prior Approval Required Substances) Committee decides on whether the risks (i.e. EHS, sustainability, financial, reputational) are sufficiently high that a senior leader is required to issue a time-limited approval to use the substance in NPI projects. The committee has reviewed its first tranche of substances and has concluded that a small number of relevant substances either face regulatory pressures of sufficient magnitude in the foreseeable future, or are sufficiently hazardous that they should be PARS listed. Although focused on NPI, existing uses of a PARS substance will consequently face additional scrutiny. We use or manufacture only a very limited number of substances considered regulated1, or of international concern2. As a proportion of our portfolio, approximately 5% of products consist of, or use in their production, such substances. Looking ahead to the next year, we plan to improve our audit programme for product lifecycle management. At present, it forms part of the EHS audits of our sites. We are now reviewing how we manage our product lifecycle work across the group and will embed our findings in a more targeted audit programme on this specific issue. This will enable us to be proactive across all our sites and businesses and to provide more consistent information to our customers. And in the medium term, we recognise that we have more work to do on end of life solutions for our products, with, among other things, improved recycling. As the UK prepares to leave the EU, we have made plans for Brexit and are in a good position to manage the effects on our European operations. We are actively supporting the UK government in understanding the potential impact of the various options being considered. Product lifecycle performance We made good progress during 2017/18. We completed our 1 to 100 tonne per annum substance registrations for our operations in the EU in good time for the May 2018 deadline under the REACH requirements (the European Regulation on the registration, evaluation, authorisation and restriction of chemicals). Work is also progressing on preparing registrations for a small number of priority chemicals in South Korea. In the US, the US Toxic Substances Control Act (TSCA) was recently subject to a major update and we have responded to the resetting of the TSCA Inventory per the deadlines. We use a systematic product responsibility reporting scheme to monitor the performance of our operations and maintain surveillance of the company’s products and services. In 2017/18, there were no notifications of significant end user health effects involving our products. We did not identify any non-compliance with regulations or voluntary codes concerning health and safety impacts of products and services or product and service information, labelling and marketing communications. Policy on animal testing: matthey.com/stewardship-testing 1 2 e.g. SVHCs under REACH, RoHS or California Prop 65 listed substances. e.g. controlled by the Montreal Protocol, Stockholm and Rotterdam Conventions, GHS category 1A/1B carcinogens, mutagens or reprotoxins, etc. 43 Johnson Matthey / Annual Report and Accounts 2018 Strategic Report Environmental performance Environmental performance summary 2018 2017 % change Operational carbon footprint thousand tonnes CO2 equivalent 445 4691 -5 (Scope 1 and 2 market method) Energy consumption thousands GJ 5,104 5,1472 -1 Electricity consumption thousands GJ 2,055 1,955 +5 Natural gas consumption thousands GJ 2,722 2,8722 -5 Total waste sent off site tonnes 71,787 70,2003,4 +2 Total hazardous waste sent off site5 tonnes 44,020 43,542 +1 Waste to landfill tonnes 6,271 6,8943 -9 Water withdrawal thousands m3 2,729 2,643 +3 1 Carbon footprint data for 2016/17 has been restated using updated methodology to be used to 2025, see further details on page 201. 2 Restated to reflect updated conversion factors. 3 Excludes 17,682 tonnes of uncontaminated soil from a construction project in Redwitz, Germany in 2016/17 which was classified as non-hazardous waste to landfill under local law. 4 Restated to include additional waste stream omitted last year. 5 Excludes hazardous waste sent for beneficial reuse. All percentages and ratios in this section are calculated on unrounded numbers. We have group policies, processes and systems in place to manage our environmental performance and help us realise continuous improvement. In addition to process improvement efforts, the efficiency and longevity of equipment are considered in purchasing decisions and for large capital expenditure projects. The company also provides environmental policies on areas including emissions to atmosphere, energy management, waste management, protection of waste water discharge systems and discharges to surface and ground water. These policies provide the guiding principles necessary to ensure that high standards are achieved at all our sites around the world. All our major manufacturing sites are required to maintain certification to the ISO 14001 environmental management system as a means of setting, maintaining and improving standards. The group also requires new or acquired sites to achieve ISO 14001 certification within two years of beneficial operation or acquisition; 89% of such sites are ISO 14001 compliant. Energy consumption Energy consumption Carbon footprint GJ (’000) GJ / tonnes output Other fossil fuels 7% Tonnes C02 equivalent (’000) Tonnes / tonnes output 5,500 5,015 5,366 5,064 5,1472 5,104 42.1 38.6 4,400 3,300 2,200 1,100 0 50 40 30 20 10 0 2014 2015 2016 2017 2018 GJ (’000) GJ / tonnes output 2 Restated to reflect updated conversion factors. 44 Other grid electricity purchases 31% Natural gas 53% Certified renewable electricity purchased or generated on site 9% 600 500 463 510 482 4691 3.8 400 300 200 100 0 445 3.4 6 5 4 3 2 1 0 2014 2015 2016 2017 2018 Tonnes C02 equivalent (’000) Tonnes / tonnes output 1 Restated using updated methodology to be used to 2025, see further details on page 201. 21% of grid electricity was purchased on zero carbon tariffs in 2017/18. We expect this percentage to increase in 2018/19 as several of our Pennsylvania area sites switch suppliers. Our absolute carbon footprint using the market method decreased by 5% in 2017/18. Using less gas and processing cleaner feeds in our pgm refinery yielded a 6% reduction in our Scope 1 carbon footprint. We purchase zero carbon electricity at many of our UK sites. A reduction in the carbon intensity of our electricity purchases around the globe led to a 4% drop in Scope 2 emissions, despite a 5% increase in electricity usage. Relative to production output, our carbon footprint decreased by 12%. Pages 39 and 40: Details of our actions to reduce greenhouse gas emissions t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Going beyond this, 12% of our manufacturing sites are also ISO 50001 compliant. ISO 50001 builds on ISO 14001 and looks specifically at the development of energy management systems to systematically and continuously improve energy efficiency. Our manufacturing sites in Macedonia, South Africa and our major sites in Germany have all achieved this standard. Every year we undertake a comprehensive review of group environmental performance across all our manufacturing, R&D facilities and large offices that are under our financial control. Energy consumption Group product output grew by 8% in the year. By contrast we recorded a 1% absolute decrease in energy usage within our facilities this year. The make-up of our energy purchases changed in 2017/18 as our combined heat and power (CHP) plant in Royston, UK was out of service for much of the year as we are replacing it with a new CHP. Electricity usage across the group rose by 5% whilst gas usage declined by a similar amount. 0.2% of our electricity came from local solar power facilities that are not grid connected, a 14% rise on last year (see further details on page 40). In total, 467,960 GJ (21%) of the electricity we consumed during the year came from certified renewable energy sources for which JM is in possession of the associated Renewable Energy Certificates. 3 Greenhouse gas emissions We report greenhouse gas emissions from our manufacturing processes and energy usage in accordance with the 2015 revision of the Greenhouse Gas Protocol (www.ghgprotocol.org). Our total operational carbon footprint is based on: • • Scope 1 emissions – generated by the direct burning of fuel (predominantly natural gas) and process derived greenhouse gas emissions (CO2, N2O, CH4 and refrigerants). Scope 2 emissions – generated from grid electricity and steam use at our facilities. Although we dual report our Scope 2 emissions, in 2017/18 we have switched to using Scope 2 calculated by a market based method. This reflects the emissions of the electricity we are actually buying more accurately than using location based emissions factors. Market data is available for 57% of our sites and is obtained from local suppliers, energy contractual documents and website declarations. At 80% of sites where competitive electricity purchasing markets are operational, the carbon intensity of electricity we purchased was lower than the national or regional average. Thus, Scope 2 carbon footprint calculated by the market method is 10% lower than the location based method. Carbon footprint 2018 2018 2017 2017 thousand % of total thousand % of total tonnes CO2 carbon tonnes CO2 carbon equivalent footprint equivalent 1 footprint Scope 1 215 48% 229 49% Scope 2 (market based method) 230 52% 240 51% Scope 2 (location based method) 279 56% 286 56% Scope 3 (from electricity transmission and distribution) 20 n/a 22 n/a Total operational carbon footprint (Scope 1 and 2 market based method) 445 100% 469 100% Total operational carbon footprint (Scope 1 and 2 location based method) 494 100% 515 100% 1 Restated using updated methodology to be used to 2025, see further details on page 201. 45 Johnson Matthey / Annual Report and Accounts 2018 Strategic Report Other emissions to air Emissions from our operations are typically licensed by local regulations and are generated from a number of sources including combustion processes, materials handling and chemical reactions. All sites monitor emissions to ensure compliance with local regulations and set their own absolute targets aimed at reducing significant emissions as part of their local environment, health and safety improvement plans. Significant developments were made in systems to abate emissions to air. In Germany, new ammonia abatement systems were installed and in China both oxides of nitrogen (NOx) and volatile organic compound (VOC) abatement systems are being installed. The total investment for these systems is around £6.4 million. The VOC abatement system in China was our Clean Air Sector’s first VOC abatement system, which allows JM to go beyond compliance and protect the local atmosphere. New government legislation in China means that all our sites in Shanghai will be subject to mandatory NOx, oxides of sulphur (SOx) and VOC reporting going forward. In 2017/18, our reported NOx (NO + NO2) emissions were 383 tonnes, up 10% on the previous year due to an increase in production in our Catalyst Technologies business. Our total SO2 emissions decreased by 13% to 44 tonnes due to change in the type of material processed through our pgm refinery in Brimsdown, UK. Our emissions of VOCs decreased by 24% to 101 tonnes. This mainly resulted from a review of the efficiency of the vacuum pumps scrubbing the emissions at our Health Sector’s sites. Our emissions to air data disclosed here are comprised of data from 39% of our manufacturing sites. Within these numbers, we believe we have captured our material emissions across the group but will be working to increase coverage of our emissions to air reporting over the coming year to confirm this. Waste In 2016/17 we introduced a more detailed reporting system for waste disposal across the group, allowing us to better track and report the considerable efforts our sites are making in minimising their waste streams and disposing of waste in the most responsible way. We continued to focus on better waste reporting this year and have needed to restate our 2016/17 data to include some waste streams that were previously omitted. We have had our reporting of total solid waste and total hazardous waste data externally assured for the first time in 2017/18. We disposed of 71,787 tonnes of waste via third parties in 2017/18. Of this 79% is liquid waste, largely dilute aqueous waste coming from our UK pgm refineries. 65% of our total waste sent off site was classified as hazardous waste. 96% of our hazardous waste is very dilute aqueous waste, 65% of which comes from our pgm refinery in the UK and is tankered off site for treatment by third parties; we are actively investigating alternative ways to deal with this waste stream in future years. Only 1,822 tonnes of our hazardous waste is solid material that is not reused or recycled after it has been sent off site. 2% of our hazardous waste was shipped internationally for disposal. This is a 33% drop on last year due to less waste being shipped internationally, mainly from our Clitheroe, UK site. Of the total waste sent off site for treatment, 5% was sent for reuse by others, 25% for recycling, 9% for energy recovery and 9% was sent to landfill. The remainder was sent directly to third parties that offer a variety of treatment and incineration services. We also incinerated 7,075 tonnes of waste within our own facilities, principally waste sent to our refineries for precious metal recovery. Other emissions to air Where our waste goes Total waste to landfill 2018 2017 % change NOx tonnes 383 348 +10 SOx tonnes 44 51 -13 VOC tonnes 101 132 -24 Waste to treatment 52% Waste to landfill 9% Reused 5% Waste to energy 9% Recycled 25% Tonnes 8,000 6,000 4,000 3,819 3,482 2,000 0 Tonnes / tonnes output 6,8941 0.100 6,271 0.075 0.056 0.050 0.047 0.025 0.00 1,953 2014 2015 2016 2017 2018 Tonnes Tonnes / tonne output 1 Excludes 17,682 tonnes of uncontaminated soil from a construction project in Redwitz, Germany which was classified as non-hazardous waste to landfill under local law. 46 The chemical oxygen demand (COD) test is commonly used to indirectly measure the amount of organic compounds in water and is a useful measure of water quality. In 2017/18 the group discharged organic chemicals equivalent to an average COD of 197 mg/L into water courses, as regulated by local emission limits at each manufacturing facility. This average COD was calculated from readings collected at sites representing 65% of our total water discharged. Some of our sites use a different measure of water quality which cannot be translated directly to a COD calculation and are therefore not included in this measurement. Environmental incidents Johnson Matthey has a robust and effective management system that requires all sites to report environmental incidents to our Group EHS department. All spills that occur on unmade ground or near drinking water sources are classified as significant. One site (Royston, UK) has self-reported an incident to the local authorities in 2017/18 which is still under investigation. During 2017/18, we received one fine for an environmental permitting requirement breach, which had no environmental impact. This was at our Clean Air plant in Shanghai, where we had begun work to construct a new production line prior to receiving an environmental permit from the Environmental Protection Bureau. The permit was granted retrospectively but the business was fined RMB 1.998 million (approximately £220,000). The management error that led to the breach was subsequently investigated and actioned. Environmental performance – priorities for 2018/19 More regular reporting by sites throughout the year (using the recently launched Enablon reporting tool) will enable areas of improvement to be identified and implemented more quickly. It will also allow us to report data from a greater proportion of sites for some areas, such as other emissions to air. Additionally, we will review and update some environmental policies and their associated guidance. t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Water withdrawal Water withdrawal increased slightly this year to 2.7 million m3, a 3% increase in absolute terms but a 5% decrease relative to production output. 91% was supplied by local municipal water authorities, 7% was abstracted from groundwater and 2% was abstracted from fresh surface water. 40% sites operate their own waste water treatment facilities treating 1.2 million m3 of waste water per year, a 3% increase on last year. 27% of the water treated on site is recycled back into our processes rather than being discharged as effluent, reducing the sites' water demand. Our Clitheroe, UK site is leading our initiatives, recycling 64% of its water treated on site. Our total effluent increased by 1% to 1.6 million m3 in 2017/18 after data from 2016/17 was restated due to inaccurate billing to our Germiston, South Africa site by its local authority. 86% of our total effluent was discharged to local authority sewers after treatment and in accordance with local discharge consent agreements. The remainder was discharged to surface water courses after treatment and within quality limits set by local water authorities. Our total consumption (water withdrawn less water discharged) was 1.1 million m3, a 7% increase on last year. More information is available on our website in our CDP disclosure. matthey.com/cdp-water Water withdrawal Environmental spills Thousands m3 m3 / tonnes output Location Volume (litres) Material Impact Royston, UK 2,000 Chemicals Under investigation 2,564 2,529 2,605 2,643 2,729 21.6 20.6 3,000 2,500 2,000 1,500 1,000 500 0 30 25 20 15 10 5 0 2014 2015 2016 2017 2018 Thousands m3 m3 / tonnes output 47 Johnson Matthey / Annual Report and Accounts 2018 Strategic Report People Our people are key in delivering our strategy and achieving our vision. We want to harness their commitment to our sustainability goals. At the same time, we want them to be confident that they are coming to work in a safe and healthy environment, with a strong ethical culture, clear values and a positive approach to diversity and inclusion. Sustainable business goals Our values Health and safety Our people Community engagement 1 2 6 Protecting people and the planet Acting with integrity Working together Innovating and improving Owning what we do 48 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Creating the right culture No compromise on health and safety; doing the right thing without question; engaged and enabled people, ready to play their part. Three of our 2025 goals relate to people and cover health and safety, employee engagement and volunteering in the community. They continue work already in place and build on our achievements. For example, under our Sustainability 2017 programme, we reduced lost time injury and illness rates by 25% and occupational health incidents by 75%. But now we are setting the bar higher for ourselves and there are significant new inclusions in our targets. As a company handling chemicals and hazardous materials, we must maintain and continuously improve our health surveillance systems and preventative actions. 1 Keeping our people healthy and safe Our vision is for a cleaner and healthier world. As we embark on our sustainable business framework, health and safety – and our aspiration to zero harm – heads the list of our six new goals to 2025. We are building on decades of hard work to enhance health and safety. However, we saw our performance plateau in 2017/18 so much remains to be done in an area where both leadership and employee awareness must always be active and alert. During the last year we created a strategic environment, health and safety (EHS) leadership committee that developed and approved a three year EHS roadmap, taking us up to 2021. We have analysed our current position in key areas such as process safety, lifesaving policies, occupational health and EHS capability and have defined where we want to be by 2021. These clear targets and the interim milestones will shape our activities over the next years. Our roadmap to 2021 has four main elements: leadership and personal ownership, managing key risks, management processes and the effectiveness of our EHS staff. While formal tasks have been set for all four elements and their components, what underpins the whole roadmap is personal engagement with the plan. We expect our leaders to ‘walk the talk’, for example, through site visits and getting involved in questions, conversations and updates. We also expect our line managers to take responsibility and give continuous emphasis and clarity on health and safety requirements. And employees are being empowered to participate actively in EHS activities. We are placing a special emphasis on what we call high potential learning events, where we can draw lessons from incidents and risky behaviour. Across JM, everyone is required to follow five clear and simple safety principles and with a health and safety element a requirement of all employees’ performance reviews, we ensure it remains firmly on everyone’s radar and that they are clear about what is expected from them. We have designated a core group of our health and safety policies as ‘lifesaving policies’. These policies cover known dangers, where policy breaches could endanger life or lead to serious injury. We have eight lifesaving policies covering areas such as process isolation, permit to work, driving, working at height, guarding dangerous machinery and isolating electrical equipment, and have refreshed them during the year. They are available in local languages and we are providing guidance to our sites on how to implement them, using tools such as e-learning, gap assessments and internal audits. The first e-learning module was an overall awareness on all eight of our lifesaving policies and was completed by about 8,000 staff who had access via e-mail. For staff without e-mail, internal briefings were carried out. The main causes of injuries across JM are slips, trips and falls, hand injuries and ergonomic problems. We have set a behaviour standard in order to prevent injury, the task now is to ensure that employees remain aware of their personal safety at all times, and that of their colleagues. We know from our EHS audits which sites have the highest rates of injury and where they stand in meeting our behaviour standard. To improve performance on these sites, we have introduced safety improvement plans. These are special short term safety plans specific to a particular site based on its risk profile and EHS performance in lagging and leading indicators. These special plans are over and above our annual EHS plans. My Team, My Responsibility We have continued to implement My Team, My Responsibility, the training programme that builds on our EHS behaviour awareness programme and aligns with our EHS behaviour standard. The training supports work we have already done to encourage employees to take personal responsibility for safety. Team leaders receive training on how to deliver the interactive programme. Back at their local site, team action plans are developed, along with how they will be tracked. These are later submitted to a third party consultancy for audit. The aim of the programme is to help us identify preventative measures to avoid incidents from happening in the first place. It also builds the skills and confidence of team leaders, removes employee reluctance to speak up and make the right behaviours second nature. We plan to complete the implementation of this by end of 2018. Process safety risk management One area of special concern for us is process safety risk management (PSRM), which is all about how we safely manage our most hazardous processes. We are committed to improving safety by embedding process safety capability in our sites through training at all levels. We have completed PSRM training for 96 of our senior executives and also 312 of our site leadership teams. This training was developed with Cogent Skills in the UK and meets the national training standards for process safety. A PSRM experts group has been established which holds regular meetings to discuss strategy and implementation. 49 Johnson Matthey / Annual Report and Accounts 2018 Strategic Report During the year we have updated our own PSRM Policy which defines ‘applicable processes’, i.e. those with high hazards such as flammable gas and toxic liquids, and also provided detailed guidance for this. We have completed maximum credible event (MCE) studies and gap assessments against our PSRM Policy. We also have developed a process safety audit protocol and audited selected sites. The focus for the coming year is the completion of the action plans from the MCE studies and the gap assessments against our PSRM Policy, training our process safety champions and embedding process safety indicators. We are also reviewing the resources we have on PSRM and plan to meet the requirements for these with in-house capabilities or through external recruitment. Occupational health Occupational health also remains important for us. While the number of occupational illnesses reported each year remains low, we remain vigilant on both known and recently emerging types of illness. Our approach to occupational health is covered at the group and business level. At group level, for example, we set policy and provide guidance for the management of chemical exposure, which is implemented at our sites. Chemical exposure is a major area of focus for us and incidents are declining. We continue to conduct work on key areas such as platinum salt exposure because platinum salt sensitivity can occur in some, but not all, employees who are exposed to certain types of platinum salts during the course of their work. We have improved our management of platinum salts and are working with the International Platinum Group Metals Association (IPA) to gain a better understanding of the epidemiology of those at higher risk of sensitisation. We are seeing an increase in mental health incidents involving stress and we are responding with research and planned action. Following a pilot survey, we identified three factors that are leading to stress in our workplaces: work relationships, work pressures and organisational change. Until recently, companies have not recognised sufficiently the toll that mental health issues are taking. In the UK alone, over 11 million working days a year are lost because of a mental health problem, with one in four people affected. We are putting in place employee assistance programmes (EAPs) in all of our major countries to support our people. EAPs are voluntary, work-based programmes that offer free and confidential assessments, short term counselling support, referrals and follow-up services to employees who have personal and / or work related problems. Ergonomics and the prevention of musculoskeletal disorders also remain an area of focus for us. These are tackled at the level of our businesses based on guidance that is provided at group level. Driving improvement We provide ongoing training on health and safety to maintain employees’ awareness towards known risks and advise on the top injury trends. Our Enablon health and safety reporting platform is used for reporting and analysing risks, which helps us target areas of concern. In September 2017 we held a three day conference and training session in North America, attended by 23 EHS professionals and 23 operational staff. During the conference attendees shared best practice, networked and obtained a deeper understanding of the JM EHS strategy, enabling them to better drive EHS performance in their areas. We have an ongoing programme of regular EHS assurance audits which are undertaken using global protocols. In 2017/18, we undertook 26 audits at our manufacturing and R&D facilities. 44% of our manufacturing sites are compliant with BS OHSAS 18001, the internationally recognised British Standard that sets out requirements for occupational health and safety management good practice. In addition, our group occupational health and policy director visits up to five sites a year to audit their occupational health programmes. Occupational health consultants have been appointed in Europe, India, the US and China. They provide help in identifying local problems and implementing solutions. Lost time injuries and illnesses by event type Lost time injuries and illnesses by region Rest of World 4% Asia 3% Europe 66% Lifting and handling 21% Slip, trip or fall 19% North America 27% Other 8% Chemical related 10% Exposure to workplace stressor 10% Struck against / struck by object 32% 50 Occupational illness cases Number of cases Rate / 1,000 employees 30 25 20 15 10 5 0 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2014 2015 2016 Occupational illness cases 2018 2017 Rate per 1,000 employees All of our manufacturing sites have formal health and safety committees to help monitor, collect feedback and advise on occupational safety programmes. They are led by site senior management and meet on a regular basis to cascade plans and ideas to and from our workforce. Over half of our manufacturing sites have a formal joint worker-management health and safety committee comprised of representatives from both staff level and management grades, covering 67% of employees globally. Health and safety performance Our renewed emphasis over the last year has led to a slight improvement in our TRIIR and occupational illness performance. However, our LTIIR of 0.48 was the same as last year. Over the same period, our TRIIR improved from 1.00 to 0.93, a decrease of 7%. There was a total of 68 lost time accidents and illnesses across the group during 2017/18. There were no employee fatalities in the year; the last employee fatality at Johnson Matthey occurred in July 2015. Our performance is summarised in the charts below. Our construction projects use a contractor workforce and we work hard to ensure the safety of all contractors who work for us. Overall, contractor LTIIR dropped from 3.15 to 0.74. We saw a rise from six lost time incidents involving contractors during 2016/17 to eight during 2017/18. The drop in contractor LTIIR was due to improved classification and reporting of contractor hours worked, which increased from 381,359 during 2016/17 to 2,171,462 during 2017/18. There were no contractor fatalities in 2017/18; the last one occurred in October 2010. The number of occupational illnesses reported during 2017/18 was eight, giving a rate of 0.64 illnesses per 1,000 employees in 2017/18 (compared with 1.0 in 2016/17). Of the eight, six were in Europe and two were in North America. By gender, five were males and three were females. No contractor illnesses were reported in 2017/18. Our overall number of occupational illnesses remains very low and we expect to see annual fluctuations as the figures are subject to statistical variation. We use a health scorecard system developed by the UK Chemical Industries Association to monitor our health performance. This year 64 sites completed the scorecard questionnaire, compared to 69 sites the previous year. Of these, 64% reported average scores of A or B (which corresponds to best practice), the same figure as in the previous year; 30% reported average C scores (which corresponds to our current minimum target score), compared to 26% in the previous year; and 6% reported an average D score (below our current minimum standards), compared to 9% the previous year. The survey continued to reveal mental wellbeing programmes as the least well performing area of occupational health. It was also the lowest performing topic from sites reporting A and B scores. We are aware of a rising incidence of mental ill health and are conducting internal research to help tackle the problem and provide proactive guidance (as described above). Alongside our other health and safety performance metrics, we also monitor our OSHA severity rate. The severity rate from the US Occupational Safety and Health Administration (OSHA) is a calculation that gives us an average of the number of lost work days per recordable incident and as such, provides an indication of how critical each injury and illness is. The premise is that an incident that resulted in an employee missing time from work to heal and recover has greater significance than one where the employee can immediately return to work. It is therefore a useful metric for us as we strive to reduce the severity of the incidents that occur at our facilities by improving our workplaces and our behaviours to avoid incurring these more significant incidents. At 31st March 2017 2018 OSHA severity 11.2 12.2 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Lost time injury and illness rate (LTIIR) per 200,000 working hours in a rolling year Total recordable injury and illness rate (TRIIR) per 200,000 working hours in a rolling year 0.60 0.50 0.40 0.30 0.20 0.10 1.20 1.00 0.80 0.60 0.40 0.20 0 March 2015 LTIIR March 2016 March 2017 March 2018 0 March 2015 TRIIR March 2016 March 2017 March 2018 Trade union committee representation 31 of our manufacturing sites have active trade unions and 26 of them have a trade union representative on their local health and safety committee. 22 sites have formal trade union agreements that cover health and safety topics (listed in the table below). Topics covered by trade union agreements Topic % of sites covered Use of personal protective equipment Participation of worker representatives in health and safety inspections and investigations Training and education Complaints mechanisms The right to refuse unsafe work Periodic inspections 86 82 95 64 95 82 51 Johnson Matthey / Annual Report and Accounts 2018 Strategic Report Our People Strategy We want our people to feel that JM is a great place to work, where working safely is a priority, where diversity is valued, and working collaboratively is very much encouraged, all within an environment that promotes growth and development. Our aim is to become an employer of choice. We have refreshed our company brand, making it more relevant to existing employees and new recruits. Linked to this is our employee value proposition (EVP); this is the essence of how we position ourselves as a company with a unique set of benefits which an employee receives in return for the skills, capabilities and experience they bring to Johnson Matthey. We have begun work on our EVP and plan to develop it further in the coming year. Guiding our HR practices is our people strategy, which has five pillars: • • • • • attracting and recruiting talent; developing and supporting our people; rewarding and retaining them; embedding our culture and values; and supporting change. The last year has seen considerable progress. We have launched our first ever JM wide global graduate development programme. The two-year programme has been rolled out in the UK, the US and China, with programme managers in each of the countries. We select high calibre graduates from partner universities who are deployed in one of three disciplines – science, engineering and operations or commercial. Graduates work on stretch projects with defined objectives for three eight-month rotations. After the third rotation, we will consider permanent placement in JM based on what is appropriate for the next phase in their career development. We are making a significant investment in the programme to make it a highly positive experience for the new recruits in the expectation that they will want to make their future careers with us. Alongside this we are improving the consistency of our global recruitment processes and we have launched a single recruitment website for JM. We are also developing a global onboarding programme for all new recruits. To support our business and growth ambitions, it’s important for us to ensure our people understand the career development opportunities that exist across JM. We are also keen to unlock the potential we have within the company and ensure that all employees are enabled to reach their career aspirations. 52 With this in mind, over the last year we have undertaken a job classification project to enable us to develop a new globally consistent framework of career paths and a common, globally applied job grading system. All sectors and global functions have been working together to identify the various different roles we have within the organisation and to systematically classify them into a common structure that will operate globally across JM. We have classified the various roles across the organisation into: • • Job families - a broad grouping of jobs where the type of work performed and knowledge, skills and expertise are related (e.g. Finance); and Job disciplines – a narrower grouping of jobs with similar characteristics within a given job family (e.g. Accounting and Control is an example of a job discipline within the Finance job family). This job classification forms the basis on which CareerPath frameworks and Global Grade systems are established. The CareerPath framework is a tool to help give employees better clarity on the different career steps available in Johnson Matthey across different functional areas. In the past, it has been difficult for people to know how to progress in JM because of a lack of common CareerPaths across our different businesses, countries and functions. We are piloting a new R&D CareerPath framework that focuses on career steps within the R&D job family. This CareerPath highlights key accountabilities and competencies (technical and behavioural) that are expected at each career level in the R&D job family so it can enable better career aspirations, more meaningful career conversations about opportunities for development and how to match ambitions with the needs and goals of JM as a whole. Once the pilot is complete, we will create CareerPaths in all other job family areas within JM. We develop employees at all levels of our organisation so that they are equipped with the knowledge and skills our company needs and to improve their career satisfaction. With a fresh look at the JM strategic drivers and skills needed for the future, we are developing a new leadership development strategy. This includes a series of programmes designed to shift mindsets towards those required for leading through change. These will be targeted across our leadership pipeline, from first time managers to executives, and will seek to equip leaders to deal with the full range and context of JM’s business operations. This past year we have launched a new pilot development programme for middle level leaders and redesigned the development programme for our senior level executives. This senior executive programme will launch in 2018, along with a new pilot development programme for employees taking on a leadership role for the first time. As part of our strategic pillar to develop and support our people, we are developing an enhanced approach to performance management under a programme called Inspiring Performance. The decentralisation of our sites meant that, in the past, performance management was handled at a local level, with a lack of global consistency. We are now well advanced in a programme of improving performance management and ensuring it is globally consistent for our management and staff level employees. We are committed to inspiring, growing and investing in our people, cultivating a continuous feedback culture that empowers employees and leaders to set stretching and achievable outcomes that meet strategic goals. The business goals in JM, and of each of our sectors and global functions are cascaded down so that employees are able to link their personal objectives to business objectives – aligning company and individual aspirations so that our people can see how they can contribute to JM’s goals. We continue to work to ensure that our reward and benefit packages are in line with the location markets. In the past year, we have realigned our UK Pension Scheme to make sure it is more sustainable for the future. We are working to develop our global wellbeing framework further so that we can support our employees in the areas of emotional, financial, physical and social wellbeing. There is clear evidence that wellbeing programmes do impact attraction and retention and play a significant role in ongoing employee engagement. As a result, well designed and coherent wellbeing programmes go beyond their proven ability to improve healthcare risks and are now more firmly linked to the business metrics that are a product of a competitive EVP. t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O In the last year, we reshaped our business into four new sectors. Change is always unsettling to employees and our HR team is providing support to our people as our business transformational change programmes are implemented. We are taking a holistic view and approach to managing change. We are creating communications toolkits across the businesses and functions to support them in helping employees to understand our new strategy and the reasons for change. The toolkit breaks down the core messages and explains how to cascade to our people. 2 Employee engagement The driving force behind JM is our employees who bring our inspiring science to life every day. Their engagement, last measured in 2016, is evident, but we know we can do better and have made it one of our sustainable business goals. We plan to ensure that Johnson Matthey is truly inclusive, fostering employee engagement and development within a diverse and global workforce (goal 2). Clear values are essential for securing engagement. As part of our strategy review during 2017/18, we recognised that our previous set of values did not fully support our new strategy and were sometimes confusing. Following internal research and feedback, we have developed a refreshed set of values. They are defined as: • • protecting people and the planet; acting with integrity; • working together; • • innovating and improving; and owning what we do. For each of our values, we have also defined the four or five types of behaviour needed to achieve them, expressed as actions. The behaviours will help people to know what is expected of them and ‘what good looks like’. The new values were launched in April 2018 and a programme of work to embed them is underway. Engagement survey Our first global employee engagement survey was conducted in November 2016 and managed for us by employment consultancy Korn Ferry Hay Group. Overall, we scored 61% for employee engagement and 62% for employee enablement, slightly below the industry average. These form the baseline for our sustainable business goal 2. ‘Engagement’ encourages our people to contribute actively to our success, while ‘enablement’ measures how we are creating an environment where people can perform at their best. The survey revealed ‘health and safety’ and ‘doing the right thing’ as company strengths. However, we received mixed ratings on clarity around our strategy and the openness and transparency of communications across the company. We made these priorities for action and have developed a far reaching, two-year engagement programme. Our second engagement survey will take place in September 2018. JM200 In 2017, the company celebrated its 200th anniversary. Pages 56 and 57 It provided an opportunity for employees to unite as one company to celebrate our success and the positive contribution we make through our science to a cleaner, healthier world. At the end of our anniversary year, we held an awards ceremony at the Royal Institution in London. The new ‘JM200 Awards’ recognised the best examples of our people applying Johnson Matthey’s values and vision in their everyday work. The awards, which are set to become an annual event, brought together over 100 shortlisted employees from around the world in an evening of celebration and networking, together with – most appropriately – live science experiments. 2 Diversity and inclusion Diversity and inclusion (D&I) forms part of our drive towards wider employee engagement. There is convincing research from consultants CEB (now Gartner) and McKinsey that companies with high levels of diversity and inclusion see greater employee contributions to the organisation and experience improved retention and morale. We also believe that it is ethically right and are committed to developing a truly inclusive culture. That means providing equal opportunities for everyone, regardless of their ethnic origin, age, disability, religion, gender identity or sexual orientation. In line with our Equal Opportunities Policy, we recruit, train and develop employees who are the best suited to the requirements of the job role, regardless of gender, ethnic origin, age, religion or belief, marriage or civil partnership, pregnancy or maternity, sexual orientation, gender identity or disability. People with disabilities can often be denied a fair chance at work because of misconceptions about their capabilities, and we work to enhance their opportunities by attempting, wherever possible, to overcome the obstacles. This might mean modifying equipment, restructuring jobs or improving access to premises, provided such action does not compromise health and safety standards. This is set out in our policy, which extends to employees who have become disabled during their employment and who will be offered employment opportunities consistent with their capabilities. We would also look to make reasonable adjustments for new recruits. matthey.com/diversity We have set up a D&I taskforce and developed a D&I action plan, which launched with JM’s D&I month in May 2018. The D&I action plan has five elements: training and development; standards; data; leadership accountability; and recruitment. Among our targets we plan to add awareness training for the organisation, include D&I content in all our leadership development courses, make D&I part of our global induction process and provide training in unconscious bias for employees involved in recruitment. We will track our progress against this detailed D&I plan using our own criteria with the aim of achieving 100% completion of the plan by 2025 (our sustainable business goal 2). Employee resource groups There is much for us to do to become a truly diverse and inclusive organisation but we have made a good start. We have set up two employee resource groups (ERGs). The first is Pride in JM (inviting LGBT+ membership, together with ‘allies’ or supporters), which launched in October 2017. Pride in JM is working to create a network of LGBT+ role models and foster inclusivity. It also aims to become an employer of choice, with a place in the top 100 index of UK charity Stonewall (with whom we are partnering) within three years. 53 Johnson Matthey / Annual Report and Accounts 2018 Strategic Report Our second ERG is a women’s group, Netwo +rked, launched in Royston, UK in July 2017. A global group is now being formed with the aims of networking, personal empowerment and increasing the proportion of women in the company to reflect the talent pool in society. The groups have been welcomed by employees – “vital to both increasing confidence and awareness of various groups”, in the words of one employee. Next on our list is the formation of a disabilities employee resource group. Gender pay gap report In March 2018, we published our first gender pay gap report, covering UK employees. It showed a median gender pay gap of 9.2%, reducing to 4.7% if pay before any salary sacrifice deductions for voluntary benefits is considered. Our figures compare favourably to the average pay gap for UK companies, which is of 18.8%. matthey.com/gender-pay-gap-17 We are working to close the gender pay gap and gender imbalance through our D&I action plan. We are also boosting our investment in apprentice and graduate outreach and encouraging more women into these roles in STEM areas (science, technology, engineering and mathematics). Over the next year, we plan to roll out our unconscious bias training to our ethics ambassadors, hiring managers and the HR function. We will also complete our global flexible working policy and roll it out. Ethics and compliance A strong culture of ‘doing the right thing’ will be critical to achieving our vision and strategy. Our aim is to eliminate ethical lapses and breaches of compliance and in doing so, turn our reputation for doing the right thing to our strategic advantage. Our ethics and compliance strategy has two pillars: (i) promoting an ethical culture across the company; and (ii) implementing a compliance programme underpinned by a framework applied to each risk area. One of the main ways we promote an ethical culture at JM is through our global code of ethics, ‘Doing the Right Thing’, which is central to the way we act as a company. The code is available in 22 languages and contains information and resources that enable our employees to make the right choices in line with 54 our values and demonstrate the highest standards of integrity and ethical behaviour. We plan to refresh our existing code during 2018 in line with best practice. We have a network of over 85 ethics ambassadors who play an important role in bringing our code of ethics to life, supporting senior leaders with their responsibilities for ethics and compliance and promoting a good ethical culture. In March 2018, we hosted a global conference for our ambassadors to share experiences, best practices and shared challenges whilst strengthening the ethics ambassador network. Within Johnson Matthey we promote a ‘speak up’ culture encouraging everyone to speak up when they have a concern or are unsure about something. We encourage individuals to do this through their local management, ethics ambassador, or HR or legal function wherever possible. We also provide employees (and third parties) with an independently run speak up helpline (which can also be accessed online) where concerns can be raised. This helpline also allows individuals, where local law permits, to remain anonymous. The helpline is available to everyone and not just Johnson Matthey employees. An Ethics Panel made up of senior leaders meets monthly to provide oversight of investigations into all speak ups received. The panel reports three times a year to the board with a particular focus on identifying themes and opportunities to continually look to improve the way we do things in JM. During 2017/18, 144 speak ups were received and investigated which, given our size, is in line with the industry norm in terms of volume (see charts on page 59). We view the increasing numbers as a positive reflection of the confidence in and awareness of the process and many recommendations arising from investigations have been actioned in our businesses. Everyone within Johnson Matthey has undertaken training on our global code of ethics. Additionally, targeted compliance training is provided to people whose roles expose them to specific risk areas. We regularly review our training and communications materials and methods for delivery to ensure they remain relevant to the risks our business and employees face. In order to have an effective ethics and compliance programme we have developed, and continue to review, a compliance programme framework applied to each risk area. These risk areas include bribery and corruption, data protection, export controls and sanctions, conflicts of interest, competition / anti-trust, financial crime (including the new Corporate Criminal Offence of failing to prevent the facilitation of tax evasion), modern slavery (see pages 43 and 44 and activities regulated by the UK Financial Conduct Authority. Data protection is now subject to sweeping change in Europe, thanks to the EU General Data Protection Regulation (GDPR), which came into force in May 2018. We have an ongoing programme of work to ensure that we are in line with GDPR. Upholding high standards of data privacy and information security is a key focus of our business and we will continue building on this to enhance the privacy culture throughout our organisation. We are part way through a strategic review of all the third party intermediaries (TPIs) JM uses, initially looking at those that are the highest risk. Focusing deeply on these relationships and, where appropriate, challenging the rationale for them enables us both to mitigate and better manage bribery risks associated with using them, as well as realise commercial benefits from cost savings and improved direct knowledge of our customers and how they operate. 6 Engaging with the community We have a long tradition of community engagement. We work with charities, organisations and schools to help develop the local economy, protect the environment, promote science education and enhance health and nutrition. In 2017/18, we donated £680,000 to charities, a small decline on the previous year. The major elements of our spend were on STEM education and on health and nutrition. We have a policy which entitles all our permanent employees to two days of paid leave each year, during normal working hours, to support projects and charities in their local communities. During the year, our people took 678 paid volunteering days. Using the group average cost of an employee per day, this is equivalent to £152,000 in in-kind giving to our local communities. 53% of volunteers’ time was spent supporting STEM education in local schools, 14% was spent working on local community development and 12% on contributing to the education of disadvantaged people. Now, as part of our sustainable business framework, we are reinvigorating our commitment to community investment and hope to increase the number of sites that are active in their local community. We have set ourselves a formal target to increase our volunteer work with local communities; our 2025 goal is 50,000 cumulative volunteer days (goal 6). We are encouraging HR teams and general managers at our sites to promote employee volunteering and are asking employees themselves to identify opportunities for local volunteering that aligns with our strategic aims. We have set up a new online system on our employee intranet, MyJM, to make it easier for employees to record their volunteering activities. We have also updated our Community Investment Policy and Volunteer Guidelines. We have continued to support the global children’s development charity, Plan International. Together we are working on an education programme in Sierra Leone to train women teachers. In a country where 73% of girls have dropped out of school by the age of 11 and with 92% of teachers being men, there is an overwhelming need for more female teachers to ensure girls are not left behind in their education. Working with Plan International and the Open University, the programme is on track and it is estimated that over 120,000 children will directly benefit over the next ten years. In March 2017, 480 women enrolled in teacher training college and JM has supported the cost of their tuition fees, learning materials and transport. So far, 476 of them have graduated to their second year. After their third year of training, these young women will be qualified to teach in primary schools. During the year we donated £28,000 to Plan International in support of this, and other projects. We support employees’ fundraising efforts for good causes and match donations up to £1,000 per employee per year (up to a total of £70,000 per annum for the group as a whole). In the last year, employees raised £38,000 for charities and JM matched their contributions. These company-matched contributions are included in our total company donations figure. Communicating with external stakeholders We maintain ongoing communications with our external stakeholders and update them on our activities through regular publications (including this report), our website, surveys and topic specific meetings. We outline details of our major stakeholders on pages 20 and 21. We are also active members of a number of trade associations which help us to understand, inform and contribute to issues and discussions that are relevant to our stakeholders. Associations we have worked with in 2017/18 include the UK Chemical Industries Association, the Diesel Technology Forum, the Society of Motor Manufacturers and Traders, the Association for Emission Control by Catalyst, the International Platinum Group Metals Association, the European Precious Metals Federation, the Platinum Group Metals Health Science Research Group of the International Precious Metals Institute in the US, Eurometaux (which represents the European non-ferrous metals industry) and CEFIC (the European Chemical Industry Council). Shareholders are an important stakeholder group. We meet with our major shareholders regularly, as described in the Corporate Governance Report. Pages 97 and 98 For investors particularly interested in ethical and socially responsible investments, we meet with specialists from their organisations to discuss sustainability and corporate social responsibility (CSR) issues where applicable and participate in key sustainable investment benchmarking studies. These include the Carbon Disclosure Project (CDP), the Dow Jones Sustainability Index (DJSI), FTSE4Good and Business in the Community. In March 2017, we received an ‘AAA’ ESG rating from investment index provider MSCI for the fifth consecutive year. This is the highest possible rating for a company’s risk and performance against a range of environmental, social and governance (ESG) factors, and one that places us above our chemical industry peers. We are a constituent of the FTSE4Good UK 50 Index. t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Investment in 2017/18 £’000 Community investment summary 39% of our sites had a site-specific local community engagement and development plan that was active during the year. Topics included in the plans were: % % sites including Community engagement topic topic in their plan Direct expenditure Donations to Plan International Other corporate donations Donations by sites to local charities and community projects 28 272 3% 33% 380 46% Indirect expenditure Employee volunteering 152 18% Total group 832 Social impact assessments, including gender impact assessments 23% Environmental impact assessments and ongoing monitoring 64% Public disclosure of results of environmental and social impact assessments 23% Local community development programmes based on local communities’ needs 82% Stakeholder engagement plans based on stakeholder mapping 27% Broad based local community consultation committees and processes that include vulnerable groups 32% Works councils, occupational health and safety committees and other worker representation bodies to deal with impacts 50% Formal local community grievance processes 23% 55 Canada Candiac Chasing the Sun For 24 hours, we followed the sun. Sites from Melbourne in Australia to San Diego, USA marked JM’s bicentennial year in a way that reflected the local culture at their site and the diversity across the company. We captured events in a live 24 hour broadcast whilst employees shared their experiences with each other through photos, videos and social media posts. Our vision was at the heart of the celebrations, with many sites planting trees to mirror our commitment to a cleaner, healthier world. US Albuquerque, Alpharetta, Audubon, Chicago, Detroit, Devens, Devon, Downingtown, Merrillville, Newark, North Andover, Ravenna, Riverside, San Diego, San Jose, Savannah, Smithfield, Tennessee, Wayne, West Deptford, West Whiteland Switzerland Zurich UK Annan, Belasis, Brimsdown, Cambridge, Chilton, City Office, Clitheroe, Edinburgh, Milton Keynes, Paddington, Royston, Sonning, Stockton, Swindon, Teesdale The Netherlands Maastricht Italy Turin Germany Redwitz, Moosburg Mexico Queretaro Argentina Pilar Celebrating 200 years of inspiring science 2017 was Johnson Matthey’s 200th anniversary; an impressive milestone worthy of a unique celebration. It was an opportunity to engage and involve our people in our rich heritage, our strategy for growth and mark our commitment to making the world a cleaner and healthier place. On 19th July 2017, the 200th day of our 200th year, employees from our sites across the globe came together as one JM. 56 Sweden Gothenburg, Perstorp Finland Kotka, Turku Russia Krasnoyarsk Poland Gliwice Israel Tefen Macedonia Skopje India Manesar, Gurgaon, Vadodara, Taloja China Beijing, Changzhou, Yantai, Shanghai, Zhangjiagang South Korea Jangan Japan Kitsuregawa Thailand Bangkok South Africa Germiston Malaysia Kuala Lumpur, Nilai Australia Melbourne Watch our 200th anniversary video t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Recognising JM and its people 2017 was full of memorable events. We published a book of our history, opened the market at the London Stock Exchange and shared historical memorabilia at our Annual General Meeting. We closed the year by honouring perhaps the most important part of JM: the achievements of our people. The ‘JM200 Awards’ celebrated the incredible efforts and successes of our employees and were a fitting way to close our 200th anniversary year. 57 Johnson Matthey / Annual Report and Accounts 2018 Strategic Report People performance data Governance and Human Resources As a global company, we maintain progressive HR standards backed by group policies. Our HR activities meet local statutory requirements and we often go beyond them to recognise best practice. Our global HR policies are applied across our sites and are supplemented by local policies. Site specific policies and procedures are explained at inductions and through staff handbooks. Our HR policies and risks are reviewed in accordance with our governance framework, with the board responsible for overseeing the overall people strategy. In addition, the Nomination Committee oversees talent and succession decisions and the Remuneration Committee deals with remuneration policy. There were no significant fines or non-monetary sanctions for non-compliance with laws and regulations during the year. New employees by age category Aged under 30 Aged 30 to 50 Aged over 50 Total Total Total Male Female Total Male Female Total Male Female Male Female Europe 210 100 North America 114 53 Asia 111 25 Rest of World 21 6 310 209 168 377 46 28 74 465 296 167 98 37 135 40 10 50 252 100 136 175 52 227 6 0 6 292 77 27 27 13 40 0 0 0 48 19 Total group 456 184 640 509 270 779 92 38 130 1,057 492 Attendance Levels of attendance were reduced slightly this year. The average number of days lost per employee in 2017/18 due to sickness and unplanned absence was 5.7 days, up from 4.8 days in 2016/17. This represents 2.2% of lost time per employee in the working year. Average number of people employed The following tables set out the average number of people employed by Johnson Matthey and the net change in the number of people employed during 2017/18 by geographical region and by employment contract. Average headcount 2017/18 Permanent Temporary contract employees employees Male Female Total Male Female Total Total Europe North America Asia Rest of World 4,614 1,751 6,365 176 124 300 6,665 2,376 649 3,025 18 11 29 3,054 1,597 382 1,979 18 10 28 2,007 400 183 583 8 2 10 593 Total group 8,987 2,965 11,952 220 147 367 12,319 Annual change in people employed During the year 459 people left our business through redundancy. This included reductions in New Markets (Battery Materials) in China and Canada, in Health in Europe and North America, as well as reductions due to a reorganisation following the formation of Efficient Natural Resources. We support our employees during their redundancy transition with practical help to find new roles, which often includes a mix of counselling and training in job search techniques, CV preparation and interview techniques. Net change between average headcount 2016/17 and 2017/18 Temporary Total Permanent contract net employees employees change Europe +215 +4 +219 North America +7 0 +7 Asia -172 -4 -176 Rest of World +47 +8 +55 Total group +97 +8 +105 Employee turnover by region The high level of employee commitment and loyalty to the group continues to bring strength to our businesses. Voluntary staff turnover was low compared to many other organisations at 9.1% (2016/17: 8.9%). The total employee turnover figure increased slightly to 12.8% from 12.3% in 2016/17. The following table sets out the employee turnover in 2017/18 by geographical region. The employee turnover figure is calculated by reference to the total number of leavers during the year expressed as a percentage of the average number of people employed during the year. The analysis does not include agency workers not directly employed by Johnson Matthey. Voluntary Aged under 30 Aged 30 to 50 Aged over 50 Total Employee employee Male Female Total Male Female Total Male Female Total leavers turnover turnover Europe 96 58 154 228 130 358 157 48 205 717 10.8% 7.9% North America 91 31 122 162 45 207 101 32 133 462 15.1% 10.8% Asia 98 18 116 174 47 221 11 2 13 350 17.4% 11.6% Rest of World 9 4 13 28 5 33 0 2 2 48 8.1% 4.9% Total group 294 111 405 592 227 819 269 84 353 1,577 12.8% 9.1% 58 Gender diversity statistics The table below shows the gender breakdown of the group’s employees as at 31st March 2018. As at % 31st March 2018 Male Female Male % Female Board 6 3 67% GMC 6 3 67% Subsidiary directors 95 10 90% Senior managers 180 60 75% New recruits 1,057 492 68% 33% 33% 10% 25% 32% Total group 9,462 3,253 74% 26% Some individuals are included in more than one category. Gender of people employed by employment type Full time Part time As at % % % 31st March 2018 Male Female Male % Female 75% Europe 73% 27% 25% North America 79% 21% 50% 50% Asia 82% 18% 0% 100% 80% Rest of World 68% 32% 20% Total group 76% 24% 28% 72% Percentage of people employed by gender As at 31st March 2018 Europe North America Asia Rest of World Total group % Male 71% 78% 82% 68% % Female 29% 22% 18% 32% 74% 26% Female 26% Male 74% Trade union representation 26% of our employees (2016/17: 26%) belong to a recognised trade union. We have positive and constructive relations with all the recognised trade unions that collectively represent our employees. The following table sets out the average number and percentage of employees who were covered by collective bargaining arrangements and represented by trade unions by geographical region in 2017/18. During the year no working time was lost due to employee action. % Permanent employees Represented Represented Europe North America Asia Rest of World 6,365 3,025 1,979 583 2,138 514 97 308 34% 17% 5% 53% Total group 11,952 3,057 26% Average number of contractors employed Europe North America Asia Rest of World Total group Male Female Total 608 48 107 23 786 264 28 21 23 872 76 128 46 336 1,122 % 100 80 60 40 20 0 Europe N orth A m erica Male Asia W orld Rest of Female Total group Speak up reports In 2017/18 there were a total of 144 speak up reports, an increase of 92% on the 75 cases in the previous year (see page 54). 63% of these were closed in the year. We consider the increase in the number of speak ups to be a signal of the increasing confidence in and awareness of our speak up processes since the launch of our code of ethics in 2015. Concern / allegation raised Number of cases Bribery and corruption / supply chain Business and financial reporting Computer, email and internet use Confidential information and intellectual property Conflict of interest Discrimination including harassment and retaliation Environment, health and safety Fraud Misconduct or inappropriate behaviour Other or general query Violence or threat 15 2 4 8 17 63 16 7 6 4 2 Anti-bribery and corruption training by region number of employees Rest of World 300 Asia 1,124 North America 1,609 Europe 4,091 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Code of ethics training by region number of employees Competition law training by region number of employees Rest of World 727 Asia 1,757 North America 2,995 Europe 6,367 Rest of World 310 Asia 1,084 North America 1,526 Europe 3,397 59 Johnson Matthey / Annual Report and Accounts 2018 Strategic Report Financial performance review Johnson Matthey 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. 60 Group performance review Year ended 31st March Reported results 2018 2017 % change 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 Year ended 31st March % change, Underlying1 performance 2018 2017 % change constant rates2 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 – 2017/18 highlights 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 (PRMB) in the prior period. Excluding this, operating profit grew 4%3. Underlying EPS was flat as translational foreign exchange 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. 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 71 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. t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Notes: 1 Underlying is before amortisation of acquired intangibles, major impairment and restructuring charges, profit or loss on disposal of businesses, gain or loss on significant legal proceedings together with associated legal costs, significant tax rate changes and, where relevant, related tax effects. For reconciliation see note 4 on page 153. 2 Unless otherwise stated, sales and operating profit commentary refers to performance at constant rates. Growth at constant rates excludes the translation impact of foreign exchange movements, with 2016/17 results converted at 2017/18 average exchange rates. 3 See page 72 for further details of performance excluding the 2016/17 US post-retirement medical plan credit. For definitions and reconciliations of other non-GAAP measures see page 191. Sales by sector New Markets 8% Health 6% Clean Air 62% Efficient Natural Resources 24% Underlying operating profit excluding corporate New Markets 3% Health 8% Clean Air 61% Efficient Natural Resources 28% 61 Johnson Matthey / Annual Report and Accounts 2018 Strategic Report Sector performance review Performance summary by sector Clean Air Efficient Natural Resources £2,454m £349m Sales1 +9%2 Operating profit3 +7%2 £956m £158m Sales1 +4%2 Operating profit3 -4%2 Sales1 by business Sales1 by business HDD On Road Asia 5% Other 2% LDV Americas 15% Diagnostic Services 6% Advanced Glass Technologies 9% Catalyst Technologies 59% LDV Europe 35% Pgm Services 26% HDD Europe 13% HDD Americas 16% LDV Asia 14% Heavy Duty Diesel (HDD) 34% Light Duty Vehicles (LDV) 64% • A global leader providing catalysts to reduce harmful emissions from vehicles • Light Duty Vehicles – catalysts for gasoline and diesel light duty vehicles, including hybrids • Heavy Duty Diesel – catalyst systems for diesel powered trucks and buses and non-road machinery • Other – catalyst systems for stationary equipment Customer profile • Car companies • Heavy duty truck and engine manufacturers • Local Chinese producers • Global customer base Major competitors • BASF • Umicore • Cataler Margin 14.2% Return on invested capital 30.8% Employees 5,470 1 Sales excluding precious metals. 2 At constant rates (see note 2 on page 61). 3 Underlying (see note 1 on page 61). 62 • Creating value from efficient use and transformation of critical natural resources including oil, gas, biomass and platinum group metals (pgms) • Catalyst Technologies – manufactures speciality catalysts and additives, licenses process technology and delivers services to the chemical and oil & gas industry • Pgm Services – marketing, distribution, refining and recycling of pgms, fabricates products using precious metals and related materials and manufactures pgm chemicals • Advanced Glass Technologies – precious metal pastes and enamels primarily for the automotive industry Customer profile • JM businesses and their customers • Chemical companies • Engineering contractors • Oil and gas companies • Industrial pgm users • End of life autocatalyst collectors • Automotive industry suppliers Major competitors • Haldor Topsøe • Albemarle • Umicore • Clariant • Grace • Ferro • BASF • UOP • DuPont • Lurgi • Heraeus Margin 16.5% Return on invested capital 12.0% Employees 3,711 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Health New Markets £247m £44m Sales1 +6%2 Operating profit3 -13%2 £312m £17m Sales1 -2%2 Operating profit3 +34%2 Sales1 by business Sales1 by business Innovators 30% Generics 70% • Leading provider of complex chemistry solutions to generic and innovator pharmaceutical companies • Develops and manufactures active pharmaceutical ingredients (APIs) for a variety of treatments • Operates in the large and growing outsourced small molecule API market • Providing solutions to the complex problems of both generic and innovator companies Customer profile • Multiple small and large branded generic pharmaceutical companies • Innovative pharmaceutical companies developing novel products Major competitors • Noramco • Cambrex • Hovione • Francopia • AMRI • Almac • Siegfried • Alcami Margin 18.0% Return on invested capital 8.4% Employees 964 Other 12% Alternative Powertrain 50% Life Science Technologies 14% Medical Device Components 24% • Accessing new areas of potential growth aligned to global priorities of cleaner air, improved health and more efficient use of natural resources • Alternative Powertrain – provides battery materials for automotive applications, battery systems for a range of applications and fuel cell technologies • Medical Device Components – leverages our science and technology to develop products found in devices used in medical procedures • Life Science Technologies – provides advanced catalysts to the pharmaceutical and agricultural chemicals markets Customer profile • Automotive and heavy duty vehicle companies • Lithium-ion cell manufacturers • Fuel cell manufacturers • High performance cordless tool and niche transport manufacturers • Medical device companies • Pharmaceutical, fine chemical and agrochemical companies Major competitors • Umicore • BMZ • Heraeus • BASF • WL Gore • Evonik • LG • 3M Margin 5.3% Return on invested capital 8.1% Employees 1,714 63 Johnson Matthey / Annual Report and Accounts 2018 Strategic Report Operating results by sector Clean Air Year ended 31st March 2018 2017 restated1 % change, £ million £ million % change constant rates Sales LDV Europe 855 828 +3 - LDV Asia 351 338 +4 +4 LDV Americas 358 334 +7 +9 Total Light Duty Vehicle (LDV) Catalysts 1,564 1,500 +4 +3 HDD Americas 395 330 +20 +22 HDD Europe 320 259 +23 +20 HDD Asia 131 93 +40 +42 Total Heavy Duty Diesel (HDD) Catalysts 846 682 +24 +24 Other – stationary 44 42 +7 +6 Total sales 2,454 2,224 +10 +9 Underlying operating profit 349 318 +10 +7 Margin 14.2% 14.3% Margin excl. PRMB 14.2% 14.0% Return on invested capital (ROIC) 30.8% 30.7% 1 Restated to reflect a change in group structure. Strong sales growth led by double digit growth in HDD catalysts in every region • • • • • Light Duty Europe sales were flat but with a stronger second half. Very strong growth in gasoline offset by a decline in diesel. Light Duty Americas sales growth ahead of vehicle production driven by a favourable mix. Light Duty Asia sales growth ahead of vehicle production helped by higher substrate content. Sales of HDD catalysts were strong across the board and ahead of truck production, helped by a strong Class 8 market, ramp up of business wins in Europe and strong production growth in Asia. Excluding the US post-retirement medical benefit (PRMB) plan credit in the prior period, operating profit grew by 9% with margin improving by 0.2 percentage points to 14.2%. Light Duty Vehicle (LDV) Catalysts Our LDV Catalyst business provides catalysts for cars and other light duty vehicles powered by gasoline and diesel. The business grew ahead of global vehicle production. In Europe, where diesel accounts for approximately 80% of our LDV business, we maintained sales as significant growth in gasoline offset slightly lower sales in diesel. Sales of diesel catalysts were down 4%, mainly reflecting the impact of lower substrate costs which are passed through directly to customers. Volume and sales growth excluding substrate were down 1%, broadly in line with market production which was flat year on year. One customer delayed a diesel platform launch from December 2017 to March 2018, which has affected the phasing of our share gains though we remain on track to reach circa 65% by March 2019. In Western Europe, diesel accounted for 42% of new car sales in 2017/18 compared with 49% in the last financial year. Light duty commercial vehicles remain overwhelmingly diesel today. When these are included the overall share of diesel sales in Western Europe was 48% for 2017/18, compared with 54% in 2016/17. Diesel’s proportion of new car sales has continued to decline and in April 2018 represented 37% of sales. These trends do not change our assumptions of a diesel share of around 25% of total light duty vehicles and 20% of cars by 2025. Across Europe, production of diesel light duty vehicles for 2017/18 was 10.1 million out of a total of 22.3 million, representing 45%. For 2016/17, 10.1 million diesel light duty vehicles were produced out a total of 21.8 million, representing 46%. 64 Sales of catalysts for gasoline vehicles were up 23%, well ahead of the 4% growth in market production. We achieved volume growth ahead of market production and saw an improved sales mix as we applied our science to help customers with solutions for larger and more complex platforms. As we have outlined, our growth in LDV Europe will be driven, in both diesel and gasoline, by a combination of share gains and increasing value per catalyst over the next few years. Sales in our Asia LDV catalyst business also grew ahead of market production driven by higher substrate content in China, which is passed directly to customers. Excluding substrate, our sales in Asia were flat. Sales in our Americas LDV catalyst business grew well ahead of market production led by significant growth in sales of catalysts for diesel platforms, which have a higher value. Heavy Duty Diesel (HDD) Catalysts Our HDD business provides catalysts for trucks, buses and non-road equipment. The business had a very strong year, growing significantly ahead of market production in Europe and Asia and benefiting from strong production growth in the Americas, particularly for large (Class 8) trucks. Our Americas HDD catalyst business saw very strong growth of 22% led by the continued recovery of the Class 8 truck market. Sales of catalysts for Class 8 trucks were in line with the 30% growth in production over the year. We expect the current high levels of production to continue until the end of the 2018 calendar year with year on year growth slowing significantly as it laps a higher base. Catalyst sales to smaller Class 4 to 7 trucks grew slightly. t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Estimated LDV sales and production (number of light duty vehicles)* Year ended 31st March 2018 2017 % millions millions change North America Sales 20.8 21.1 -1 Production 17.0 17.9 -5 Total Europe Sales 20.7 20.2 +3 Production 22.3 21.8 +2 Asia Sales 44.1 43.1 +2 Production 49.3 48.4 +2 Global Sales 93.6 92.3 +1 Production 94.6 93.3 +1 * Source: LMC Automotive. Estimated HDD truck sales and production (number of trucks)* Year ended 31st March 2018 2017 % thousands thousands change North America Sales 540 479 +13 Production 540 457 +18 Total Europe Sales 457 425 +7 Production 593 565 +5 Asia Sales 2,019 1,650 +22 Production 2,092 1,710 +22 Global Sales 3,112 2,633 +18 Production 3,321 2,801 +19 * Source: LMC Automotive. Our European HDD catalyst business Our Asian HDD catalyst business continued to outperform, growing sales by 20% in a market with only a 5% increase in truck production. This outperformance was driven by the ramp up of production from business wins in the last financial year and a continued increase in the proportion of our sales related to higher value products, both coated and extruded. continues to grow rapidly from a small base. Sales in China increased by more than 50%, led by high levels of truck production as the impact of loading limits continued to push demand for more trucks and an increase in the catalyst value per vehicle. Operating profit ROIC Outlook Return on invested capital was maintained at 30.8%. Operating profit grew by 7% and margin was broadly maintained. Excluding the US post-retirement medical benefit plan credit in the prior period, margin improved by 0.2 percentage points. Margin was negatively impacted by an adverse platform mix in European Light Duty but this was more than offset by benefits from transactional foreign exchange and from operational gearing in our Americas HDD business given the strong sales growth. Clean Air is expected to deliver a strong 2018/19 as significant share gains in Light Duty Europe come through. We will mitigate the additional costs from serving these share gains through increased efficiency in our manufacturing footprint and processes. We had previously expected that margin would be negatively impacted by up to one percentage point but we now expect to maintain margin in 2018/19. 65 Johnson Matthey / Annual Report and Accounts 2018 Strategic Report Efficient Natural Resources Year ended 31st March 2018 2017 restated1 % change, £ million £ million % change constant rates Sales Catalyst Technologies 564 542 +4 +3 Pgm Services 253 234 +8 +9 Advanced Glass Technologies 82 85 -4 -6 Diagnostic Services 57 58 -2 -2 Total sales 956 919 +4 +4 Underlying operating profit 158 163 -3 -4 Margin 16.5% 17.7% Margin excl. PRMB 16.5% 17.2% Return on invested capital (ROIC) 12.0% 13.4% 1 Restated to reflect a change in group structure. Good sales growth with efficiencies driving margin improvement in the second half • • Sales growth driven by strong demand for catalyst refills and growth in Pgm (Platinum group metal) Services partly offset by the expected significant decline in licensing income. Excluding the US post-retirement medical benefit plan credit in the prior period, operating profit declined 2% and margin was only 0.7 percentage points lower at 16.5% despite the significant decline in licensing experienced in the year. • We are starting to see the benefits of actions we have taken, including restructuring, destocking and product rationalisation, to improve the quality of the business. Catalyst Technologies Sales in our Catalyst Technologies business, which licenses technology and manufactures speciality catalysts and additives for the chemicals and oil and gas industry, grew 3%. Excluding licensing, the business grew strongly, outperforming its markets in aggregate. As expected we saw a significant decline in licensing income. Licensing activity remained subdued with limited new plant builds, especially for the technologies we license. We do not anticipate any further decline in the business and whilst we see some early signs of improved activity in certain markets (e.g. methanol), we do not expect a material recovery in licensing income in the near term. Sales of catalyst first fills were stable, supported in the second half by the increased activity in methanol driven by increased industry capacity coming on stream. 66 Growth was led by high single digit sales growth in refill catalysts and additives. Sales of refill catalysts to ammonia plants were strong, with customers having delayed turnarounds in 2016/17. Additives sales also grew strongly, mainly driven by deteriorating feed quality which resulted in increased demand for environmental additives to remove SOx (oxides of sulphur) impurities. Sales of refill catalysts to methanol and hydrogen plants were lower due to the cyclicality of our customers’ orders. Pgm Services Sales in Pgm Services increased 9%. Our Pgm Refining and Recycling business benefited from higher pgm prices with average palladium and rhodium prices up 39% and 79% respectively, while platinum prices decreased 6%, compared to 2016/17. Volumes were up, supported by good demand for refining of autocatalyst scrap in North America, driven in part by higher metal prices. Our precious metal management activities benefited from the volatility in the precious metal prices over the year. Sales of chemical products also grew strongly, supported by growth in our Clean Air Sector, which uses pgm materials in its catalyst products. Sales of industrial products containing pgms were down in the year as the business focused on rationalising its product portfolio. Advanced Glass Technologies Sales in our Advanced Glass Technologies business, which primarily provides black obscuration enamels and silver paste for automotive glass applications, declined despite a slight increase in global car production. The decline was principally due to destocking in the supply chain in China following a build-up of inventory at the end of the 2016 calendar year. Diagnostic Services Sales in Diagnostic Services were broadly flat as increased activity in the global reservoir market, leading to higher sales of our tracer technologies, was offset by lower equipment sales. t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Operating profit ROIC Outlook Return on invested capital declined 1.4 percentage points to 12.0% impacted by higher precious metal working capital especially through the second half. This was driven by increased precious metal prices and reduced liquidity in these markets. In 2018/19, we expect slight sales growth and we will continue to improve the quality of our business as we focus our resources on areas of higher future growth. Operating profit will grow ahead of sales. In addition, we will also benefit from £7 million of cost savings in relation to the restructuring programme started in 2017/18. As expected, operating profit and margin declined. Excluding the US post-retirement medical benefit plan credit in the prior period, margin was down by 0.7 percentage points. In line with our strategy, we made significant progress in improving the efficiency and quality of our business. This came with some additional costs in the period, principally in relation to destocking. Additionally, as expected, licensing income was significantly down. These more than offset the benefit of higher precious metal prices, transactional foreign exchange and the delivery of the expected cost savings. Health Year ended 31st March 2018 2017 restated1 % change, £ million £ million % change constant rates Sales Generics 173 174 – +1 Innovators 74 62 +19 +20 Total sales 247 236 +5 +6 Underlying operating profit 44 52 -14 -13 Margin 18.0% 21.9% Margin excl. PRMB 18.0% 20.9% Return on invested capital (ROIC) 8.4% 10.5% 1 Restated to reflect a change in group structure. Good sales growth but operating profit impacted by inefficiencies in manufacturing • • • Sales growth driven by active pharmaceutical ingredients (APIs) for innovators and non-controlled generics, but partly offset by lower sales of controlled generic APIs. Excluding the US post-retirement medical benefit plan credit in the prior period, operating profit declined 9% and margin was 2.9 percentage points lower at 18.0% as the benefits of improved pricing and increased profit shares were more than offset by higher manufacturing costs. As we build our platform for break out growth, we started to optimise our manufacturing footprint, including developing our new plant in Annan, UK, and announcing the closure of our Riverside, US plant. This optimisation has associated costs in the short term including higher operating costs in Annan and inventory write downs as we drive efficiency across sites. Generics In our Generics business, where we develop and manufacture generic APIs for a variety of treatments, sales were flat with a mixed performance in the business. Sales of controlled APIs were down. Our speciality opiate sales grew strongly led by customer orders ahead of an anticipated product launch. However, this was offset by lower sales in relation to ADHD APIs in the US and to bulk opiates in Europe. Our sales of ADHD APIs were impacted by the end of a profit share agreement during the year along with increased competition in the US market which continued from the second half of 2016/17. Non-controlled APIs grew strongly, driven primarily by an increased profit share contribution from dofetilide, which was launched by our customer in June 2016. This remained the only true generic on the market throughout 2017/18 but two competitors have now received US Food and Drug Administration (FDA) approval and are expected to launch in the first half of 2018/19. This will impact our sales and operating profit in 2018/19. We invested £16 million in the year on our new API product pipeline. This development of a broader, deeper product portfolio continued in line with our plans to scale the business with three submissions for regulatory approval within the year. Innovators Sales in our Innovators business grew strongly. This was mainly driven by improved pricing and volumes of APIs for branded drugs in commercial production. We continue to invest in growing our innovator product pipeline utilising our chemistry strengths to develop complex APIs for our customers. 67 Johnson Matthey / Annual Report and Accounts 2018 Strategic Report Operating profit ROIC Outlook Return on invested capital declined 2.1 percentage points to 8.4% driven by the lower operating profit. Operating profit, excluding the US post-retirement medical benefit plan credit in the prior period, was down 9% and margin declined 2.9 percentage points. Improved pricing and increased profit shares benefited margin. However, these were more than offset by additional costs as we optimise our manufacturing footprint, including higher operating costs associated with our plant in Annan, UK coming on stream and inventory write downs as we drive efficiency across sites. In 2018/19, sales in our Health Sector are expected to be broadly stable. However, operating profit will be down, particularly in the first half. Several API products with high margin or profit sharing agreements move into decline in 2018/19, reflecting normal product lifecycles of generics, while launches of new API products only have a small contribution in the year. The optimisation of our manufacturing footprint partly mitigates this decline, as it will generate a small net benefit in 2018/19 and a significant benefit once Annan is fully operational in 2020/21. New Markets Year ended 31st March 2018 2017 restated1 % change, £ million £ million % change constant rates Sales Alternative Powertrain 156 160 -2 -7 Medical Device Components 74 69 +8 +8 Life Science Technologies 45 48 -7 -8 Other 37 31 +18 +19 Total sales 312 308 +1 -2 Underlying operating profit 17 12 +37 +34 Margin 5.3% 4.0% Margin excl. PRMB 5.3% 3.3% Return on invested capital (ROIC) 8.1% 6.2% 1 Restated to reflect a change in group structure. Lower LFP sales led to a small sales decline; significant progress in developing eLNO • • • Significant decline of lithium iron phosphate (LFP) battery materials was partially offset by strong growth in fuel cells and Medical Device Components. Excluding the US post-retirement medical benefit plan credit in the prior period, operating profit grew by 60% reflecting comparison against a £5 million impairment charge in the second half of last year. Significant progress in developing eLNO and our strategy to commercialise this market leading next generation product. 68 Alternative Powertrain Operating profit Operating profit grew by 34%, helped by comparison against a £5 million impairment charge last year. Excluding this, operating profit was flat as strong growth in medical device components and improved profitability in fuel cells was offset by the decline in LFP sales and by increased development costs for our eLNO battery material. ROIC Return on invested capital increased to 8.1% reflecting the improvement in operating profit. Outlook New Markets is expected to deliver sales and operating profit growth in 2018/19 led by continued growth in fuel cells and Medical Device Components and a stronger year for battery systems. Our Alternative Powertrain business provides battery materials for automotive applications, battery systems for a range of applications and fuel cell technologies. Sales were down 7% as the decline in LFP battery material sales more than offset significant growth in fuel cell products. As expected, the business grew sales in the second half following stronger orders for battery system products. Sales of our LFP battery materials continue to be subdued as the number of platforms we serve is significantly lower than in previous years. This primarily reflects changes in electric vehicle tax incentives in China which has led to increased substitution of LFP by high energy materials. While a recovery in our LFP sales is expected in the medium term, led by demand for our next generation LFP for a range of higher value hybrid applications, we do not see a recovery in the near term given the current competitive landscape and price points. We continue to make significant progress in the development of our ultra-high energy density battery material, eLNO, as discussed on pages 8 and 10. Sales of fuel cell products grew by over 50% in the year, helped by increased volumes to stationary applications for existing and new customers. Sales of battery system products were flat following a strong second half as expected. Medical Device Components Our Medical Device Components business leverages our science and technology to develop products found in devices used in medical procedures. Sales growth was strong across product areas, including for example, components for cochlear implants to aid hearing. Growth was driven by customer growth as demand for our products across the world continues to expand. Life Science Technologies Our Life Science Technologies business provides advanced catalysts to the pharmaceutical and agricultural chemicals markets. As expected, sales were lower in the period reflecting lower sales to two large customers. t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O 69 Johnson Matthey / Annual Report and Accounts 2018 Strategic Report Financial review Introduction Johnson Matthey delivered results in line with expectations in 2017/18. At constant rates, sales grew 7% and underlying operating profit was flat. Further aspects of the group’s financial performance in 2017/18 are outlined below. This was 4% lower than last year, reflecting more focused and disciplined investment into areas of higher potential return. Key areas of spend included next generation technologies in Clean Air, our Health API product pipeline and development of our eLNO battery material. Corporate In line with our guidance, corporate costs in the period were £43 million which was an increase of £11 million from 2016/17. This was driven by additional spend on central programmes that will deliver operational excellence and efficiency across the group, including rolling out the global procurement programme, and higher legal costs. Corporate costs are expected to be higher in 2018/19 reflecting further investment in group efficiency programmes and our IT systems. Research and development (R&D) We invested £193 million on R&D in the period, including £18 million of capitalised R&D, representing 5% of sales. Foreign exchange The calculation of growth at constant rates excludes the impact of foreign exchange movements arising from the translation of overseas subsidiaries’ profit into sterling (see note 2 on page 61). The group does not hedge the impact of translation effects on the income statement. The principal overseas currencies, which represented 86% of non-sterling denominated underlying operating profit in the year ended 31st March 2018, were: Share of 2017/18 Average exchange rate non-sterling denominated Year ended 31st March underlying operating profit 2018 2017 % change US dollar 38% 1.328 1.308 +2 Euro 35% 1.134 1.191 -5 Chinese renminbi 13% 8.79 8.79 – 70 Anna Manz Chief Financial Officer t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O We had a good year, delivering results in line with our expectations at the start of the year In our first half, sterling decreased in value against most major currencies compared to the half year ended 30th September 2016. However, this partly reversed in the second half of the year especially in relation to the US dollar. This meant that overall the impact of exchange rates increased sales and underlying operating profit for the year as a whole by £33 million and £9 million respectively following an £86 million and £18 million benefit respectively in our first half. If current exchange rates (£:$ 1.354, £:€ 1.143, £:RMB 8.62) are maintained throughout the year ending 31st March 2019, foreign currency translation will have a negative impact of approximately £6 million on underlying operating profit. A one cent change in the average US dollar and euro exchange rates each has an impact of approximately £2 million and £2 million respectively on full year underlying operating profit and a ten fen change in the average rate of the Chinese renminbi has an impact of approximately £1 million. Pgm prices Higher average pgm prices benefited operating profit by around £15 million in the year in Efficient Natural Resources. Reconciliation of underlying operating profit to operating profit Year ended 31st March 2018 2017 £ million £ million Underlying operating profit 525 513 Amortisation of acquired intangibles1 (19) (20) Major impairment and restructuring charges1 (90) – Loss on disposal of businesses1 (7) – Loss on significant legal proceedings1 (50) – Operating profit 359 493 1 For further detail on these items please see notes 5 to 8 on pages 153 and 154. Major impairment and restructuring costs We have taken restructuring and impairment charges of £90 million in the year, as we execute our strategy and build our platform for future growth. Cash spend was £13 million and in 2018/19 cash spend on restructuring is expected to be £10 million. The implementation of our group restructuring programme resulted in costs of £43 million, which was below our previous guidance of £50 – 65 million. This programme delivered £12 million of cost savings in 2017/18. We remain on track to deliver around £25 million of annualised cost savings. In March 2018 we notified employees at our Health Sector Riverside, US facility of our intention to close the plant, as we continue our strategic focus on speciality, low volume, complex APIs. The closure of Riverside led to a charge of £36 million. We expect the plant to cease production by the end of the first half of 2018/19. This is a key part of our plan to optimise our Health manufacturing footprint, which will deliver a small net benefit in 2018/19. We have also impaired goodwill by £11 million relating to our Water Technologies business within New Markets reflecting lower growth assumptions for this business. Impairment and Associated total £ million restructuring charge cash costs Group restructuring programme 43 19 Health – Closure of Riverside, US 36 4 New Markets - Impairment of Water 11 – Total 90 23 Loss on disposal of businesses On 31st January 2018, the group sold its UK automotive battery systems business for net proceeds of £5 million which resulted in a loss on sale of £7 million. This is excluded from underlying operating profit. Legal settlement Finance charges As announced in February 2018, a lawsuit against a group company, Johnson Matthey Inc. was settled on mutually acceptable terms with no admission of fault. Under the settlement agreement, we have recognised a charge of £50 million in connection with resolution of the lawsuit. This charge has been excluded from underlying operating profit for the year ended 31st March 2018. Net finance charges in the year amounted to £38 million, up from £31 million in 2016/17. This was the result of higher precious metal funding costs. We anticipate that net finance charges will be slightly higher in 2018/19 due to rising US interest rates and higher borrowing costs as we expand in China. These will be only partly offset by lower precious metal funding costs. The five year record can be found online at: matthey.com/five-year-record 71 Johnson Matthey / Annual Report and Accounts 2018 Strategic Report Taxation 2016/17 US PRMB The effective tax rate on reported profit for the year was 6.9%, a reduction of 9.8% from 2016/17. The lowering of the US federal tax rate led to a revaluation of our US deferred tax assets and liabilities, which has resulted in a £24 million non-cash benefit in the income tax expense line in the income statement for the year ended 31st March 2018. Of this, £23 million has been excluded from the tax on underlying profit. Tax on underlying profit was 17.7%, an increase of 0.7% from 2016/17. We currently expect the tax rate on underlying profit for the year ending 31st March 2019 to be around 16%, due to changes in the US tax legislation. Our approach to tax Johnson Matthey has developed a reputation over the last 200 years for integrity and our people take pride in doing the right thing across all aspects of our business. These principles underpin our approach to the management of tax. We want to be clear and open on our approach so that our stakeholders understand it. Today we have operations in over 30 countries and, for each of those countries, we endeavour to pay our fair share of tax. We follow the laws of the relevant country and our group tax strategy so that we pay the correct and appropriate amount of tax at the right time. Profit growth for the period 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. The table below shows the impact of this by sector: Year ended 31st March 2017 £ million US PRMB gain Clean Air 6 Efficient Natural Resources 5 Health 3 New Markets 2 Corporate 1 Total 17 The table below shows the performance excluding the impact of the PRMB: % change, at constant rates, Adjusted underlying operating profit growth excl. PRMB 1 Clean Air +9 Efficient Natural Resources -2 Health -9 New Markets +60 Group +4 Through implementation of our tax strategy we plan to: 1 Excludes the translational FX impact on the PRMB as the impact is immaterial. • • • • Optimise global tax incentives and exemptions, such as those which support the research and development of our next generation of sustainable technologies. We will only engage in tax planning which is supported by a clear commercial rationale. Have clear and consistent tax policies and procedures to support our business strategy. All our tax policies and guidelines are managed and maintained by our professional tax function which is supported by external advisers. This ensures compliance and allows us to properly respond to global tax changes and developments. Proactively identify, evaluate, manage and monitor tax risks arising from our business operations to ensure they remain in line with the group’s risk appetite, seeking external advice where necessary. Ensure that all tax returns are accurate, complete and are submitted in a timely manner through the activation of a thorough tax risk compliance management process. • Maintain open, positive and cooperative relationships with governments and global tax authorities. We also partake in constructive discussions on taxation policies that are relevant to our business. The board approves our tax strategy each year and reviews compliance against it on a regular basis. That way, our strategy will encompass any learning and remain relevant and consistent with our values. The tax strategy satisfies the requirements of UK Finance Act 2016. In line with our code of ethics and commitment to doing the right thing, together with the requirements of Part 3 of The Criminal Finances Act 2017, we are also taking steps to put in place adequate procedures to prevent the facilitation of tax evasion. 72 Post-employment benefits IFRS – accounting basis At the year end the group’s net post-employment benefit position, after taking account of the bonds held to fund the UK pension scheme deficit, was a surplus of £190 million, up from a surplus of £63 million at 31st March 2017. This increase in the surplus mainly reflects a reduction in obligations in the UK plan due to a 20 basis point increase in the real (after inflation) discount rate caused by rising corporate bond yields and falling market-implied inflation. The cost of providing post-employment benefits in the year was £69 million, an increase of £23 million, mainly as a result of the impact of the £17 million one-off credit in the prior year in relation to the implementation of an inflation cap in the US post-retirement medical plan. Actuarial – funding basis The UK pension scheme has a legacy defined benefit career average section which was closed to new entrants on 1st October 2012 when a new defined benefit cash balance section was opened. The last triennial actuarial valuation of the career average section as at 1st April 2015 revealed a deficit of £69 million, or £28 million after taking account of the future additional deficit funding contributions from the special purpose vehicle set up in January 2013. The latest valuation update of this section as at 1st April 2017 revealed a deficit of £67 million, or £22 million after taking account of the special purpose vehicle. t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O During the year a pension increase exchange exercise was conducted whereby current retirees were invited to exchange an inflationary-linked pension for a higher non-increasing pension. The last triennial actuarial valuation of the cash balance section as at 1st April 2015 revealed a surplus of £2 million with the latest update as at 1st April 2017 showing a deficit of £3 million. Improvements in efficiency and better control of working capital have driven a reduction in working capital days as sales have grown. Excluding precious metal working capital days have improved to 50 days from 54 days at 31st March 2017. Average working capital days excluding precious metal decreased from 69 days to 62 days. Our target is for working capital excluding precious metal to be in the 50 to 60 day range. The latest actuarial valuations of our two US pension schemes showed a deficit of £11 million at 30th June 2017 up from a £2 million deficit at 30th June 2016. The deterioration in the funding position of our defined benefit pension schemes is mainly due to a reduction in gilt yields and in the UK is also due to an increase in inflationary expectations, both of which increased the value placed on the liabilities. Capital expenditure Capital expenditure was £217 million for the year ended 31st March 2018, 1.4 times depreciation and amortisation (excluding amortisation of acquired intangibles). In the year, key projects included: • • • • A new Clean Air manufacturing plant in Poland to support demand from tightening legislation and the significant share gains made in European Light Duty diesel while also enhancing our efficiency and operating flexibility. Continued investment in a new pgm catalyst plant in Germany to meet future demand for a range of products in our Catalyst Technologies business. Investment in our Health manufacturing and development facilities in Annan, UK and continued investment in our Health API product pipeline. Upgrading our core IT business systems to drive efficiency across the group. Capital expenditure was below our previous guidance of £285 million for the year due to more rigorous capital allocation and lower than planned spend on our Poland Clean Air plant caused by permitting delays. Capital expenditure for 2018/19 is expected to be around £390 million as our investments into growth projects increases. Key projects include: • • • Clean Air plants in Poland and China to meet the growing demand for our technology. Investment in our eLNO demonstration and commercial plants as we commercialise our market leading product. Upgrading our core IT business systems. Depreciation and amortisation (excluding amortisation of acquired intangibles) is expected to increase by around £7 million in 2018/19 primarily as we start depreciation of our investment in upgrading our core IT systems. Free cash flow and working capital Free cash flow was £136 million. Within this, working capital outflows of £158 million were impacted by a precious metal outflow of £84 million driven by higher precious metal prices and volumes, and non-precious metal related outflows of £64 million. Dividend The board has recommended an increase of 7% in the final dividend to 58.25 pence per share. Together with the interim dividend of 21.75 pence per share this gives a total ordinary dividend for the year ended 31st March 2018 of 80.0 pence per share (2016/17: 75.0 pence per share). Subject to approval by shareholders, the final dividend will be paid to shareholders on 7th August 2018, with an ex dividend date of 7th June 2018. Return on invested capital (ROIC) ROIC declined to 16.4% from 18.2%, mainly due to an increase in the UK pension fund asset and higher precious metal working capital during the year. It was also impacted by higher levels of non-current assets reflecting increased investment to drive future growth. Capital structure Net debt at 31st March 2018 was £679 million. This is down £212 million from 30th September 2017 and is a decrease of £37 million from 31st March 2017. Net debt increases to £725 million when adjusted for the post-tax pension deficits. The group’s underlying EBITDA increased to £681 million (2016/17: £665 million). As a result, the group’s net debt (including post tax pension deficits) to EBITDA was 1.1 times (2016/17: 1.1 times) and, whilst below our target range of 1.5 to 2.0 times, ensures we have flexibility to invest further in the future growth of the business. Contingent liability Johnson Matthey has been informed of failures in certain engine systems for which the group supplied a particular coated substrate as a component for emissions after-treatment. The extent to which, if any, the reported failures are due to the coated substrate supplied by Johnson Matthey group companies has not been demonstrated. Potential solutions for the reported engine system issues and any associated costs have not yet been notified to the group. Johnson Matthey has not been contacted by any regulatory authority and no Johnson Matthey group company has been served with any contract dispute lawsuit, nor has any formal claim for recovery of identified costs been made at this point. Having reviewed its contractual obligations and the information currently available to it, the group believes that were it to be served with a contract dispute lawsuit, it would have defensible warranty positions in respect of its supplies of coated substrate for the after-treatment systems in the affected engines. If required, it will vigorously assert its available contractual protections and defences. The outcome of any discussions is not certain, nor is the group able to make a reliable estimate of the possible financial impact at this stage, if any. 73 Johnson Matthey / Annual Report and Accounts 2018 Strategic Report Treasury policies, going concern and viability Treasury policies and financial risk management Group Treasury is a centralised function within Johnson Matthey based in the UK and US. The role of Group Treasury is to secure funding for the group, manage financial risks and provide treasury services to the group’s operating businesses. Group Treasury is run as a service centre rather than a profit centre. The group does not undertake any speculative trading activity in financial instruments. Funding and liquidity risk The group’s policy on funding capacity is to ensure that we always have sufficient long term funding and committed bank facilities in place to meet foreseeable peak borrowing requirements. At 31st March 2018 the group had cash and deposits of £329 million and £510 million of undrawn committed bank facilities available to meet future funding requirements. The group also has a number of uncommitted facilities, including overdrafts and metal lease lines, at its disposal. The maturity dates of the group’s debt and committed borrowing facilities as at 31st March 2018 are illustrated in the chart on page 75. Of the committed bank facilities, £155 million has a final maturity date within the 15 months to 30th June 2019 (the going concern period). £53 million of these committed bank facilities were refinanced in May 2018 for a further two years with a long term relationship bank. Going concern The directors have assessed the future funding requirements of the group and the company and compared it to the level of long term debt and committed bank facilities for the 15 months from the balance sheet date. The assessment included a sensitivity analysis on the key factors which could affect future cash flow and funding requirements. Having undertaken this work, the directors are of the opinion that the group has adequate resources to fund its operations and so determine that it is appropriate to prepare the accounts on a going concern basis. 74 Viability In accordance with provision C.2.2 of the UK Corporate Governance Code 2016, the directors have assessed the viability of the company over a longer period than the 15 months covered by the ‘Going Concern’ statement. During the year, the board has carried out a robust assessment of the principal risks affecting the company, particularly those which could threaten the business model. These risks and the actions taken to mitigate them are described in the section on risks and uncertainties. To reach the viability statement conclusion we have undertaken the following process: • • • • The Audit Committee annually reviews the risk management process to ensure its continuing effectiveness. A rolling programme is in place of deep dive reviews of principal risks. In each one, the board receives a presentation on the risk and mitigations from the GMC risk owner. Twice a year, a presentation is made to the board from the Group Assurance and Risk Director, explaining the process followed by management to identify, assess and manage risks throughout the business. At this time all of our principal risks are considered along with the linkages between them. Throughout the year, a number of deep dives into specific risk areas were conducted by the Corporate Assurance and Risk team, the results of which were presented to and discussed by the board. The group’s prospects are assessed through the annual strategic and business planning processes. This process includes a review of assumptions made and the ongoing assessment of annual and longer term plans, including appraisal of the group strategy and significant capital investment decisions. Reviews are led by the Group Chief Executive and Chief Financial Officer in conjunction with Sector Chief Executives. In addition, the board participates fully in the annual process by reviewing sector strategies throughout the year. During these reviews, the group’s current position and its prospects over the forthcoming years are reviewed which allows reaffirmation of the group strategy. The directors have determined that a three year period to 31st March 2021 is an appropriate period over which to assess the group’s viability. As part of our long term planning, the group also prepares forecasts for longer periods than three years, but there is inevitably more uncertainty associated with longer time horizons. We have therefore chosen a three year horizon since this period is also aligned with our normal and well established business planning process which includes preparing and reviewing a three year plan each year. In making the assessment, we have considered a number of severe but plausible stress scenarios linked to the group’s principal risks. We have analysed the impact of the following three hypothetical stress scenarios plus all of them occurring at the same time. Scenario 1: Business performance risks. Under this scenario we evaluated the possible impact from a faster than expected uptake of electric vehicles and the failure to grow existing businesses and to launch new products. Scenario 2: Execution risks. This includes poor management of capital projects, significant production losses due to downtime at a major site and the inability to improve certain businesses or sites. Scenario 3: External and macroeconomic risks. This scenario assesses the impact from a hard Brexit, cyber and IP related risks and from adverse events and movements in commodity markets. All of our stress tests were derived through discussions with senior management and the board after considering our principal risks and uncertainties. Our evaluation took account of the group’s current financing arrangements and assumes that existing debt and borrowing facilities can be refinanced as they mature, but we have also considered the potential capacity for additional funding should this be required. Our stress testing showed that certain combinations of these hypothetical scenarios would increase JM’s funding requirements substantially and risk breaching a key financial covenant, requiring additional funding and potentially mitigating actions in order to maintain sufficient headroom against the covenant limit. Credit risk The group is exposed to credit risk on its commercial and treasury activities. In both cases counterparties are assessed against the appropriate credit ratings, trading experience and market position. Credit limits are then defined and exposures monitored against these limits. In treasury and precious metal management, these exposures include the mark to market of outstanding transactions and potential settlement risks. Pages 76 to 81: Our principal risks t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O However, we are satisfied that the mitigating actions and our capacity for additional financing will allow JM to effectively respond to the negative impact from a combination of these stress scenarios. We have also undertaken a reverse stress test in order to identify what additional or alternative scenarios and circumstances would threaten our current financing arrangements. Based on the results of our assessment, the directors have a reasonable expectation that the company will be able to continue in operation and meet its liabilities as they fall due over a period of at least three years. Foreign currency risk Johnson Matthey’s operations are located in over 30 countries, providing global coverage. A significant amount of profit is earned outside the UK. In order to protect the group’s sterling balance sheet and reduce cash flow risk, the group has financed a significant portion of its investment in the US and Europe by borrowing US dollars and euros respectively. Additionally, the group uses foreign currency swaps to hedge a portion of its assets. The group uses forward exchange contracts to hedge foreign exchange exposures arising on forecast receipts and payments in foreign currencies. Details of the contracts outstanding on 31st March 2018 are shown on pages 175 and 176. Interest rate risk At 31st March 2018 the group had net borrowings of £679 million of which 99% was at fixed rates with an average interest rate of 3.1%. The remaining 1% of the group’s net borrowings was funded on a floating rate basis. A 1% change in all interest rates would have an immaterial impact on underlying profit before tax. Precious metal prices Fluctuations in precious metal prices have an impact on Johnson Matthey’s financial results. Our policy for all manufacturing businesses is to limit this exposure by hedging against future price changes where such hedging can be done at acceptable cost. The group does not take material exposures on metal trading. A proportion of the group’s precious metal inventories are unhedged due to the ongoing risk over security of supply. Maturity profile of debt facilities At 31st March 2018 exchange rates £ million 1,600 1,400 1,200 1,000 800 600 400 200 0 Net debt at 31st March 2018 March 2018 March 2019 March 2020 March 2021 March 2022 March 2023 March 2024 March 2025 March 2026 March 2027 March 2028 Private placement notes KfW loans EIB loans Committed bank facilities 75 Johnson Matthey / Annual Report and Accounts 2018 Strategic Report Risks and uncertainties A holistic approach to managing risk Our approach to risk management focuses on identifying key risks early and action to reduce the likelihood of these having a detrimental effect on the business. During the year we: • Continued to strengthen our processes, monitoring and reporting capabilities so that risks continue to be appropriately identified and managed. As with all Johnson Matthey processes, we regularly review our approach to ensure that it continues to meet business needs and supports the effective management of risks while meeting the requirements of the UK Corporate Governance Code. The effective management of risk enables Johnson Matthey to: • • • • Improve our decision making, planning and prioritisation. Pursue opportunities while keeping risks at an acceptable level in a rapidly changing external environment. Effectively deal with risks should they materialise. Consider risk and reward and implement controls in the areas that matter most to us. All this helps us to deliver our strategic objectives. Our risk framework We operate a holistic risk management system that is applied throughout the business: Board 3 Has overall responsibility for the approach to risk management and internal control 3 Ownership of principal risks and uncertainties 3 Sponsors the framework for enterprise risk management at Johnson Matthey 3 Determines the organisational risk management approach 3 Monitors the nature and extent of exposure for our principal risks Audit Committee 3 Oversight of process and review of controls testing Group Management Committee (GMC) 3 Championship of risk management 3 Carries out top down identification and review 3 Development of company strategy in line with board risk appetite 3 Reporting on principal risks and uncertainties to the board and on process to the Audit Committee Sector level 3 Carrying out top down review activities 3 Responsible for ensuring that sites and functional areas have developed risk registers 3 Review and challenge of risk registers 3 Continuous monitoring 3 Reporting to GMC on sector risk and issues Site / Functional areas / Programmes / Projects 3 Carrying out risk identification, assessment and mitigation 3 Reporting top risks to sector and Corporate Assurance and Risk 3 Carrying out regular reviews on effectiveness of existing controls and progress with control implementation TOP DOWN Oversight Identification of risk Mitigation of risk at group level BOTTOM UP Identification of risk Assessment of risk Mitigation of risk Reporting 76 How we manage risk Evolution of our framework We recognise that risk management is an important part of our business and continually seek to improve our processes. This year we have enhanced our existing processes by continuing to review and refine: • • • • • Our bottom up risk management process, ensuring that our sectors have an embedded risk management process in their businesses which are consolidated and reviewed by the sector leadership twice a year. Training and facilitation is provided to support this. Our top down risk management process, to ensure that any risks not materialising through the bottom up process were captured through looking at the external environment and internal environment with the GMC and board. Following the revision of our strategy in 2017, we took a fresh look at our risks to confirm that these continued to be aligned to our strategy. With greater clarity of our strategic priorities, we have tightened our risks so that we can focus on understanding worst case scenarios that could threaten our business model, future performance, solvency or liquidity. Our approach has meant that we have effective risk related conversations and that these are embedded within the GMC and board agendas; and not just as specific discussions on risk. As a result of this activity, our assessment of our risks has changed, narrowing the focus towards the worst case scenario; and deeper more informed conversations that include constructive challenging debates. • We have embedded risk mitigation monitoring in our business management processes. This therefore means that we are continually monitoring our mitigating activities as part of our normal course of business management and not waiting for a risk management process deep dive to flag progress against plan. • Our new process puts significantly more focus on monitoring the quality of our mitigation plans. We have embedded continuous monitoring and improvement of the mitigation plans within the business, and ensure there is ongoing challenge to further improve effectiveness of the plans. t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Our risk process Our risk process is designed to support everyone, at all levels of the business, in identifying and managing risks. All risks, whether they are identified at the most senior level or throughout the business, are described, analysed and reported using a standard framework. The central Corporate Assurance and Risk team acts as an advisory function and provides independent challenge and review. Each of our business functions also participates in the process, identifying any risks that may prevent them achieving their objectives and describing these in terms of cause and consequence. These are scored using a variety of impact measures, including financial, operational, reputational and people factors. Controls for each risk are described and assessed. Each risk, at every level, has a designated owner who is responsible for ensuring the described controls are effective and efficient. We continually review the level of risk throughout the business and complete a formal submission every six months for reporting purposes (as illustrated in our risk framework opposite). Identification of risk Monitoring and reporting Framework supported by central Corporate Assurance and Risk Team Assessment and evaluation Control effectiveness Determination of response 77 Johnson Matthey / Annual Report and Accounts 2018 Strategic Report Our principal risks and uncertainties Understanding why and how our principal risks change The ongoing review of our principal risks ensures that we reflect on the challenges facing our business and the changes that we have made to our business in response to those challenges. We continually map our principal risks and uncertainties to strategic and business plans to ensure that we have appropriate coverage of risks. Following the revision of our strategy in 2017, we took a fresh look at our risks to confirm that these continued to be aligned to the strategy. With greater clarity of our strategic priorities we have better focused our risks, understanding the worst case scenarios that could threaten our business model, future performance, solvency or liquidity. As a result of these exercises, we have concluded that for the most part, the overarching areas of risk remain unchanged. In all cases we continue to review and refine the documented mitigations for each risk. We have also changed our risk reporting to consider whether the risk profile is increasing, decreasing or remaining constant. We believe that provides our board and shareholders greater transparency in reporting compared to reporting the gross or net risk as high, medium or low. Changes to our principal risks and uncertainties in 2017/18: • Future revenue growth. Now this is the risk specifically associated with our failure to deliver against the growth opportunities identified in our strategy. Previously it was defined more broadly as the risk associated with revenue growth opportunities, investment decisions, significant capital investment, mergers and acquisitions and research and development activities. 1 Existing market outlook • Applications systems and cyber security. This was added to our principal risks during the year. The external cyber threat is increasing with more sophisticated attacks on a wide range of organisations. The elevation of this risk ensures that the board has greater visibility of the actions we take to mitigate the risk. Brexit Whilst not a principal risk and uncertainty, Johnson Matthey continues to monitor closely the potential EU exit (Brexit) risks through our businesses. Our well established Brexit working group is composed of a number of functional experts who look to mitigate risks for a range of Brexit scenarios with a specific focus on trade, regulation and our people. Whilst there remains a great deal of uncertainty as to what Brexit will mean for the company, the Brexit working group is developing and implementing plans to ensure Johnson Matthey is able to navigate the best possible outcome for our people, our business and our customers. The following table sets out the principal risks and uncertainties facing the group, the mitigating actions for each and an update on any change in the profile of each risk during the course of the year. Our risks are not listed from greatest risk to lowest risk; we list our strategic risks first, followed by operational risks. As explained above, we added applications, systems and cyber risk this year. It is our newest risk and so it is listed last. Risk and impact The risk of a change to the outlook for our key markets is either unplanned or unforeseen and as a result we are poorly positioned to respond. This risk would include legislative change, for example as a result of Brexit or changes in customer or consumer behaviour impacting our business. 2 Future growth Risk and impact To deliver growth as communicated in our capital markets day, we are making significant investments in key growth opportunity areas. This risk considers the potential failure to deliver this growth and create value. 78 Mitigation • Strategic planning process in place to assess and understand trends across our sectors and markets with an understanding and assessment of the impact of economic and geopolitical uncertainty and legislative changes. • Plans in place to execute mitigation strategies. • Mechanisms to monitor changes and launch mitigation actions if required. Changes since 2017 annual report As we continue to strengthen our strategic planning process, the robustness of our scenario planning is also increasing. However, uncertainty will always be present in the external environment. This risk is unchanged. Mitigation • A clear strategy, which is continuously reviewed in the light of new information, and a business review process to track execution of that strategy. • Appropriate investment in R&D, capital and talent identified to support realisation of the strategy. • Ongoing monitoring and review of new technologies and market competitiveness. • Project Management Offices (PMOs) in place to ensure appropriate governance in place and plans are delivering to expected timelines. Changes since 2017 annual report This risk has been refined to consider our key growth areas as described in our capital markets day. This risk is therefore not directly comparable with that reported in 2016/17. t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O 3 Maintaining our competitive advantage Risk and impact Failure to maintain our competitive advantage in existing markets and, as a result, not meeting customers’ evolving needs as efficiently as our competitors. Mitigation • Strong customer relationships, built around technical proposition, reputation in the market and a high level of technical service. • Regular strategy reviews to retest the external environment. • Embedding analysis of competitor strategy and benchmarking relative performance. • Strong balance sheet to support significant ongoing investment in R&D. • Active prioritisation of R&D and capital investment to areas of greatest opportunity. 4 Environment, health and safety Risk and impact In common with other similar manufacturing companies, the group operates in a challenging safety environment that is subject to numerous health, safety and environmental laws, regulations and standards. If we fail to operate safely we could injure our people. We could breach applicable laws, regulations and standards which could adversely impact our employees, result in lost production time and could attract negative media and regulator interest. Mitigation • Setting the tone from the top with senior managers leading by example. • Understanding of our business risk profile. • Systems and processes to facilitate adherence to corporate policies, procedures and standards. • Ongoing investment in the business to ensure that our equipment is appropriate. • Training and awareness activities. • Risk, audit and safety checks. • Safety culture programme and behavioural standards. • Investigations to determine the cause of incidents and accidents and the development of remediation plans. • An independent hotline for employees to report concerns. Changes since 2017 annual report This risk is unchanged. We will continue to evolve our position to maintain our competitive advantage. Changes since 2017 annual report This risk is unchanged. Health and safety continues to be our priority and we take our responsibility for environmental impact very seriously. 5 Sourcing of strategic materials Risk and impact As JM has limited suppliers from which to source certain strategic raw materials, any significant breakdown in the supply of these materials would lead to an inability to manufacture and satisfy customer demand. Mitigation • Strengthening supplier relationship management, regular reviews to discuss supplier capacity constraints. • Continuing to build expertise in supply chain, logistics, procurement and trade export controls. • Supplier quality management processes. • Safety stocks held in strategic locations. • Research and development to consider alternative materials. • Business continuity management, identification of critical failure risks and plans in place to manage these. Changes since 2017 annual report This risk is inherent in our Automotive and Health related businesses, where validated materials are utilised in our products. Risk landscape unchanged. 6 People Risk and impact To execute the JM strategy and deliver growth, we need to ensure that we have the breadth and depth of leadership and the appropriate capabilities. Mitigation • Assessment of skills and capability requirements. • JM leadership values and behaviours. • Robust talent management processes. • Leadership development programmes. • Building high quality personal development plans in place for all leaders. Changes since 2017 annual report With greater clarity of our strategic priorities we have tightened this risk to focus on the skills and capabilities we need now and in the future. We are investing in our leadership and growing talent through robust succession planning to build our future leaders. 79 Johnson Matthey / Annual Report and Accounts 2018 Strategic Report 7 Security of metal and highly regulated substances Risk and impact On any given day, the group has significant quantities of high value precious metals or highly regulated substances on site and in transit; loss or theft due to a failure of the security management systems associated with the protection of metal or highly regulated substances may result in performance impact, reduced customer confidence and potential legal action. Mitigation • Assay and other process controls. • Stock takes to check inventories. • Security awareness campaigns and training. • Security management systems and site security systems. • Audits of site security systems and process controls. • Use of approved carriers for transit. • Liaison with local law enforcement for high risk sites. • Insurance coverage for losses from theft or fraud. 8 Intellectual capital management Risk and impact Failure to identify and protect the group’s intellectual capital or failure to identify third party intellectual capital rights could lead to a loss in business advantage, loss of freedom to operate and reputational damage associated with litigation. Mitigation • Business intellectual capital management strategy. • Ensuring we maintain a data security strategy to protect our intellectual capital. • Investment in cyber security (see risk 13). • Annual research and development and intellectual property reviews. • Monitoring of third party intellectual capital. • Use of intellectual capital lawyers to provide specialist guidance. • Training and awareness. 9 Failure of significant sites Mitigation • Assessment of significant sites. • Business impact analysis for sites covering all activities, e.g. supply chain, production, commercial etc. • Building plans that enable a comprehensive response to an event and annual testing. • Insurance of activities. Risk and impact Potential risks include a disruptive event such as fire, flood or earthquake, a major incident at site level such as an explosion or other events such as geopolitical instability. The consequences associated with this risk include the impact on our ability to manufacture goods and satisfy customer demand. Changes since 2017 annual report As reflected at the half year, we saw this risk increase in response to the impact of the metal price on our balance sheet. Changes since 2017 annual report We are developing market leading intellectual capital, through intellectual property, in the battery materials and health markets, both of which are crowded and litigious. Although cyber risk to our business is considered separately, it is also recognised as a threat to this risk area. As such we are investing in our mitigating activity to manage our increased risk profile. Changes since 2017 annual report Risk landscape unchanged. 10 Ethics and compliance Risk and impact Failure to comply with ethical and regulatory compliance standards leading to reputational damage, to civil or criminal legal exposure for the company or for individuals or to risk of contractual breach. Mitigation • Code of ethics and tone from the top set by senior leadership. • Use of subject matter experts, internal and external, to identify risks, set standards and provide advice and training. • Suite of legal compliance policies and procedures to mitigate key ethics and compliance risks. • Code of ethics in place supported by online training and formal acknowledgement. • Global network of ethics ambassadors. • Independent confidential speak up hotline for employees, contractors and third parties. • Investigation / response to all matters overseen by an Ethics Panel. Changes since 2017 annual report This risk is reassessed on an ongoing basis in the light of the evolving regulatory and business background. In response, we review our policies, processes and controls and amend these as appropriate. Examples of this include General Data Protection Regulations (GDPR) and the CCO (Corporate Criminal Offence). 80 11 Business transition Risk and impact To position the group for future growth and maximise available efficiencies, we continue to evolve the way in which we run our business. This includes standardising some activities across the group, directed by strong functional leaders, in order to ensure best practice is used and maintained across the group. The risk is that we fail to achieve the benefits of these efficiencies, lose our business agility and / or fail to maintain a very high level of customer responsiveness. 12 Product quality Risk and impact Our products are used in a wide range of applications, processes and systems. The safety and quality of these products is crucial to ensuring they operate as intended. Should a product fail to perform as expected, we could be responsible for consumer harm or exposed to liability claims. This could lead to loss of future business, reputational damage and loss of licence to operate. Mitigation • Strategic PMO in place to monitor progress and provide assurance across the workstreams. • Programme management in place for key initiatives, with group owners cascading plans and agreed deliverables with business leads. • Audit of key projects with third party assurance where appropriate. • Communication and employee engagement plans associated with key initiatives. Changes since 2017 annual report Risk landscape unchanged. A number of programmes are in place to mitigate this risk. Mitigation • Regulatory framework for compliance in place. • Developing robust new product introduction process and technical change processes. • Developing robust manufacturing systems supported by standardised processes. • Monitoring and reporting of quality performance, taking corrective action where required. • Quality management systems in place supported by education and audit. • Robust contract terms and conditions. Changes since 2017 annual report The regulatory environment continues to tighten and our customers are experiencing greater scrutiny which has created pressure for our business. t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O 13 Applications, systems and cyber Risk and impact Risks that our applications and systems security is inadequate or fails to adapt to changing business requirements and / or external threats. The impact of these may adversely affect our financial position and could harm our reputation. Mitigation • Ensuring we maintain a data security strategy in line with the evolving threat. • Investment in information security systems, monitoring and assurance in support of our data security strategy. • Mapping of all at risk data and understanding of regulatory requirements. • Maintenance of a breach reaction plan. Changes since 2017 annual report The external cyber threat is increasing with more sophisticated attacks on a wide range of organisations. Against this backdrop we are investing in our IT infrastructure to support a more efficient business and, in doing so, we are increasing the global consistency and connectivity of our applications and infrastructure. As such, we have decided to elevate the risk of cyber attack from within the risk of failure of a critical site to a principal risk in its own right, to ensure greater board visibility. 81 Contents 84 Board of Directors 86 Letter from the Chairman 87 Corporate Governance Report 99 Nomination Committee Report 103 Audit Committee Report 111 Remuneration Report 131 Directors’ Report 135 Responsibility of Directors Governance 82 Johnson Matthey / Annual Report and Accounts 2018 The Governance section, introduced by our Chairman, contains the Corporate Governance Report and details about the activities of the board and its committees during the year. It also contains the Directors’ Report and the statement on responsibilities of directors. t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O 83 Johnson Matthey / Annual Report and Accounts 2018 Governance Board of Directors From left to right Tim Stevenson, OBE – Chairman Appointed to board: March 2011 Experience Tim was appointed Chairman in July 2011. He was Chairman of The Morgan Crucible Company plc from December 2006 to July 2012 and Chairman of Travis Perkins plc from November 2001 to May 2010. Tim has also sat on a number of other boards including National Express plc, Partnerships UK and Tribal PLC and was Chief Executive at Burmah Castrol plc from 1998 to 2000. He is a qualified barrister and is Lord Lieutenant of Oxfordshire. Other current appointments Director of the Emmott Foundation Limited. Committees Remuneration, Nomination (Chairman) International experience Spain, UK Sector experience Chemicals, Manufacturing, Oil and Gas, Retail Robert MacLeod – Chief Executive Appointed to board: June 2009 Anna Manz – Chief Financial Officer Appointed to board: October 2016 Experience Robert was appointed Chief Executive in June 2014. He joined Johnson Matthey as Group Finance Director in 2009. Previously he was Group Finance Director of WS Atkins plc and a Non-Executive Director at Aggreko plc. He is a Chartered Accountant with a degree in Chemical Engineering. Other current appointments Non-Executive Director at RELX PLC, RELX NV and RELX Group plc. International experience UK, US Sector experience Chemicals, Oil and Gas, Professional Services Experience Anna joined Johnson Matthey as Chief Financial Officer in October 2016. Previously she was Group Strategy Director and a member of the Executive Committee at Diageo plc. During 17 years at Diageo, Anna held a series of senior roles, including Finance Director Spirits North America, Group Treasurer and Finance Director Asia Pacific. Anna is a qualified management accountant with a degree in Chemistry. Other current appointments Non-Executive Director at ITV plc. International experience China, India, Ireland, Kenya, Korea, Nigeria, Singapore, UK, US Sector experience Manufacturing, Media Patrick Thomas – Chairman Designate To be appointed to the board: June 2018 Patrick Thomas will join the board as Chairman Designate on 1st June 2018 and will succeed Tim Stevenson as Chairman at the close of the 2018 Annual General Meeting on 26th July 2018. Experience Between 2015 and May 2018 Patrick was Chief Executive Officer and Chairman of the Board of Management of Covestro AG. Between 2007 and 2015 he was Chief Executive Officer of its predecessor, Bayer MaterialScience, prior to its demerger from Bayer AG. Other Current Appointments Non-Executive Director of Akzo Nobel N.V. Committees Remuneration, Nomination (Chairman Designate) International experience Belgium, Germany, UK Sector experience Chemicals, Manufacturing, Oil and Gas, Pharmaceuticals, Technology Alan Ferguson – Senior Independent Director Appointed to board: January 2011 Odile Desforges – Non-Executive Director Appointed to board: July 2013 Experience Alan was appointed a Non-Executive Director in January 2011 and as Senior Independent Director in July 2014. Previously he was Chief Financial Officer and a Director of Lonmin Plc. Prior to this he was Group Finance Director of The BOC Group. Before joining BOC, he worked for Inchcape plc for 22 years and was Group Finance Director from 1999 until 2005. He is a Chartered Accountant and sits on the Business Policy Panel of the Institute of Chartered Accountants of Scotland. Other current appointments Non-Executive Director and Chairman of the Audit Committee at Croda International Plc and Marshall Motor Holdings plc. He is also Senior Independent Director at both these companies. Committees Audit (Chairman), Remuneration, Nomination International experience South Africa, UK Sector experience Automotive, Chemicals, Metals and Mining Experience Odile's automotive industry experience began with the French Government's Transport Research Institute and developed with Renault SA and AB Volvo. She has held senior positions in purchasing, product planning, development and engineering, including as Chairman and Chief Executive Officer of the Renault-Nissan Purchasing Organization (RNPO) and most recently, until 2012, as Executive Vice President, Engineering and Quality at Renault. She was appointed a Knight of the French Legion of Honour in 2009. Other current appointments Non-Executive Director of Safran SA, Dassault Systèmes, Imerys and Faurecia. Committees Audit, Remuneration, Nomination International experience France, Japan, Sweden, UK Sector experience Aerospace, Automotive, Defence, Manufacturing, Technology 84 From left to right Jane Griffiths – Non-Executive Director Appointed to board: January 2017 John O’Higgins – Non-Executive Director Appointed to board: November 2017 Experience Jane is currently Global Head of Actelion a Janssen pharmaceutical company of Johnson & Johnson (J&J). Since joining J&J in 1982 Jane's roles have included international and affiliate strategic marketing, sales management, product management, general management and clinical research. Jane is Director and Chair of the J&J Corporate Citizenship Trust in EMEA, a sponsor of the J&J Women's Leadership Initiative. Experience John is currently Chief Executive of Spectris plc, a position he has held since January 2006. Prior to this he worked for Honeywell in a number of management roles, including as president of automation and control solutions, Asia Pacific. He began his career as a design engineer at Daimler-Benz in Stuttgart. Between 2010 and 2015, John was a Non-Executive Director of Exide Technologies, Inc. Other current appointments Director of Johnson & Johnson Innovation Limited. Other current appointments Trustee of The Wincott Foundation. Committees Audit, Remuneration, Nomination International experience Africa, Middle East, UK Sector experience Pharmaceuticals Committees Audit, Remuneration, Nomination International experience Belgium, China, Germany, UK, US Sector experience Automotive, Energy, Manufacturing, Oil and Gas, Technology Chris Mottershead – Non-Executive Director Appointed to board: January 2015 John Walker – Sector Chief Executive, Clean Air Appointed to board: October 2013 Experience Chris is Senior Vice President of Quality, Strategy and Innovation at King’s College London and Director of King's College London Business Limited. Prior to joining King’s College in 2009, Chris had a 30 year career at BP, most recently as Global Advisor on Energy Security and Climate Change. Before this, he was Technology Vice President for BP’s Global Gas, Power and Renewables businesses. He is a Chartered Engineer and Fellow of the Royal Society of Arts. Other current appointments Non-Executive Director of The Carbon Trust and Carbon Trust Investments Limited. Committees Audit, Remuneration (Chairman), Nomination International experience UK, US Sector experience Energy, Oil and Gas Experience John joined Johnson Matthey in 1984 and was appointed Division Director, Emission Control Technologies in 2009 after holding a series of positions within the division in the US, Asia and Europe. He was appointed Executive Director, Emission Control Technologies Division in October 2013 (division subsequently renamed Clean Air Sector in April 2017). International experience Australia, China, France, Germany, India, Japan, Malaysia, UK, US Sector experience Automotive, Chemicals Simon Farrant – General Counsel and Company Secretary Joined Johnson Matthey: 1994 Experience Appointed Company Secretary in 1999 and Group Legal Director in 2007. He is a Solicitor and Attorney and Counselor-at-Law (State of New York). At the date of approval of this annual report, the Board of Directors of Johnson Matthey is as detailed here. Colin Matthews retired as a Non-Executive Director with effect from 15th November 2017. Board diversity Gender Male Female 67% 33% Board tenure 6–10 years 0–3 years 3 3 3 3–6 years t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O 85 Johnson Matthey / Annual Report and Accounts 2018 Governance Letter from the Chairman Tim Stevenson Chairman This section of the annual report describes our corporate governance structures and processes and how they have been applied throughout the year ended 31st March 2018. My role as Chairman My most important role is to ensure that Johnson Matthey has a board which works effectively under my leadership. This is particularly important as the company continues to evolve and grow. I believe we have an effective board. We report on pages 94 to 95 on our board and committee review, which we conducted externally this year. Open and constructive evaluation is integral to our effectiveness. Governance and strategy During the year we have refined our strategy and business model, including organising our business into four sectors, driving further synergies for customers and our stakeholders. We have reviewed our governance arrangements and concluded these continue to be right for the company. They effectively support our strategy and will enable us to respond to any challenges we may face. For me, ensuring the right board dynamics is vital. I am pleased to say that we have strong contributions and challenge from all our directors in an open and constructive atmosphere. This is in large part created by having a board comprising directors with a broad range of skills, expertise and attributes. As Chairman, I lead the setting of the board’s agenda and I pay considerable attention to ensuring we have a plan which allows for appropriate time to discuss all necessary items, particularly the development of strategy and the consideration of risk. Culture A key part of the board’s role is to take effective steps in shaping and embedding a healthy corporate culture throughout our organisation. This is fundamental to being able to build sound governance behaviours and practices, all of which support the success of our company and its strategic objectives. The board recognises that it has a responsibility to act with integrity and lead by example to create our desired corporate culture. Succession planning and diversity Ensuring that the group employs a process of thoughtful, strategic and practical succession planning is a key role for the board in nurturing our culture, sustaining our operating model and delivering our strategy. The board itself needs to be refreshed over time, drawing on an appropriately diverse talent pool. We recognise the benefits of bringing greater diversity throughout the organisation and in the boardroom. We explain our approaches to this component of board effectiveness in this report. The UK Corporate Governance Code We are reporting against the UK Corporate Governance Code 2016 (the Code). We report on how we have applied the Code’s main principles and complied with its relevant provisions. Except in one respect (which is explained on page 98), Johnson Matthey has complied with all relevant provisions throughout the year ended 31st March 2018 and from that date up to the date of approval of this annual report. Risk management Looking forward Risk management is an important part of our wider discussion of strategy and our operating model. In this report, we aim to show how our strategy is underpinned by a robust risk management framework. Stakeholders The board recognises the importance of balancing the needs of our stakeholders with the long term strategic aims of our business. We ensure effective engagement with our stakeholders so as to ensure their views are understood and appropriately taken into account. It has been a privilege to be Chairman of Johnson Matthey for the last seven years and I am immensely proud of what we have achieved. It is a great company with excellent people and a robust strategy. I would like to thank our customers, our employees and our shareholders for their support. I wish the business every success for the future. Tim Stevenson Chairman 86 Corporate Governance Report Introduction Our Board of Directors is responsible to our shareholders for ensuring the sound running of the company. This can only be achieved if the board is supported by appropriate and well managed governance processes to support our strategy, ensure a positive culture across the group and manage risks and uncertainties. The key elements of these are described in this Corporate Governance Report. Getting to know the business In order for our directors, particularly our Non-Executive Directors, to effectively discharge their responsibilities, it is critical that they understand our businesses. Throughout the year we review the delivery against strategy of our sectors. These sessions are attended by the relevant Sector Chief Executive and, where appropriate, other sectoral senior management. They give the board an excellent opportunity to hear about, discuss and challenge the strategic direction of our business. This was particularly important during the year as we refreshed our strategy and moved to a group structure aligned to our global priorities. The board also reviews our key functional areas. These reviews are attended by the relevant functional head and enable the board to assess the strength of these functions in their ability to support delivery of the group’s strategic objectives. The board regards it as vital to make space in the timetable to learn more about our businesses through site visits, presentations or other proposals brought to the board. During the course of the year the board engaged in significant discussion on growth within our businesses, to ensure the market opportunities were fully understood as investments to build capacity were considered. Periodically, we hold business ‘teach-ins’ for our board. These are separate from board meetings and are attended by a range of managers from the relevant business. They are designed to give the board a more in depth insight into our businesses and their customers than is possible during board meetings. This deeper understanding enhances the Non-Executive Directors’ ability to challenge, debate and contribute to sectoral strategy at board meetings. During the year a number of board members also attended a training session on process safety, led by the Group EHS Director. t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O UK Corporate Governance Code The UK Corporate Governance Code 2016 (the Code) contains broad principles and specific provisions which set out standards of good practice in relation to leadership, effectiveness, remuneration, accountability and relations with shareholders. This Corporate Governance Report is structured to report against the Code by reference to each of these key areas. Together with the Nomination Committee Report, the Audit Committee Report and the Remuneration Report, it describes how we have complied with the relevant provisions of the Code and applied its main principles during the year. While the majority of our board meetings are held at our City office in London, the board holds two board meetings each year at operational sites. The board always tours the site and management present to them on the business, its challenges and successes. These visits enable the board to see our operations on the ground and to meet the teams that are making them successful. They are a useful opportunity for the board to hear about customers, business issues, risks and strategy as well as environment, health and safety developments and the business’ sustainability and manufacturing efforts. knowledge and understanding, meeting with management and other employees. During the year our Non-Executive Directors visited our Efficient Natural Resources manufacturing facilities at Emmerich and Oberhausen in Germany. Tim Stevenson and some of our Non-Executive Directors also attended for part of the 2017 leadership conference, which gave them an opportunity to get a feel for the group’s culture, hear more about the group’s priorities in action and meet employees from across all our sectors and functions. During 2017/18, board meetings were All of the above activities enable the held at Sonning, UK (April 2017) and in Redwitz, Germany (October 2017). At Sonning, the board visited Johnson Matthey’s Technology Centre to learn more about research and development projects. At Redwitz, the board toured our Clean Air manufacturing site. Our Non-Executive Directors also undertake visits to our sites independent of the Executive Directors, either individually or collectively, to further enhance their Non-Executive Directors to continue to develop and refresh their knowledge and understanding of our businesses, the markets in which we operate and our key stakeholders. They provide an opportunity to meet with and hear the views of employees. Through these, the board develops a sound and balanced insight into the group which supports it in its role to provide entrepreneurial leadership and set strategy. Board and committee meetings Capital Markets Day feedback Facility tours Getting to know the business Sector and functional reviews Sector ‘teach-ins’ Meeting our people Leadership conference 87 Johnson Matthey / Annual Report and Accounts 2018 Governance Leadership Governance framework The group’s principal decision making body is the board. It has responsibility for setting the group’s strategic direction and for ensuring that the group manages risk effectively. The board is accountable to shareholders for the group’s financial and operational performance. It is supported by three principal committees: the Nomination Committee, the Audit Committee and the Remuneration Committee. Our governance framework at 31st March 2018 Chairman Tim Stevenson Key responsibilities • Leads the board. • Ensures an effective board, including contribution and challenge from the directors. • Ensures that Johnson Matthey maintains effective communications with its shareholders. Independent Non-Executive Directors Odile Desforges Jane Griffiths Chris Mottershead Alan Ferguson John O’Higgins Key responsibilities • Constructively challenge the Executive Directors in all areas. • Scrutinise management’s performance. • Help develop proposals on strategy. • Satisfy themselves on the integrity of financial information and on the effectiveness of financial controls and risk management systems. • Determine appropriate level of remuneration for Executive Directors. Senior Independent Director Alan Ferguson Key responsibilities • Provides a sounding board for the Chairman. • Acts, if necessary, as a focal point and intermediary for the other directors. • Ensures that any key issues not addressed by the Chairman or the executive management are taken up. • Available to shareholders should they have concerns. • Leads the annual appraisal of the Chairman’s performance. • Ensures an orderly succession process for succession to the chairmanship of the company. Board Membership Nine directors (Chairman, three Executive Directors and five independent Non-Executive Directors). Role • Provides entrepreneurial leadership of the company and direction for management. • Has collective responsibility and accountability to shareholders for the long term success of the group. • Reviews the performance of management and the operating and financial performance of the group. • Sets strategy. • Determines risk appetite. • Ensures that appropriate risk management and internal control systems are in place. • Sets the company’s values and standards. • Ensures good governance and promotes good behaviour. Chief Executive Company Secretary Executive Directors Robert MacLeod Simon Farrant Key responsibilities • Has day to day responsibility for running the group’s operations. • Recommends to the board and implements group strategy. • Applies group policies. • Promotes the company’s culture and standards. Key responsibilities • Acts as secretary to the board and its committees. • Together with the Chairman, keeps the efficacy of the company’s and the board’s governance processes under review. • Has responsibility for compliance with board procedures. • Provides advice on corporate governance issues. Robert MacLeod Anna Manz John Walker Key responsibilities • Have specific executive responsibilities. • Discharge duties in respect of the group as a whole. 88 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Responsibility for implementing operational decisions and the day to day management of the business is delegated to the Chief Executive who is supported by the Group Management Committee (GMC) as outlined on page 13. There is a clear division of responsibilities between the running of the board and the executive responsibility for running the business. The board has identified certain matters which only it can approve. These are set out in a schedule of matters reserved for the board. The Chairman’s and Chief Executive’s roles are separate and this division of responsibilities is clearly established in a written statement within the corporate governance framework, which is available on our website. The GMC is responsible for managing business performance, delivery of strategy and mitigating risks. It meets six times a year and most weeks for informal discussions on day to day matters. The GMC is supported by four sub-committees – the Environment, Health and Safety Leadership Committee, the OneJM Policy Committee, the Finance and Administration Committee, and the Legal Risk Committee. matthey.com/corporate-governance Audit Committee Membership Five independent Non-Executive Directors. Chaired by Alan Ferguson. Role Assists the board in carrying out its oversight responsibilities in relation to financial reporting, internal controls and risk management and in maintaining an appropriate relationship with our external auditor, including recommending reappointment or a requirement to tender. Nomination Committee Membership Five independent Non-Executive Directors and the group Chairman. Chaired by Tim Stevenson. Role • Considers structure, size, composition and succession needs of the board. • Oversees succession planning for senior executives. Remuneration Committee Membership Five independent Non-Executive Directors and the group Chairman. Chaired by Chris Mottershead. Role • Sets remuneration policy for Executive Directors and the Chairman and determines the application of that policy. • Reviews and monitors the level and structure of remuneration for senior executives. Disclosure Committee Membership The Chief Executive, Chief Financial Officer and the Company Secretary. Chaired by Robert MacLeod. Role To identify and control inside information or information which could become inside information, and to determine how or when that information is disclosed in accordance with applicable legal and regulatory requirements. Ethics Panel Membership The Company Secretary and three executive heads of functions. Chaired by Simon Farrant. Role To oversee the concerns raised pursuant to the Speak up Policy, including the effective review and investigation of these concerns. Group Management Committee Membership Chief Executive, Chief Financial Officer, Sector Chief Executives, Chief HR Officer, Chief Technology Officer, Chief Strategy and Corporate Development Officer and General Counsel and Company Secretary. Role Has responsibility for the executive management of the group’s businesses. Recommends strategic and operating plans to the board. Environment, Health and Safety (EHS) Leadership Committee Chaired by John Walker. Role Has responsibility for assisting the company in discharging its EHS responsibilities and in creating a positive EHS culture across the group. OneJM Policy Committee Chaired by Simon Farrant. Role Has responsibility for setting a policy framework for the group, oversight and approval of Johnson Matthey group policies. Finance and Administration Committee Chaired by Anna Manz. Role Has responsibility for certain of the group’s finance and corporate restructuring matters. Legal Risk Committee Chaired by Simon Farrant. Role Reviews contract and litigation risk for the group. 89 Johnson Matthey / Annual Report and Accounts 2018 Governance Principal board activities During the year and up to the date of approval of this annual report, the board focused on a number of specific areas which are outlined in the following table. Science Customers Role of the board Outcome Role of the board Outcome Strategy Efficiency To set the company’s strategic aims and to take responsibility for the long term success of the company. To approve major capital projects. • Reviewed and approved Efficient Natural Resources strategy. • Reviewed and approved Health strategy. • Reviewed and approved Clean Air strategy including investments in Clean Air plants in Poland and China to expand capacity. • Reviewed and approved Battery Materials strategy including investing in manufacturing capacity, for ultra-high energy battery cathode materials. R&D To ensure the long term success of the company. • Reviewed innovation and endorsed the approach taken to grow and develop the research and development portfolio. To ensure that the needs of our customers are integral to our strategy. To ensure the long term success of the company. To maintain oversight of the group’s financial performance. To establish transparent arrangements to apply corporate reporting, risk management and internal controls. To maintain an appropriate relationship with the auditors • Reviewed and approved proposals on our commercial excellence programme to capture a fair share of the value we create for customers. Financial • Reviewed and approved group budget and three year plan. • Approved full year results, half-yearly results and the annual report. • Approved the group’s going concern and viability statements. • Reviewed the group’s tax strategy, including the implications of the US tax reform. • Reviewed the group’s treasury strategy, including key policies. • Approved the appointment of PricewaterhouseCoopers LLP as external auditor for the financial year commencing 1st April 2018 subject to shareholder approval at the 2018 Annual General Meeting (AGM). • Reviewed proposals on our brand refresh and our programme of delivery to support Johnson Matthey’s 200th anniversary. 90 Operations People Role of the board Outcome Role of the board Outcome Operational Culture To supervise the management of the business. • Reviewed progress on the development and implementation of groupwide business information systems. • Reviewed our cyber security arrangements. • Reviewed and approved proposals on our procurement excellence programme, including a saving target of £60 million over three years. • Agreed to close our Health manufacturing plant at Riverside, US. Risk • Reviewed the board’s responsibilities in relation to risk assessment and monitoring of risk management and internal control systems. • Reviewed principal risks and agreed mitigating actions, key assurance activities and risk appetite. Governance • Reviewed the key features of the proposed amendments to the UK Corporate Governance Code and established a working group to consider further proposals. • Reviewed the schedule of matters reserved for the board and committee terms of reference and approved a new corporate governance framework. To determine the nature and extent of the principal risks and the group’s risk appetite. To facilitate effective, entrepreneurial and prudent management of the business. To establish the culture, values and ethics of the company. • Reviewed and agreed the articulation of our company values and behaviours. • Received a legal, ethics and compliance and intellectual property risk update. • Reviewed EHS performance at each meeting and considered significant incidents, including management responses and actions and the outcome of safety audits. Leadership To ensure the board is effective with an appropriate balance of skills, experience, independence and knowledge. • Considered board succession and approved the appointments of John O’Higgins and Patrick Thomas. • Reviewed directors’ conflicts of interest and Non-Executive Directors’ independence. To undertake a rigorous annual performance evaluation. To ensure remuneration promotes the long term success of the company. • Reviewed key findings of the board and committee performance evaluation and agreed key actions. • Reviewed objectives for the Executive Directors and GMC members for 2018/19. Pages 16 and 17: Our strategy Our principal risks Pages 76 to 81 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O 91 Johnson Matthey / Annual Report and Accounts 2018 Governance Board meetings and attendance Each year the board agrees an annual agenda plan. The board seeks to ensure there is sufficient time to discuss strategy so that the Non-Executive Directors have the opportunity to challenge and help develop strategy proposals. During the year, our board met seven times. The attendance of members at board meetings during the year was as follows: Tim Stevenson Odile Desforges Alan Ferguson Jane Griffiths Robert MacLeod Anna Manz Colin Matthews Chris Mottershead John O’Higgins John Walker Role Date of appointment to board Number of meetings eligible to attend Number of meetings attended 29th March 2011¹ Chairman 1st July 2013 Non-Executive Director 13th January 2011 Non-Executive Director 1st January 2017 Non-Executive Director 22nd June 20093 Chief Executive 17th October 2016 Chief Financial Officer 4th October 2012 Non-Executive Director Non-Executive Director 27th January 2015 Non-Executive Director 16th November 2017 9th October 2013 Executive Director 7 7 7 7 7 7 54 7 2 7 62 7 7 7 7 7 5 7 2 7 % attended 86% 100% 100% 100% 100% 100% 100% 100% 100% 100% 1 2 Tim Stevenson was appointed Chairman on 19th July 2011. Tim Stevenson was unable to attend one meeting due to illness. In his absence, Alan Ferguson, Senior Independent Director, chaired the board meeting. Tim Stevenson reviewed all meeting papers and shared his thoughts, comments and questions with Alan Ferguson, who raised these at the meeting. 3 Robert MacLeod was appointed Chief Executive on 5th June 2014. 4 Colin Matthews retired from the board on 15th November 2017. Since the end of the year, the board has met twice and all board members attended both meetings. The attendance of members at committee meetings in the year is set out in the Nomination Committee Report, the Audit Committee Report and the Remuneration Report (in respect of the Remuneration Committee) on pages 99, 104 and 122 respectively. Individuals’ attendance at board and board committee meetings is considered, as necessary, as part of the formal annual review of their performance. During the year, board members also participated in three scheduled conference calls to give the Executive Directors the opportunity to update the Non-Executive Directors on key matters between board meetings. Effectiveness Our board’s composition As at 31st March 2018, our board comprised the Chairman, three Executive Directors and five independent Non-Executive Directors. Our board believes that both it and its committees have the appropriate range and balance of skills, experience, knowledge and independence to enable them to carry out their duties and responsibilities effectively. The size and composition of the board is regularly reviewed by the Nomination Committee. The board, through the Nomination Committee, follows a formal, rigorous and transparent procedure to select and appoint new board directors. Independence of the Non-Executive Directors The board reviews Non-Executive Director independence annually, most recently at its meeting in May 2018. The board considers all relevant relationships and circumstances, including those defined in the Code that could affect, or appear to affect, their independent judgement. Each of our Non-Executive Directors is determined by the board to be independent in character and judgement. Information on the company’s procedures for authorising potential conflicts of interest is set out under ‘Directors’ conflicts of interest’ on page 94. Succession planning Effective succession planning is a fundamental component of board effectiveness and integral to the delivery of Johnson Matthey’s strategic plans. It ensures a consistent level of quality in management, in avoiding instability by helping mitigate the risks which may be associated with any unforeseen events (such as the departure of a key individual), and in promoting diversity. The board, through the Nomination Committee, is actively engaged in succession planning to ensure plans are in place for the orderly and progressive refreshing of its membership and to identify and develop senior management with potential for board and GMC positions through a pipeline of talented and capable individuals from within Johnson Matthey. Board succession The board recognises the need to recruit Non-Executive Directors with the right technical skills and knowledge for its committees and who have the potential to chair them. During the year the board, through the Nomination Committee, recruited John O’Higgins who was appointed as a Non-Executive Director in November 2017. The succession planning for my role as Chairman and subsequent appointment of Patrick Thomas was led by Alan Ferguson, our Senior Independent Director. Further details are included in the Nomination Committee report on pages 101 and 102. Executive succession planning In addition to recruiting externally, it is important to develop internal talent for board appointments, and Johnson Matthey has a wide range of management development programmes for all employee levels, as described on page 52. 92 My induction I joined the board in November 2017 and received a tailored induction programme. I met with the Chairman, Chief Executive and Chief Financial Officer on a one to one basis to discuss current priorities, strategy, future plans and review specific aspects of the business. I also met with the General Counsel and Company Secretary who provided an overview of the group, the organisational structure and the corporate governance framework. I met with the Sector Chief Executives at Royston, Billingham and Sonning, UK, and with the US-based Health sector management team. This gave me the opportunity to tour the sites and meet the teams so as to understand more about Johnson Matthey’s people, products and processes. John O’Higgins Non-Executive Director Each of our sectors and corporate functions prepare and maintain succession plans, assisted by Human Resources. A key aim is to ensure that we have the right mix of talent capability to support our business strategies whilst also encouraging broad experiences through movement of talent across our sectors and corporate functions. The GMC reviews these plans each year and the identification and development of high potential individuals is also considered. The GMC’s review of succession plans generally leads to further refinement and changes, resulting in the final plans which are submitted to the Nomination Committee. Each year the Nomination Committee, with input from the Chief HR Officer, reviews the management development and succession planning processes for the directors and senior executives, approves succession plans for the board and considers succession plans for senior executives. Succession planning at board and senior management level for Johnson Matthey includes potential succession to all senior roles, including that of the Chief Executive, and considers the identification, development and readiness of potential internal successors. The board (through the Nomination Committee) continues to focus on the key issues of active talent management, mobility across the group and diversity. Directors’ induction and development Johnson Matthey provides full tailored induction programmes for all its new board directors. These are intended to give a broad introduction to the group’s businesses and its areas of significant risk. Key elements include meeting the Executive Directors and management, and visiting the group’s major sites in order to gain an understanding of group strategy and of individual businesses. Our intention is that all directors are familiar with, and gain an appropriate knowledge of, Johnson Matthey through visits to our operations and meeting with employees. The board ensures that the company provides the necessary resources to allow this to happen. We take various steps to ensure that all of our directors continually refresh their knowledge and skills so that they can effectively fulfil their roles and so that their contributions remain informed and relevant. The board has processes in place to ensure that it receives the right information in the right form and at the right time to enable it to effectively discharge its duties. The Chairman, through the Company Secretary and with the support of the Executive Directors and management, ensures that this information is of a high quality. Directors are able to seek clarification or amplification from management where necessary. Our directors have access to independent external professional advice at the company’s expense where they judge this necessary. t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Terms of appointment of the Non-Executive Directors Our Non-Executive Directors are appointed for specified terms subject to annual election and to the provisions of the Companies Act 2006 (the 2006 Act) relating to the removal of a director. During the year and following a rigorous review, the board approved the extension of Tim Stevenson’s term of appointment until 31st December 2018. Chris Mottershead, one of our Non-Executive Directors who will be proposed for re-election at the 2018 AGM, has served on our board for three years. His term of appointment was also reviewed and extended during the year until 26th January 2021. Boardroom diversity Our board believes that diversity is important for board effectiveness. As set out in our Diversity Policy, all appointments to the board are made on merit while taking into account suitability for the role, board balance and composition, the required mix of skills, background and experience. This includes consideration of diversity. In adopting our Diversity Policy, we have chosen not to set express diversity quotas. However, in Non-Executive Director selection processes the board encourages applications from diverse candidates subject to the objective selection criteria being met and to the appointment of the best qualified candidate. The board only engages executive search consultants who have signed up to the Voluntary Code of Conduct for Executive Search Firms to address gender diversity on corporate boards. The policy requires the board to satisfy itself that plans are in place for orderly succession for appointments to the board so as to maintain balance and ensure progressive refreshing of the board. As set out on page 92, the board, through the Nomination Committee, annually reviews and approves the management development and succession plans for the directors and senior executives and makes recommendations to the board on its structure, size and composition. Since the launch of the board policy in 2013, the board has made progress in broadening the diversity of the board and senior management. As at the date of approval of this annual report we had three women on our board, which represented 33% of our total board membership. During the year the board has continued to promote diversity and inclusion at all levels of the organisation and in the boardroom. 93 Johnson Matthey / Annual Report and Accounts 2018 Governance This includes developing policies and processes that prevent bias in relation to recruitment and promotion, such as actively discussing diversity in succession planning and talent management, promoting industrial and scientific careers to women and flexible employment policies. There remain challenges to overcome, particularly in respect of gender diversity given the sector in which Johnson Matthey operates, but we are making good progress. The information from our first UK gender pay gap report as explained more fully on page 54 helps us to focus on any underlying causes of any gender pay gap and take action accordingly. Under the Code, evaluation of the board should consider board diversity (including gender), how the board works together as a unit and other factors relevant to its effectiveness. Our board followed this principle in its board and committee evaluation process in 2017/18. Further information is set out to the right under ‘Evaluation of the board, board committees and directors’. Pages 53 and 54: Diversity and inclusion matthey.com/corporate-governance Time commitment of the Chairman and the Non-Executive Directors The board recognises that it is vital that all directors should be able to dedicate sufficient time to Johnson Matthey to effectively discharge their responsibilities. The time commitment required by Johnson Matthey is considered by the board and by individual directors on appointment. The letters of appointment of the Chairman and of each Non-Executive Director set out the expected minimum time commitment for their roles. Each undertake that they will have sufficient time to meet what is expected of them for the proper performance of their duties and acknowledge that there may, on occasion, be a need to devote additional time. The minimum time commitment considered by the board to be necessary for a Non-Executive Director, who does not chair a committee, is two days per calendar month following induction. The other significant commitments of the Chairman and of each Non-Executive Director are disclosed to the board before appointment, with an indication of the time involved. These are periodically reviewed, including as subsequent changes arise. Periodic reviews are of particular importance as the board recognises that the commitments required from Non-Executive Directors can differ and evolve. Where Non-Executive Directors hold more than one other external commitment, the board carefully reviews the position to ensure that sufficient time will continue to be dedicated to Johnson Matthey. Details of the directors’ other significant commitments can be found on pages 84 and 85. Indemnification of directors and insurance Under Deed Polls dated 31st January 2017, Johnson Matthey has granted indemnities in favour of each director of the company and of its subsidiaries in respect of any liability that he or she may incur to a third party in relation to the affairs of the company or any group member. These were in force during the year for the benefit of all persons who were directors of the company or of its subsidiaries at any time during the year. They remain in force as at the date of approval of this annual report. The company has appropriate directors’ and officers’ liability insurance cover in place in respect of legal action against, amongst others, its Executive and Non-Executive Directors. Neither the company nor any subsidiary has indemnified any director of the company or a subsidiary in respect of any liability that he or she may incur to a third party in relation to a relevant occupational pension scheme. Directors’ conflicts of interest We have established procedures in place in accordance with our Articles of Association to ensure we comply with the directors’ conflicts of interest duties under the 2006 Act and for dealing with situations in which a director may have a direct or indirect interest that conflicts with, or may conflict with, the interests of the company. Johnson Matthey has complied with these procedures during the year. In April 2018, the board undertook an annual review of potential conflict matters including in respect of directors’ external appointments. In each case, the review was undertaken by directors who were genuinely independent of the matter. The board concluded that there were no matters which constituted a conflict. Potential conflicts will continue to be reviewed by the board on an annual basis. The board confirms that Johnson Matthey complies with its procedures to authorise conflict situations and is satisfied that its powers to authorise conflict situations are being exercised properly and effectively and in accordance with its Articles of Association. Evaluation of the board, board committees and directors Having undertaken an internal review process in each of the prior two years, an external review was undertaken by independent consultants, Manchester Square Partners LLP (MSP). MSP have no other connection with the company. The Chairman provided a comprehensive brief to MSP in December 2017. During January and February 2018, MSP held individual discussions with each member of the board, the Company Secretary, the Chief HR Officer and the KPMG lead audit partner regarding the board and its committees. The conversations were open, confidential and unattributed. Areas discussed included the board role, composition and dynamics, the agendas and board papers, strategy, culture and values, leadership, risk and governance. MSP also observed our January board and committee meetings. Access to board and committee papers was provided electronically prior to the meetings via a secure electronic portal. A report was prepared by MSP based on the feedback received and their own observations and experience. Following discussion with the Chairman, this was presented to the board in April 2018. The board discussed the report and agreed a number of actions. On the following page we provide an update on the actions undertaken from the 2016/17 internal review, led by the Chairman, the feedback and insight from the 2017/18 external review and the actions to be taken in 2018/19. The board’s intention remains to undertake an externally facilitated evaluation process at least every three years. In the intervening years, the review will be led by the Chairman supported by the committee chairs and the Company Secretary. 94 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Board evaluation 2016/17 Action 2017/18 Insight and update 2018/19 Action Strategy In the 2016/17 review, the board felt that there could be more discussion of the shape and strategy for the group overall and its business model in order for the board to address the medium to long term options for continued growth. During the year the board spent considerable time developing and refining strategy, resulting in good alignment on and understanding of the group’s strategic priorities. The Non-Executive Directors valued the increased time spent on these matters. Whilst not losing focus on strategic direction, there will now be an evolution in the board’s role more towards refining and monitoring execution of agreed strategies. In 2018/19 it will be necessary to ensure that sufficient time is allowed for iterative discussions, including investment decisions, whilst maintaining time for discussing customers, suppliers, talent development, culture and compliance. Risk management Board composition Board dynamics People The 2016/17 review found that the proposals for board risk reviews had been well executed but further work was required to embed an appropriately robust process throughout the group. Risk management and reporting were considered to be thorough but continued focus would be required to ensure full embedding of ownership at all levels of the group. This will need to be continuously monitored as the business evolves to ensure early identification and mitigation of emerging risks. The 2016/17 review confirmed that, taking into account some change in composition, the group of Non-Executive Directors still had good diversity of experience, background and gender and knowledge about the group’s major markets. The 2016/17 review found opportunities to work together, not only within the board but importantly when visiting businesses and meeting senior colleagues, were valuable, particularly in enabling the cementing of board relationships. There was still scope for greater contribution and input from the Non-Executive Directors, particularly on key strategy issues and on areas where they could identify what ‘good looks like’. In the 2016/17 review, the Non-Executive Directors valued continuing to receive regular updates on key people moves from the Chief Executive and the opportunity to express views on issues that arise. The review confirmed that there was a good mix of complementary, relevant skills and diverse experiences on the board. In considering succession planning, the board will consider the need for further international experience on the board, as well as having regard to other elements of diversity. The board was stated to be friendly, collaborative, open and supportive and the Non-Executive Directors appropriately engaged. Discussions were described as open and collaborative. As we deliver our strategy, we need to ensure the Non-Executive Directors continue to further their challenge, support and contribution to the Executives. In this context the board is considering whether more time together and with management would be beneficial. The continued use of ‘teach-ins’ on major business areas, explicitly separated from consideration of strategy, will also support this. Site visits are an important part of employee engagement and potential further opportunities for these will be found. People matters, including talent development, succession and employee engagement, were felt to be high on the agenda and the Non-Executive Directors welcomed their exposure to management below the Executives. All Non-Executive Directors were appropriately involved in the Chairman’s succession. 95 Johnson Matthey / Annual Report and Accounts 2018 Governance Review of the Chairman’s performance The Non-Executive Directors recognise that the Chairman’s effectiveness is vital to that of the board. Led by Alan Ferguson, the Senior Independent Director, the Non-Executive Directors are responsible for performance evaluation of the Chairman and for providing a fair and balanced assessment to shareholders. In April 2018, the Non-Executive Directors, led by Alan, met without Tim Stevenson being present to discuss Tim’s performance. Key considerations were his overall leadership of the board, the setting of tone, the planning of appropriate agendas and the effectiveness of structuring and facilitating discussions. The views of Executive Directors were also taken into account. Alan subsequently reported the outcome to the board that Tim’s leadership of the board continued to be effective and engendered openness and constructive challenge. Review of the Executive Directors’ performance The Chairman met with the Non-Executive Directors without the Executive Directors being present in November 2017 in order to review the Executive Directors’ performance. Each of the directors was considered to be effective in discharging their responsibilities. Our five Non-Executive Directors and Chairman Designate are each determined by the board to be independent directors in accordance with the criteria set out in the Code. The board considers that their skills, experience, independence and knowledge of the company enable them to discharge their respective duties and responsibilities effectively. Biographies of each of the directors standing for election or re-election can be found on pages 84 and 85. Our 2018 AGM circular details why the board believes each director should be elected or re-elected based on continued satisfactory performance in the role. In the circular, the Chairman confirms to shareholders that, following formal performance evaluation, the performance of each Non-Executive Director continues to be effective and that they demonstrate commitment to the role (including commitment of time for board and board committee meetings). Remuneration The board has established a Remuneration Committee. The composition and role of the Remuneration Committee is set out in the Annual Report on Remuneration. Pages 122 to 130 Annual election of directors Accountability In accordance with the Code, all directors retire at each AGM and offer themselves for election or re-election by shareholders. John O’Higgins joined the board as a Non-Executive Director on 16th November 2017. Patrick Thomas joined the board as a Non-Executive Director and Chairman Designate on 1st June 2018. As required by our Articles of Association, John and Patrick will retire at the 2018 AGM and offer themselves for election. All other directors will be offering themselves for re-election. Financial and business reporting In its reporting to shareholders, the board recognises its responsibility to present a fair, balanced and understandable assessment of the group’s position and prospects. This responsibility covers the annual report and accounts and extends to half year and other price sensitive public reports and reports to regulators, as well as to information required by statutory requirements. The directors are responsible for preparing this annual report and consider it, taken as a whole, to be fair, balanced and understandable and provides the information necessary for shareholders to assess the company’s position and performance, business model and strategy. 96 Each of the four sectors; Clean Air, Efficient Natural Resources, Health and New Markets, was managed by executive management teams reporting to the GMC. The GMC reviewed bi-monthly summaries of financial results from each sector through a standardised reporting process. The group has a comprehensive integrated strategic planning and annual budgeting process including three-year and ten-year plans. Budgets are approved by the board and variances are closely monitored. Pages 5 and 62 to 69: Our four sectors Risk management and internal control The board is ultimately responsible for maintaining sound risk management and internal control systems (including financial controls, controls in respect of the financial reporting process and controls of an operational and compliance nature). The company’s internal control systems are on a groupwide basis and the review of their effectiveness (including of the application of the Guidance on Risk Management, Internal Control and Related Financial and Business Reporting issued by the Financial Reporting Council in September 2014 (FRC Guidance)) is implemented and reported from a groupwide perspective, covering the company and its subsidiaries. There are no material joint ventures or associates which have not been dealt with as part of the group for the purposes of applying the FRC Guidance. Our risk management systems and internal control systems are designed to meet the group’s needs and to manage the risks to which it is exposed, including the risks of failure to achieve business objectives and of material misstatement or loss. However, such risks cannot be eliminated. Our systems can only provide reasonable, but not absolute, assurance. They can never completely protect against such factors as unforeseeable events, human fallibility or fraud. The board confirms that there is an ongoing process in place (established in accordance with the FRC Guidance) for identifying, evaluating and managing the principal risks faced by the group. This process is regularly reviewed by the GMC, the board and the Audit Committee as appropriate and has been in place during the year and up to the date of approval of this annual report. t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O The board is responsible for determining the nature and extent of the principal risks it is willing to take in achieving its strategic objectives. The board’s view of Johnson Matthey’s key strategic and operating risks and how the company seeks to manage those risks is set out in this report. The directors confirm that they have carried out a robust assessment of the principal risks facing the company, including those that would threaten its business model, future performance, solvency or liquidity. Our principal risks Pages 78 to 81 Risk management and internal control systems The group’s risk management and internal control systems comprise group policies, procedures and practices covering a range of areas including the appropriate authorisation and approval of transactions, the application of financial reporting standards and the review of financial performance and significant judgements. Review of effectiveness of the group’s risk management and internal control systems The board has important responsibilities in respect of the group’s risk management and internal control systems (including financial controls, controls in respect of the financial reporting process and controls of an operational and compliance nature). The board monitors these carefully throughout the year and carries out an annual review of their adequacy and effectiveness. The board has delegated part of this responsibility to the Audit Committee. The role and work of the Audit Committee in this regard and the role of the group’s Corporate Assurance and Risk function are described in the Audit Committee Report on page 107. The board, through setting its own annual agenda plan, defines the review process to be undertaken, including the scope and frequency of assurance reports received throughout the year. The board agenda plan, together with that of the Audit Committee, are designed to ensure that all significant areas of risk and the related risk management and internal control systems are reported on and considered during the course of the year. In addition to determining risk appetite, the board specifically reviews, amongst other things, risks relating to EHS, innovation, legal and compliance and intellectual capital. The board, in part through the Audit Committee, has conducted an overarching review of the effectiveness of the company’s risk management and internal control systems, covering all material controls, including financial, operational and compliance controls, and financial reporting processes, for the year. The review process accords with the FRC Guidance. The Audit Committee The composition of the Audit Committee is set out in the Audit Committee Report (pages 103 to 110), which describes the work of the Audit Committee in discharging its responsibilities. The board is satisfied that at least one member of the Audit Committee, Alan Ferguson, has recent and relevant financial experience, including competence in accounting and that the Audit Committee as a whole has competence relevant to the sectors in which the company operates. Stakeholders Our approach to our stakeholders is central to our decision making. We keep in close contact with our shareholders, workforce, customers and suppliers, to ensure we are aware of each other’s priorities and consider their views appropriately in decision making. on pages 54 and 59. The board receives regular reports on speak up matters which provide further insight into the culture across the group. Customers Understanding our customers’ needs helps us to deliver the best solutions for them and the board considers this as part of its strategy and approving capital investments. Pages 32 to 37: Customers Suppliers Working well with our suppliers is essential to our business. It ensures a responsible approach to our supply chain and mitigates risks. During the year the board approved Johnson Matthey’s Modern Slavery and Human Trafficking Statement which sets out the steps taken to prevent modern slavery in our business and supply chains. Pages 20 and 21: Our stakeholders Pages 40 to 42: Responsible sourcing matthey.com/modern-slavery Relations with shareholders Pages 20 and 21: Our stakeholders Dialogue with our shareholders Shareholders Information on how we manage relations with our shareholders is set out to the right and on the following page. Workforce The board welcomes the opportunity to engage with the workforce. Site visits provide the chance to meet with local management, both formally and informally, to obtain their views on the opportunities and risks and gauge the culture. In receiving presentations on strategy, we ensure that the Sector Chief Executive or key functional head, and where relevant, their teams, attend the board meeting so their views can be heard and considered. We have a variety of management committees across the group, at both a sector level and country level, which provide a forum to understand issues across the group. There are also plans in place to undertake our next employee engagement survey in September 2018. We have processes in place for the workforce to be able to raise concerns in a confidential manner. Further details on our speak up arrangements are set out Our board welcomes the opportunity to openly engage with shareholders as it recognises the importance of a continuing effective dialogue, whether with major institutional investors, private shareholders or employee shareholders. The board takes responsibility for ensuring that such dialogue takes place. Reporting of results and Capital Markets Day We report formally to our shareholders when we publish our full year results in May and our half-yearly results in November. When we publish the results, our Executive Directors give presentations in meetings with institutional investors, analysts and the media in London. Live webcasts and transcripts of these presentations are available on our website. In addition, we hold a Capital Markets Day for our institutional investors and analysts. The last of these was held in September 2017. A live webcast of the presentation to investors, a transcript of the event and a downloadable copy of the slides are made available on our website. matthey.com/cmd-17 97 Johnson Matthey / Annual Report and Accounts 2018 Governance Contact with our shareholders Our Chairman takes overall responsibility for ensuring that the views of our shareholders are communicated to the board and that our directors are made aware of major shareholders’ issues and concerns. However, contact with major shareholders is principally maintained by the Chief Executive and the Chief Financial Officer. They have a regular dialogue with institutional shareholders on performance, plans and objectives through a programme of one to one and group meetings and ensure that shareholders’ views are communicated to the board. Our Investor Relations department acts as a focal point for contact with investors throughout the year. During the year the Chairman and Senior Independent Director met with institutional investors to hear their views and discuss governance and strategy matters. The Chairman, Senior Independent Director and the other Non-Executive Directors continue to be available to discuss matters of concern if requested. Overall, the board believes that appropriate steps have been taken during the year to ensure that the members of the board, and in particular the Non-Executive Directors, develop an understanding of the views of major shareholders. These have included, for example, analysts’ and brokers’ briefings, consideration by the board of six monthly brokers’ reports and feedback from shareholder meetings on a six-monthly basis. Major shareholders’ views are canvassed for the board in a detailed investor survey which is usually conducted every two years by external consultants. The purpose of these surveys is to obtain the views and opinions of a broad range of shareholders and non-shareholders. A survey was undertaken in early 2018 and the results discussed by the board in April 2018. The Remuneration Committee undertakes detailed consultation exercises with a selection of major institutional shareholders and institutional investor bodies as part of its comprehensive review of Executive Director and senior management remuneration arrangements within the group. The circular sent to shareholders with the notice aims to set out a balanced and clear explanation of each proposed resolution. All directors who are able to attend our AGMs do so. In 2017, the entire board attended. At the AGM, we propose separate resolutions on each substantially separate issue. For each resolution, shareholders may direct their proxy to vote either for or against or to withhold their vote. The proxy form and the announcement of the results make it clear that a ‘vote withheld’ is not legally a vote and is not counted in the calculation of the proportion of the votes cast. All valid proxy appointments received are recorded and counted. All resolutions at the AGM are decided on a poll carried out by electronic means. The results are announced as soon as possible and posted on our website. This shows votes for and against as well as votes withheld. The board reviewed the arrangements for communicating with shareholders during the year and concluded that they remain a practical and efficient way for all our directors to keep in touch with shareholders’ opinions and views and to reach a balanced understanding of major shareholders’ objectives, issues and concerns. While the board recognises that the company is primarily accountable to its shareholders, it also recognises the contribution made by other providers of capital and confirms its interest in listening to their views, including where relevant, on the company’s overall approach to governance. Annual General Meetings The AGM is an important part of effective communication with shareholders. Our AGM takes place in London. Notice is sent to shareholders at least 20 working days beforehand and is published on our website. 2018 AGM Our 2018 AGM will be held on 26th July 2018. The notice, together with an explanation of the resolutions to be considered, is set out in a circular to shareholders. Our board welcomes the opportunity for face to face communication with our shareholders. Shareholders are encouraged to participate and all directors are available to answer questions, formally through the Chairman during the meeting and informally afterwards. matthey.com/shareholder-information Compliance with the UK Corporate Governance Code Code provision E.1.1 states that the Senior Independent Director should attend sufficient meetings with a range of major shareholders to listen to their views in order to help develop a balanced understanding of the issues and concerns of major shareholders. Whilst the Senior Independent Director did meet with some major shareholders, the board does not consider this to be sufficient to have fully complied with this provision throughout the year. The board has concluded, however, that there are appropriate mechanisms in place to listen to the views of shareholders and communicate them to the board without it being necessary for the Senior Independent Director to attend meetings with major shareholders. However, he is available to attend any such meetings if requested by shareholders. The board believes that this approach is consistent with the relevant main principle of the Code on dialogue with shareholders and is consistent with good governance and the promotion of delivery of the company’s objectives. This approach will continue throughout the current year but the board will keep the matter under review. 98 Nomination Committee Report This year we focused heavily on succession planning to ensure Johnson Matthey continues to have a board with the right skills to effectively develop the company’s strategy and a strong executive team to implement and support it. Tim Stevenson Chairman of the Nomination Committee The year under review saw changes to our board composition. I am pleased to announce that Patrick Thomas was appointed to the board as Non-Executive Director and Chairman Designate with effect from 1st June 2018 and will be taking on my role as Chairman after our Annual General Meeting (AGM) on 26th July 2018. Led by Alan Ferguson, our Senior Independent Director, the committee spent significant time during the year on the recruitment for my role and is confident that Patrick will successfully steer the company in delivering its strategy. We also refreshed our board in November 2017 when John O’Higgins joined as Non-Executive Director, following Colin Matthews’ decision to step down. During the year, we also continued our focus on succession planning and talent management for the senior management, recognising the importance these roles play in supporting the group’s strategic aspirations. Role Composition Our committee has six members, myself as Chairman and all the independent Non-Executive Directors. Only members of the committee have the right to attend meetings. The Chief Executive and the Chief HR Officer, as well as external advisers and others, attend for all or part of our meetings by invitation when appropriate. Simon Farrant, our Company Secretary, is secretary to the committee. Committee meetings during the year Our committee usually meets immediately prior to or following board meetings and on other occasions as needed. We met seven times during the year. I also kept committee members up to date between meetings. Several members of the committee also met as a working group during the year to progress Non-Executive Director recruitment and recruitment for the position of Chairman. The attendance of members at meetings during the year is set out below. t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O The principal role of our Nomination Committee is to keep under review the structure, size and composition of the board and to make appropriate recommendations to the board with respect to any necessary changes. We also consider the adequacy and effectiveness of senior management development and succession planning processes for board members and senior executives and ensure the adequacy and effectiveness of the group’s processes for identifying and developing the future senior management pipeline. Further details on our role and responsibilities can be found in our corporate governance framework. matthey.com/corporate-governance Tim Stevenson Odile Desforges Alan Ferguson Jane Griffiths Colin Matthews Chris Mottershead John O’Higgins Date of appointment to committee Number of meetings eligible to attend Number of meetings attended 7 62 29th March 20111 7 7 1st July 2013 7 7 13th January 2011 63 1st January 2017 7 4th October 2012 44 4 7 7 27th January 2015 3 3 16th November 2017 % attended 86% 100% 100% 86% 100% 100% 100% 1 2 3 4 Tim Stevenson was appointed Chairman of the board and the committee on 19th July 2011. Tim Stevenson was unable to attend one meeting due to illness. In his absence, Alan Ferguson, Senior Independent Director, chaired the committee meeting. Tim Stevenson reviewed all meeting papers and shared his thoughts, comments and questions with Alan Ferguson, who raised these at the meeting. Jane Griffiths was unable to attend one meeting due to prior commitments with Johnson & Johnson. She reviewed all papers and shared her thoughts, comments and questions with Alan Ferguson, who raised these at the meeting. Colin Matthews retired from the board and the committee on 15th November 2017. 99 Johnson Matthey / Annual Report and Accounts 2018 Governance Committee activities during the year Our principal activities during the year, and up to the date of approval of this annual report, were as follows: Chairman succession My term of appointment was due to expire at the end of the company’s 2017 AGM. After considering my performance and ability to contribute to the board, an extension to the term of my appointment until 31st December 2018 was recommended to the board. Led by the Senior Independent Director, the committee conducted a search process for a new chairman. • Read more on pages 101 to 102. Non-Executive Director succession Having conducted a search process for a new Non-Executive Director with assistance from The Zygos Partnership, recommended to the board the appointment of John O’Higgins as a new Non-Executive Director. Recommended to the board that on the retirement of Colin Matthews in November 2017, Chris Mottershead should chair the Remuneration Committee. Renewal of appointment terms – Having considered his performance, ability to continue to contribute to the board and time Chris Mottershead commitment, as well as his independence and the need for progressive refreshing of the board, recommended to the board that the term of appointment of Chris Mottershead as Non-Executive Director be renewed for a further three year term to 26th January 2021. Talent management framework Received a presentation from the Chief HR Officer and the Group Talent and Learning Director on the group’s integrated talent management process, addressing the talent requirements for delivery of our strategic aspirations and noting that the next engagement survey would take place in 2018. Succession planning and senior Reviewed the 2018 succession and development plans in respect of the Group Management Committee management changes (GMC) including the Chief Executive, and other senior executives in each sector and function. Discussed GMC membership, responsibility changes and senior (non-GMC) moves. Considered the process for, and progress in, recruiting a Chief Strategy and Corporate Development Officer and a Chief Executive for the Health Sector. Review of performance and With the assistance of external consultants, Manchester Square Partners LLP, reviewed our effectiveness during 2017/18 committee’s performance and effectiveness. Review of committee terms Undertook a thorough review of the committee’s terms of reference to ensure that they reflected legal of reference and governance requirements and continued to be fit for purpose. The terms of reference were subsequently expanded to clearly cover both periodical assessment of the knowledge, skills and experience of individual members of the board, and the board collectively, and review and recommendation of the Diversity Policy to the board for approval. Nomination Reviewed and approved the draft Nomination Committee Report for 2017/18. Committee Report Board appointments In considering board composition, we assess the range and balance of skills, experience, knowledge and independence on the board, identify any gaps or issues and consider any need to refresh the board. If, after this evaluation, we feel that it is necessary to appoint a new director we then prepare a description of the role, the capabilities and characteristics required for the appointment and set objective selection criteria accordingly. The benefits of diversity, in its broadest sense, on the board are carefully considered. We consider any proposed recruitment in the context of the company’s strategic priorities, plans and objectives, as well as the prevailing business environment. We also take into account relevant succession plans already in place. In appointing Non-Executive Directors we seek individuals who can make positive contributions to the board and its committees and who have the capability to challenge on strategic and other matters. This is balanced with the need to maintain board cohesiveness. We use external search consultancies to help with the appointment process and appointments are ultimately made on merit against the agreed objective selection criteria, having due regard, amongst other things, to the benefits of diversity. While the board has not set express gender or other related diversity quotas or measurable objectives, the board seeks to encourage applications from diverse candidates, subject to the selection criteria being met. Succession planning A key role of the Nomination Committee is to ensure that plans are in place for the orderly and progressive refreshing of the board and to identify and develop individuals with potential for board and GMC positions. As announced in April 2017, we made several changes in the leadership of our group and the Nomination Committee played a key role in supporting the Chief Executive in making these changes. During the year we discussed the recruitment of two key positions: the Chief Strategy and Corporate Development Officer and the Sector Chief Executive, Health. Matthew Harwood and Jason Apter joined Johnson Matthey in July 2017 and March 2018 respectively. You can read more about their experience on page 13. The Nomination Committee has continued to focus on active talent management, mobility across the group and diversity within the year. 100 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O We considered a presentation from our Chief HR Officer in respect of Johnson Matthey’s leadership pipeline in the context of the group’s talent strategy. This covered both assessment and development of internal talent as well as external recruitment. We also considered a presentation on the company’s integrated talent strategy and talent focus for 2018. This included discussion of further strengthening of performance management across the group. Non-Executive Director succession During the year, we decided it was desirable to seek a further Non-Executive Director following Colin Matthews’ decision to step down from the board. The preference expressed to the headhunters was for a current serving Chief Executive with strong international experience to further support and challenge our strategy. We engaged The Zygos Partnership in a search process which led to the appointment of John O’Higgins in November 2017. The Zygos Partnership is a signatory to the Voluntary Code of Conduct for Executive Search Firms and has no connection with the company, other than Non-Executive Director recruitment. The Committee felt that John O’Higgins’ executive experience in successfully driving growth as well as improving operational efficiencies and his independence in character and judgement would be beneficial to the board as a whole. Chairman succession The term of my appointment as Chairman was reviewed in May 2017. After full review, this was extended to 31st December 2018. Given my intention to step down as Chairman by this date, Alan Ferguson, our Senior Independent Director led a process on behalf of the committee to search for my successor. Leading the search for a new Chairman As Senior Independent Director, I led the search for a new Chairman for Johnson Matthey. The Committee decided to appoint The Zygos Partnership to support the recruitment process, given their knowledge of the board and the company following the successful recruitment of John O’Higgins. As the announcement of Tim’s retirement was made to the market and interested parties were able to contact me directly, it was not considered necessary to publicly advertise the role. Following detailed discussions, the committee agreed the key skills, experience and characteristics required for the role which were shared with The Zygos Partnership. It was felt that the new Chairman should have a successful and accomplished track record as a global industry leader, preferably in the areas of science and technology, be strong strategically and have demonstrated an ability to bring leadership to a board. Candidates would also likely be low ego, down to earth, challenging and yet supportive, indeed a natural mentor, with strong people and communication skills. As you can see from the timeline for the recruitment (page 102), the committee invested significant time and effort to ensure that the right candidate was appointed. The Zygos Partnership put forward an extensive range of candidates for the committee to initially consider. Following detailed discussion, this was narrowed down to a shortlist for interview by myself and the Chief Executive. This shortlist developed and evolved over the period. In order to canvas views, a small selection of candidates met with some of my fellow directors and, in time, the preferred candidate met with the rest of the board, the Company Secretary and the Chief HR Officer. Tim Stevenson, as outgoing Chairman, did not take part in the selection process. However, I did consult him for his views and considerations on the role. Following full consideration, the Nomination Committee unanimously recommended to the board to appoint Patrick Thomas as an independent Non-Executive Director and Chairman Designate with effect from 1st June 2018. Patrick’s succession as Chairman will take place after the 2018 AGM. The committee believes Patrick is very well placed to lead the board and support the management team in delivering its strategy. Alan Ferguson Senior Independent Director 101 Johnson Matthey / Annual Report and Accounts 2018 Governance Timeline of succession planning Date Action June 2017 July 2017 It was announced that Tim Stevenson had confirmed to the board his intention to step down as Chairman of the company by 31st December 2018. Following multiple discussions and working with The Zygos Partnership, the Nomination Committee identified the key skills, experience and characteristics required for the role of the Chairman. October 2017 – February 2018 Alan Ferguson and Robert MacLeod interviewed the shortlisted candidates with the list evolving over this period. A small selection of candidates met with other board members. February – March 2018 April 2018 July 2018 All board members, the Company Secretary and Chief HR Officer met with the preferred candidate. Following recommendation from the Nomination Committee, the board approved the appointment of Patrick Thomas as Non-Executive Director and Chairman Designate with effect from 1st June 2018. Subject to shareholder approval, Patrick Thomas will be Chairman with effect from the close of the 2018 Annual General Meeting. The Chief Executive and the Company Secretary have commenced a detailed induction process for Patrick. Further details on this will be reported in the 2019 Annual Report and Accounts. The Nomination Committee Report was approved by the Board of Directors on 30th May 2018 and signed on its behalf by: Tim Stevenson Chairman of the Nomination Committee Committee effectiveness The committee’s annual performance review was externally facilitated by Manchester Square Partners LLP (MSP) who held meetings with all committee members to seek their individual views on the committee’s composition, its responsibilities and the culture of meetings. The report from MSP, which was reviewed by the committee at its meeting in April 2018, contained positive feedback, including that the committee operated well and had strong processes in place for key appointments. The committee noted the importance of giving continued appropriate attention to the impact of new hires to the company’s culture, and that of succession planning including the importance of diversity. 102 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Audit Committee Report The committee delivered its key priorities for the year, including a successful tender of the external audit. Alan Ferguson Chairman of the Audit Committee I am pleased to present our report for the year ended 31st March 2018 which outlines the committee’s activities during the year. Of particular note this year was the work carried out in respect of the external audit tender. We spent a significant amount of time planning this to ensure it was conducted effectively and efficiently in order to secure the best result for Johnson Matthey. Further details are set out on pages 108 and 109. We have also looked at the risk management processes across the group and at risk assurance mapping. Throughout the year we have discussed and challenged risk and control matters and worked closely with the Group Assurance and Risk Director to ensure delivery of a well targeted and robust internal audit plan. Continuing to monitor and review the effectiveness of the group’s Our principal risks internal controls and risk management systems has been particularly important as we aligned our group structure to four sectors and the risk landscape continued to evolve. Each year, we look at the control environment of selected sectors and this year we focused on Clean Air and Health. Page 76: Risk management systems Looking ahead, we will monitor and support the successful transition to the new external auditor, ensuring audit quality is not put at risk during this period. Role Composition Our principal role is to assist the board in carrying out its oversight responsibilities in relation to financial reporting, internal controls and risk management and in maintaining an appropriate relationship with our external auditor. More details on our role and responsibilities can be found in our terms of reference which were updated during the year and are available on our website. matthey.com/corporate-governance Our committee currently comprises five members: myself as Chairman and all of our independent Non-Executive Directors. We welcomed John O’Higgins to the committee in November 2017. This is my seventh year as Chairman of the committee. I am a Chartered Accountant with many years’ experience working in finance, having been, over a 12 year period, the Group Finance Director at Inchcape plc, The BOC Group plc and Lonmin Plc. I also chair the audit committees of two other companies. As a committee, we have a broad range of knowledge, skills and experience gained from a variety of backgrounds, as detailed on pages 84 and 85. This is essential to the effective discharging of our duties. The board has agreed that the committee has experience relevant to the sectors in which we operate and that I have recent and relevant financial experience, including competence in accounting, as required by the provisions of the UK Corporate Governance Code 2016. The secretary to the committee is Simon Farrant, Company Secretary. 103 Johnson Matthey / Annual Report and Accounts 2018 Governance Committee meetings during the year We met six times during the year. Attendance at these meetings was as follows: Alan Ferguson Odile Desforges Jane Griffiths Colin Matthews Chris Mottershead John O’Higgins Date of appointment to committee Number of meetings eligible to attend Number of meetings attended 13th January 20111 1st July 2013 1st January 2017 4th October 2012 27th January 2015 16th November 2017 6 6 6 3 6 3 6 6 52 33 6 3 % attended 100% 100% 83% 100% 100% 100% 1 Alan Ferguson was appointed Chairman of the committee on 19th July 2011. 2 3 Jane Griffiths was unable to attend one meeting due to prior commitments with Johnson & Johnson. She reviewed all papers and shared her thoughts, comments and questions with Alan Ferguson, who raised these at the meeting. Colin Matthews resigned from the board and the committee on 15th November 2017. Since the end of the year, the committee has met twice and all members attended. The committee’s meetings coincide with key events in the company’s financial calendar. Following each meeting, I report on the main discussion points and findings to the board. In order for us to properly discharge our role, it is critical that we have the opportunity to openly discuss with management any matter which falls within our remit and probe and challenge where necessary. The Chief Executive, the Chief Financial Officer and the Group Assurance and Risk Director attend all of our meetings and other senior managers attend to support the committee’s activities and provide technical or business information as necessary. In addition, our meetings were attended On a more frequent basis, I meet with by the KPMG lead audit partner and other representatives from KPMG. Their attendance is important as it gives us the opportunity to seek their independent and objective views on matters which they encounter during their audit. At least once a year, we meet separately with the lead audit partner and with the Group Assurance and Risk Director, who manages the internal audit function, to discuss matters without executive management being present. the Chief Financial Officer, the Group Assurance and Risk Director, other senior management and with KPMG. This means any issues or concerns can be raised at an early stage, allowing me to ensure that sufficient time is devoted to them at the subsequent committee meeting. Communication between the committee, management and the internal and external auditors is open and constructive. Overview of how we discharged our responsibilities during the year Our principal activities during the year, and up to the date of approval of this annual report, were as follows: Role Activity Published financial information To monitor the integrity of the reported financial information and to review significant financial issues and judgements 104 • • • • • • Reviewed the group’s full year results and half-yearly results and considered the significant accounting policies, principal estimates and accounting judgements used in their preparation. Reviewed the matters in support of preparing the accounts on a going concern basis and assessing the long term viability of the group. Assessed the process which management put in place to support the board when giving its assurance that the 2018 Annual Report and Accounts, taken as a whole, is fair, balanced and understandable. Received an update on new or forthcoming accounting standards that could materially impact the group, including IFRS 15 – ‘Revenue from Contracts with Customers’ and IFRS 16 – ‘Leases’. Responded to questions from the Financial Reporting Council (FRC) as part of their thematic review of significant accounting judgements and sources of estimation uncertainty. Reviewed and approved the 2018 Audit Committee Report. t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Role Activity Risk management and internal control To review the group’s internal financial controls and its risk management systems and to monitor the effectiveness of the group’s internal audit function • Received reports at every meeting from the Group Assurance and Risk Director on the corporate assurance and risk reviews and risk management processes. • Monitored progress against the 2017/18 corporate assurance and risk plan and agreed the 2018/19 plan. • Monitored the effectiveness of the Corporate Assurance and Risk function. • • • • • • • • Reviewed the key control framework and finance policies, including treasury policies. Received reports from the Clean Air and Health Sector Finance Directors. Received a report from the Precious Metals Finance Director on the outcome of a review of the precious metal governance framework including an enhanced set of controls. Reviewed reports from the General Counsel on litigation and on the speak up (whistleblowing) procedures and outcomes. Reviewed reports on credit controls and credit risks. Approved, after due challenge and discussion, KPMG’s proposed terms of engagement, audit plan and fees for 2017/18. Considered reports from KPMG on its audit. Conducted a comprehensive external audit tender process and recommended two firms to the board, with a stated preference that PricewaterhouseCoopers LLP (PwC) be appointed as the external auditor for 2018/19. For further information, please see pages 108 and 109. External auditor To ensure an appropriate relationship with the external auditor, to monitor its independence and objectivity, negotiate and approve its fees, recommend its reappointment or not and to ensure it delivers, based on a sound plan, a high quality effective audit These activities are covered in more detail on the following pages. Published financial information Significant issues considered by the committee in relation to the group’s and company’s accounts Ensuring the integrity of the accounts is fundamental to our remit. In preparing the accounts, there are a number of areas requiring management to exercise a particular judgement or a high degree of estimation. Our role is to assess whether the judgements and estimates made by management are reasonable and appropriate. Significant issues considered by the committee in relation to the accounts Work undertaken by the committee in forming an opinion Refining process and stock takes When setting process loss provisions and agreeing commercial terms with customers, key judgements are made in estimating the amount of precious metal that may be lost during the refining and fabrication processes. In addition, refining stock takes involves key judgements in estimating volumes of precious metal bearing material in the refining system and the subsequent sampling and assaying to assess the precious metal content (accounting policies section on page 148). In order to satisfy ourselves on the robustness of the stock take results and the adequacy of process loss provisions, we reviewed the results from the refinery stock takes together with explanatory commentary from management which included whether these results were in line with expectations and historic trends. We also reviewed the results as a percentage of throughput. The refining process and stock takes were also an area of focus for KPMG who reported its findings to us. We considered whether the accounting treatment for refining stock take gains and losses was in accordance with agreed methodology and concurred with management’s opinion that it was. During the year, the committee agreed that a full refinery stock take in the UK refineries would be delayed. This was due to strong customer demand and concern over a possible shortage of palladium if our refinery had to be shut down for the stock take. In the absence of the full stock take, the committee reviewed additional controls and procedures to be performed by both management and KPMG, and were satisfied that they were appropriate. 105 Johnson Matthey / Annual Report and Accounts 2018 Governance Significant issue considered by the committee in relation to the accounts Work undertaken by the committee in forming an opinion Impairment of goodwill, other intangibles and other assets Key judgements are made in relation to the assumptions used in calculating discounted cash flow projections to value the cash generating units (CGUs) containing goodwill, to value other intangible assets not yet being amortised and to value other assets when there are indications that they may be impaired. The key assumptions are management’s estimates of budgets and plans for how the relevant businesses will develop or how the relevant assets will be used in the future, as well as discount rates and long term average growth rates for each CGU (accounting policies section on page 147 and notes 18, 19 and 20 on pages 167 to 171). Taxation Key judgements are made in arriving at management’s best estimate of the tax charge included in the accounts, where the precise impact of tax laws and regulations is unclear (accounting policies section on page 147). Post-employment benefits Key judgements are made in relation to the assumptions used when valuing post-employment benefit obligations (accounting policies section on page 147 and note 17 on pages 160 to 167). Claims and uncertainties The business is exposed to potential claims and uncertainties and how to deal with these often involves significant judgement (accounting policies section on pages 146 and note 32 on pages 181 to 182). As part of the annual impairment review of goodwill and other intangible assets not yet being amortised, we reviewed a report from management. This explained the methodology used and the rationale for the assumptions made including explanations for any significant changes from those used in prior years. For these annual impairment tests, there was significant headroom over the carrying value of the relevant CGU’s net assets apart from the water business. In looking at the sensitivities of average growth expectations of the markets for water services, management concluded that an impairment of £11 million was appropriate. In addition, following the annual impairment review, a number of other asset impairments were identified as a result of restructuring activities during the year. Asset write offs totalling £55 million included in major impairment and restructuring charges comprise impairments of tangible fixed assets (£40 million) and goodwill, inventory and intangible assets (£15 million). There were no other significant impairments of other assets in the year. The impairment reviews were also an area of focus for KPMG who reported its findings to us. We concluded that management’s key assumptions were reasonable. We reviewed explanatory papers from management which included a review of the appropriateness of the tax provisions, relevant disclosures and the impact of the recent US tax changes. KPMG also reported its findings in this area to us and we reviewed these. We concluded that the judgements, estimates and disclosures were reasonable and appropriate. We reviewed the report from management summarising actuarial valuations and key assumptions for the main post-employment benefit plans. We compared these assumptions with those made by other companies and those used last year. We also considered the opinions expressed by KPMG in this area. We concluded that the assumptions used are appropriate for the group’s post-employment benefit plans. We reviewed information provided by management in relation to legal claims and uncertainties in accordance with relevant accounting standards. After challenge, we concurred with their conclusions around provisioning and the contingent liability. In addition to the above, the committee paid particular attention to the non-underlying charges this year as they were of a different magnitude to previous years. This involved understanding the rationale for the charge as well as how it was disclosed in the Consolidated Income Statement and accompanying notes to the accounts. Fair, balanced and understandable We reviewed and assessed the process which management has put in place to support the board when giving its assurance that the 2018 Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provided the information necessary for shareholders to assess the company’s position and performance, business model and strategy. This process included senior managers undertaking a detailed review of the sections of the Annual Report and Accounts that fall within their area of responsibility and confirming it is fair, balanced and understandable. A separate independent review is also undertaken and key sections are reviewed by our external advisers. Following our review, we confirmed to the board that we had reviewed the process put in place by management and that it was satisfactory. Going concern and viability statement We reviewed the matters, assumptions and sensitivities in support of preparing the accounts on a going concern basis and assessed the long term viability of the group. This included assessing the risks which would threaten our business model, the current funding position and different stress scenarios. We concluded that the group would be able to continue in operation, comply with facility covenants and meet its liabilities as they fall due over a period of at least three years and that the accounts should be prepared on a going concern basis. Further information can be found on pages 74 and 75. 106 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Corporate assurance and risk The committee receives regular reports on the number and type of internal audit and security reviews undertaken during the period and how this compares to the plan, the key findings of those audits and reviews, the number and nature of actions to address the findings and progress made by management in implementing the actions. During the year we paid particular attention to the level of engagement of all our managers, whether at local, sector or executive level, in implementing corrective actions and in strengthening the control framework across all our sites, irrespective of location, size and activity. At each meeting we tracked progress in completing open actions and challenged management to ensure that actions were being dealt with in a timely manner. We pay close attention to the resourcing of the Corporate Assurance and Risk function, knowing that the calibre, knowledge and experience of individual auditors are critical to achieving an effective audit and this is supplemented with external support to provide specialist skills as required. At each meeting the Group Assurance and Risk Director is present and we have the opportunity to ask detailed questions and challenge her. We receive regular reports from her and we seek the views of managers and also of KPMG, all of whom have frequent contact with the function. We pay attention to whether the function has adequate standing across the group and is free from management or other restrictions. We review the performance of the function annually. We spend a significant amount of time Internal control reviewing the corporate assurance and risk annual plan to ensure it is comprehensive, well targeted and provides the appropriate level of assurance. In reviewing the 2018/19 plan, we considered the maturity of existing internal controls and the work planned by sector management, particularly the finance teams, to review and check the controls across different areas of their businesses. As part of the detailed planning process, information from a variety of sources was analysed to assess levels of risk. This included output from the key control assessment process, speak up concerns, previous internal audit findings, including EHS audits, as well as input from our strategy team in relation to future revenue growth. We also looked at what is not covered by the plan, either by way of business activity or geographic coverage. Where there is no coverage at certain sites or businesses, we discuss what other mechanisms are in place to check the adequacy of controls. We were pleased to see that the plan included assurance work undertaken by the functional teams, including Finance, as well as sector management. In addition, there were also proposals to enhance the second line of defence controls further, with the sectors reviewing each other. The plan was mapped against the principal risks which allowed us to see how much coverage there would be on each risk. We believe the 2018/19 plan addresses Johnson Matthey’s key risks and its coverage is appropriate for the size and nature of the group. On the basis of our review, we approved the plan. The key control questionnaire process is an important part of our assurance programme. It is a bottom up process that requires sectors and management to certify the existence and effectiveness of key controls within their areas of responsibility. We assessed the effectiveness of the process and we evaluated the nature and quality of responses, the level of challenge to the responses, significant findings, areas for improvement and how management intended to address findings. Risk management Working with the board, the risk assurance processes were reviewed and refined. We concentrate primarily on reviewing the mitigating controls and the levels of assurance over these. The board may ask for additional assurance to be provided and this can be carried out by the Corporate Assurance and Risk function who report back on this to the committee. Speak up issues The committee receives regular updates on speak up (whistleblowing) issues. We review key matters raised via speak up reports and ensure the procedures allow proportionate and independent investigation of such matters, as well as appropriate follow up action. Due to the importance of this process to Johnson Matthey, the board delegates some responsibility to the committee and to the group’s Ethics Panel. Risk management and internal control The committee assists the board in its overall responsibility for the group’s internal controls by reviewing the adequacy and effectiveness of controls and risk management systems. The Corporate Assurance and Risk Director has a direct reporting line to me and is responsible for providing independent assurance that our risk management and internal control processes are operating effectively. She provides regular oversight of risk matters that affect our business and monitors compliance to ensure that any mitigation actions are properly managed and completed. She takes comfort from a number of other sources of internal assurance when reviewing the effectiveness of the group’s systems of internal control. Sector and functional control reviews During the year the committee reviewed the control environment in Clean Air and Health. This gave us an opportunity to learn more about key financial risks and provide independent challenge as to how these were being managed, what control enhancements were being carried out and understand the bench strength of the sector finance teams. In particular, we heard from the Sector Finance Directors about the main themes arising from the key control assessment process, which enabled us to better understand the control environment in the sectors. We also received an update from the new Group Financial Controller on his first impressions of the group and the finance function. The committee receives updates from individuals responsible for maintaining controls over financial risk areas across the group, so that we can be sure these are managed effectively. The Group Financial Controller presented an overview of the control framework and the finance policies which were being revised to clarify accountabilities and the committee sought assurance on the actions being taken. The committee also reviewed the treasury strategy and policies during the year, including the changes to the net investment hedging policy. These policies were recommended to the board for approval in accordance with our corporate governance framework. The committee also reviewed the precious metal governance framework and controls associated with the balances of precious metal held in the businesses. Our principal risks Pages 76 to 81 107 Johnson Matthey / Annual Report and Accounts 2018 Governance External auditor External audit plan The external audit plan for 2017/18 began with a review of significant risks and an assessment of how those risks impacted on the audit approach which then formed the basis of the plan. In deriving the key audit risks, KPMG considered the internal and external factors impacting the group and the group’s own risk assessment. These were then discussed with sector and group management and translated into audit risks which shaped the audit approach. Key audit risks were identified at the initial planning stage and were reviewed and refined during the course of the year. The final four risks are referred to in the Independent auditor’s report on pages 192 to 197. Materiality and the scope were agreed, as set out on page 192. In assessing adequacy of coverage, we also looked at local materiality levels, whether local statutory accounts were to be signed off and the number of site visits to be carried out by the group audit team. We also discussed the background and experience of the audit partners responsible for the largest local teams, independence and KPMG’s audit quality framework. Following discussion, we concluded that the proposed plan was sufficiently comprehensive for the purpose of the audit of the group’s accounts and approved the proposed fee after due challenge. How we reviewed KPMG’s performance The committee is committed to ensuring a high quality audit and this is particularly important ahead of the audit transition from KPMG to PwC. Towards the end of the 2016/17 external audit, a feedback questionnaire was circulated to the Executive Directors and senior management. They were asked to rate how satisfied they were with KPMG, including its level of planning, ability to meet objectives, industry and specialist knowledge, organisation, ability to challenge management, independence, level and quality of communication and value for money. The results showed an overall level of satisfaction with KPMG. Stephen Oxley, the lead audit partner, presented an action plan for the 2017/18 audit to address the areas for further improvement, including at a sector level. We also reviewed the FRC’s report highlighting the principal findings they found when reviewing a selection of KPMG’s audits in 2016/17, including Johnson Matthey’s. This gave us some insight into how the FRC sees the quality of KPMG’s work and is relevant to the consideration of audit quality. 108 On a continuous basis throughout the During the year the committee reviewed year, we look at the quality of KPMG’s reports and the performance of Stephen Oxley both in and outside committee meetings. We pay particular attention to the way Stephen and the team interact with and challenge management as well as the effectiveness of the relationship between the internal and external audit teams. We also obtain feedback from the Chief Executive, the Chief Financial Officer and the Group Financial Controller, all of whom have extensive interactions with KPMG. As noted earlier, I have regular one to one update meetings with Stephen to discuss agenda items and other matters which either Stephen or I feel are important. Provision of non-audit services Last year, in light of EU legislation and the FRC’s Revised Ethical Standard, the committee adopted a new policy on the provision of non-audit services which was effective from 1st April 2017. The policy identifies certain types of engagement that the external auditor shall not undertake, including tax services, the preparation of accounting records and risk management procedures. It also sets out the circumstances in which a former employee of KPMG can be employed by Johnson Matthey and the procedure for obtaining approval for such employment. The policy also includes key controls to ensure that the provision of non-prohibited services does not create a threat to KPMG’s auditor independence and objectivity. The auditor can be invited to provide non-audit services which, in its position as auditor, it must or is best placed to undertake and which do not impact auditor objectivity or independence. The policy sets out how approval should be obtained prior to KPMG being engaged. Services likely to cost £25,000 or less should be approved by the Chief Financial Officer; services likely to cost more than £25,000 but £100,000 or less must be approved by myself as Chairman of the committee and services likely to cost over £100,000 must be approved by the committee. During the year, I approved the engagement of KPMG to provide assurance over cyber risk management. The committee approved the provision of additional accounting advice on the implementation of IFRS 15 and the reappointment of KPMG to provide further independent programme assurance in relation to the implementation of new business information systems. compliance against the policy and the provision of non-audit services and details of the non-audit services provided by KPMG and associated fees. Non-audit fees in the year were £0.8 million compared to audit fees of £2.2 million. The non-audit fees predominantly comprised expenditure on the provision of independent programme assurance (a continuing spend from prior year). More information on fees incurred by KPMG for non-audit services, as well as the split between KPMG’s audit and non-audit fees, can be found in note 10 on the accounts, page 154. An additional interim policy on the engagement of those audit firms tendering for the external audit was applied during the year to ensure they were not precluded from participating in the tender process and to avoid any independence issue arising in the run up to the appointment of a new auditor. Objectivity and independence The committee is responsible for monitoring and reviewing the objectivity and independence of the external auditor to ensure this is safeguarded. Given the work outlined above, the committee concluded that the audit was both independent and effective. External audit tender KPMG (and its predecessor entities) has been our external auditor since 1986, following a full tendering process in 1985. We have undertaken a review of KPMG’s performance every year since then. Stephen Oxley, our current lead audit partner, was appointed in 2013/14 and each year since then he has taken steps to refresh KPMG’s approach to certain aspects of its audit. As disclosed in last year’s annual report, it was always our intention to put the audit out to tender when Stephen’s term expired, after completion of the 2017/18 audit. This approach is in line with EU legislation on audit firm rotation requirements, which came into force on 17th June 2016. Under the EU audit reform transitional arrangements KPMG’s last possible audit would be for the year ended 31st March 2020. The committee was fully responsible for the operation of the audit tender process and for recommending two firms of auditors to the board, together with the committee’s preference. KPMG was not invited to participate. Set out on the following page is a summary of the detailed process carried out. t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Activity relating to the external audit tender March 2017 June 2017 The Audit Committee Chairman, Chief Financial Officer and senior management considered who should be invited to tender for the appointment. The appointment was discussed with various firms. The Audit Committee Chairman and Chief Financial Officer met with the audit firms who had confirmed their participation in the tender. We provided an outline of the tender process and discussed the key attributes we would expect to see in the senior members of the group audit team, including the lead audit partner, and the likely structure of that team. The objective of this was to ensure each firm put forward the highest quality team to lead the tender that fits best with our requirements. Each firm was also requested to confirm that it had not carried out any services for us which would cause an issue with audit independence and that they had processes in place to ensure their independence throughout the tender process. September 2017 The Audit Committee Chairman and Chief Financial Officer met with a number of prospective lead audit partners from each participating firm and decided who would lead the tender from each firm. November 2017 The committee finalised the selection criteria for the tendering process. These included: • • • • • • • • Quality of audit. Continuous improvement and innovation in the audit approach, including through data analytics. Independence. Geographic coverage. The team and cultural fit with a particular focus on the lead partner. Understanding the business and industry. Ability to challenge management and display rigour in approach. Value for money. The committee signed off the tender request. December 2017 The tender request was issued and a data room opened. January 2018 Meetings were held with key management, the Chairman and the Chairman of the Audit Committee to allow the tendering firms to gain an insight to the business, the culture and our requirements. Feedback was gathered to provide input into the subsequent decision making process. February 2018 Written tenders were submitted. Three shortlisted firms gave presentations to a panel comprising all Audit Committee members, the Chairman, Chief Financial Officer and Group Financial Controller. A formal decision was made by the committee, having given full consideration to the panel’s recommendation. The committee recommended two firms to the board for approval, with a stated preference for PwC. The committee believe that PwC has a strong team with the skills and experience to provide rigour and challenge in the audit. Proposed appointment of PricewaterhouseCoopers LLP (PwC) After considering the committee’s recommendation, and as announced in March 2018, the board selected PwC as the group’s auditor for the financial year commencing 1st April 2018 subject to the approval of shareholders at the 2018 Annual General Meeting (AGM). The lead audit partner is Mark Gill. A resolution proposing PwC’s appointment is included in the notice of the AGM. Audit transition Statement of compliance The committee will closely monitor the audit transition from KPMG to PwC and the Chief Financial Officer and I will meet regularly with both lead partners from the firms to discuss progress. I look forward to reporting on PwC’s first audit in the 2019 Annual Report and Accounts. The committee confirms that, during the financial year ended 31st March 2018, the company complied with the applicable provisions of the Competition and Markets Authority’s Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014. 109 Johnson Matthey / Annual Report and Accounts 2018 Governance Committee effectiveness The committee’s annual performance and effectiveness evaluation was externally facilitated by Manchester Square Partners LLP, who held meetings with all committee members, the Executive Directors and KPMG to seek their views on matters such as committee composition, its responsibilities and the dynamic and culture of meetings. The report was positive and confirmed that the committee operates effectively and manages its remit well. Our priorities In last year’s annual report we set out our priorities, over and above our business as usual work, for 2017/18. Below we report on the status of these and set out our priorities for 2018/19. 2017/18 Comments • Continue to monitor progress of the investment in business information systems. Due to the size of this project, the need to have significant management input and the value to be delivered on completion, it was decided that the board would maintain close oversight of the investment and implementation of business information systems. The board received three presentations on the topic, two of which were attended by KPMG, which provided independent programme assurance on the implementation. The Chief Financial Officer has also kept me regularly informed on the achievement of key milestones. • Plan and conduct the tender of the external audit. Pages 108 and 109 2018/19 • Monitor and support the external audit transition. • • • Given the significant impact of precious metal (both customer and owned metal) held by the company on working capital, the committee will receive further presentations on how management will oversee this, including a ‘teach-in’ for the Non-Executive Directors. As the group’s new business information systems are deployed, the committee will pay particular attention to the associated control processes. Given the substantial increase in planned capital expenditure, the committee will review the control framework around the significant areas of spend. The Audit Committee Report was approved by the Board of Directors on 30th May 2018 and signed on its behalf by: Alan Ferguson Chairman of the Audit Committee 110 Remuneration Report t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Our role is to ensure that Johnson Matthey’s remuneration arrangements align with shareholders’ interests, reward directors for performance and are well managed in line with good governance. Chris Mottershead Chairman of the Remuneration Committee The long term incentive awards granted on 1st August 2015 will lapse on the third anniversary of their grant following compound annual growth in underlying earnings per share (EPS) of 5.1% over the three year period to 31st March 2018, which fell below the threshold target of 6% compound annual growth. Salary review The company’s general approach to senior executive salaries is to consider the delivery and experience of an individual in the context of comparable rates of pay in similar sized organisations. Executives are considered for an increase set at the typical rate of increase applied to the wider workforce in their geographical location. Reflecting this principle, and taking into account performance and time in role, both Robert MacLeod and John Walker received an increase on 1st April 2018 of 2.5%. Anna Manz was awarded an increase of 5% effective from 1st April 2018 to reflect her strong performance in her relatively new role, against comparable rates of pay in similar sized organisations. The committee now considers her pay to be set at the appropriate rate and expects that future increase will be in line with those typically awarded to other UK employees. Incentive plan targets During the year the committee assessed both the current choice of performance metrics and the level of challenge within the incentive plan targets. The committee’s review considered the specific business targets / metrics included in the one and three-year business plans along with the degree of stretch contained within them. With regard to the annual bonus plan, the committee concluded that given the company’s current clearly identified strategic objectives it would be appropriate to recognise these through the introduction of a weighting of 20% to non-financial objectives within the short term incentive plan for 2018/19. These non-financial objectives will be specific and focus on deliverables to support our strategy relating to science, customers, operations and people. Delivery against these objectives will also be underpinned by achieving a satisfactory health and safety record over the year. The remainder of the bonus will be based on financial metrics relating to profit and working capital, and the targets set with reference to the challenging internal plans approved by the board. Our long term variable reward continues to be tied to growth as measured by increases in underlying EPS. The long term incentive plan will remain subject to a challenging range of growth targets that measure how successful we are in delivering on our growth strategy, underpinned by achieving an acceptable return on invested capital (ROIC). 111 Introduction As Chairman of the Remuneration Committee, I am pleased to present our report for the year ended 31st March 2018. This is my first report as Chairman of the committee following Colin Matthews stepping down from the board last year. It is intended to explain the key matters considered by the committee during the last 12 months and to set out the matters we expect to consider over the coming year. We submitted our latest Remuneration Policy to shareholders at our 2017 Annual General Meeting (AGM), and appreciated the high level of support we received (92.3% in favour). We also value the continuing constructive dialogue we have had with a number of our shareholders and representatives of institutional investors. This Annual Report on Remuneration sets out how we applied the Remuneration Policy in 2017/18 and how we intend to apply it in the forthcoming year. Our approach to remuneration The overall objective of Johnson Matthey is to deliver sustained superior shareholder value using our world class science and our competitive strengths, contributing to a cleaner, healthier world. The remuneration strategy focuses on: motivating our talent to achieve the company’s strategic objectives; to deliver on customer commitments; to inspire employees; and to drive value for our shareholders through long term success and growth. This long term focus is supported by our Remuneration Policy, which includes an incentive structure that is purposefully weighted towards long term performance and includes shareholding guidelines for Executive Directors at, or above, 200% of salary. Our remuneration strategy is also designed to be competitive in the various markets in which we operate and compete for talent. Incentive plan outcomes During the year Johnson Matthey delivered strong sales growth and continued to successfully implement the board’s strategy through: growing our Clean Air Sector; expanding the pipeline in our Health Sector; making targeted investments in our Efficient Natural Resources Sector; and developing our Battery Materials business for future growth. Overall, in terms of the performance against the annual bonus targets we set for 2017/18, we achieved growth in underlying profit before tax and reduced the average working capital days during the year, which resulted in bonuses becoming payable at 69.19% of the maximum for Robert MacLeod and Anna Manz and 68.67% of the maximum for John Walker. In the context of a challenging external environment, and the company’s overall performance during the year, the committee considered the level of annual bonus payout appropriate. Johnson Matthey / Annual Report and Accounts 2018 Governance The Remuneration Committee is actively engaged in monitoring In addition, we reviewed the pay levels of employees below the performance and continuing to ensure that the level of challenge within our short and long term incentive plans remains appropriate. In addition, in determining outcomes, the committee also considers the precise numerical results and the character of the results themselves, including the manner in which they are achieved. Board changes After seven years as Chairman, Tim Stevenson will be stepping down as Chairman at our 2018 AGM. It was announced in April 2018 that Patrick Thomas will be appointed as Non-Executive Director and Chairman Designate on 1st June 2018. On his appointment to the board Mr Thomas’ remuneration was set in line with our standard policy for Non-Executive Directors and, on becoming Chairman, he will be paid an annual Chairman fee of £360,000, which is subject to review in April each year. Subject to shareholder approval, Patrick Thomas will become Chairman with effect from the close of the 2018 AGM. Other reviews Following the completion of our triennial review of executive remuneration, the Remuneration Committee reviewed the services provided by its remuneration advisors, New Bridge Street. This review resulted in a change and the appointment of Korn Ferry Hay Group as new advisors. Korn Ferry Hay Group is a member of the Remuneration Consultants Group and adheres to its Code of Conduct. An independent evaluation of the Remuneration Committee’s performance over the year was conducted by Manchester Square Partners LLP and formed part of a wider board evaluation discussion led by the Chairman. The Remuneration Committee was considered to have operated effectively during the year. Group employee considerations During the year we reviewed the company’s new global grading arrangements for employees below the board together with the new annual and long term incentive plans associated with each new grading level. This new grading structure will help the business manage its talent and enable more structured career pathways, while new incentive levels help support our remuneration strategy to provide competitive remuneration in the various markets in which we operate and compete for talent. board, particularly in relation to the UK gender pay gap. Our UK gender pay gap is 9.2%. This is lower than the UK national average of 18.1%. Our gender pay gap is driven by female under-representation and also issues that are evident in the wider economy including a lower number of women occupying science, technology and engineering roles. While it will take some time for there to be meaningful change and tackle the root causes of our gender imbalance, the company is fully committed to ensuring a truly inclusive culture that supports diversity and has already a number of programmes and actions in place to improve our gender balance. The year ahead Looking ahead to the next 12 months, we will monitor the appropriateness of the performance conditions attached to our annual and long term incentive plans and their alignment to the evolving external governance landscape. The Remuneration Committee is also currently considering the changes to the UK Corporate Governance Code that are expected to come into effect from 1st January 2019 and wider regulatory changes, with a view to taking the necessary steps to ensure we continue to take due account of best practice expectations and regulatory requirements. 2018 Annual General Meeting I ask you to support our 2017/18 Annual Report on Remuneration at our forthcoming AGM on 26th July 2018. We believe that our policy is simple, transparent and effective, strongly supporting our business strategy. We welcome an open dialogue with our shareholders and I will be available at the meeting to answer any questions about the work of the Remuneration Committee. Chris Mottershead Chairman of the Remuneration Committee 112 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Remuneration overview Remuneration Policy The table below sets out the Remuneration Policy for the 2018/19 financial year. Further details are set out in the Directors’ Remuneration Policy and the Annual Report on Remuneration. Remuneration element Remuneration structure Base salary Current salaries as follows: • Robert MacLeod – £818,000 (2017/18 £798,000) • Anna Manz – £515,000 (2017/18 £490,000) • John Walker – £468,250 (2017/18 £456,850) The 2018/19 salaries shown above include a salary increase effective from 1st April 2018 of 2.5% for Robert MacLeod and John Walker and 5% for Anna Manz. Benefits Medical, life and income protection insurance, medical assessments, a company car (or equivalent), matching shares under the all employee share incentive plan and assistance with tax advice and tax compliance services where appropriate. Pension contribution 25% of salary cash supplement in lieu of pension. Annual bonus 180% of salary for Chief Executive and 150% of salary for other Executive Directors. The bonus for 2018/19 will be substantially based on key financial measures (80% of maximum opportunity), including underlying profit before tax (PBT) and working capital performance. It will also include an element attributable to non-financial strategic objectives (20% of maximum opportunity) focusing on our strategy relating to science, customers, operations and people. 50% of any bonus earned is deferred in shares for three years. Long term incentive 200% of salary for the Chief Executive and 175% of salary for other Executive Directors. Awards vest subject to achieving challenging EPS growth targets (with a ROIC underpin). Targets for unvested awards require 4% to 10% p.a. underlying EPS growth for 15% to 100% vesting. Performance is measured over three years with awards vesting in equal tranches over three, four and five years. Shareholding guidelines 250% of salary for the Chief Executive and 200% of salary for other Executive Directors. 50% of the shares (net of tax) vesting under the incentive schemes must be retained until the guideline holding has been achieved. 2017/18 outcomes The table below sets out the remuneration outcomes for the Executive Directors for 2017/18. £’000 Robert MacLeod Anna Manz John Walker Salary Benefits Annual bonus 1 Long term incentive 798 490 457 21 16 22 994 509 470 – – – Pension Total 200 123 114 2,013 1,138 1,063 1 In accordance with the rules of the plan, 50% of the bonus payable is awarded as shares and deferred for three years. Annual bonuses for Robert MacLeod and Anna Manz were based on the underlying profit before tax and working capital of the group and paid out at 69.19% of the maximum. The bonus for John Walker was based on the underlying profit before tax and working capital of the group plus underlying operating profit of the Clean Air Sector and paid out at 68.67% of the maximum. 50% of the bonus paid to the Executive Directors was paid in shares and deferred for three years. The long term incentive plan awards were based on underlying EPS performance to 31st March 2018 and failed to meet the minimum threshold vesting performance requirements. 113 Johnson Matthey / Annual Report and Accounts 2018 Governance Directors’ Remuneration Policy Below we publish the Remuneration Policy table, which includes the elements of directors’ remuneration. For each element we describe its purpose and its link to strategy, how it works, the opportunity, boundaries and performance measures and any clawback or withholding conditions which may apply. This Remuneration Policy was subject to a shareholder vote at the 2017 AGM, where shareholders voted 92.3% in favour, and applies to all remuneration for the financial year commencing 1st April 2017 onwards. Remuneration Policy table Purpose and link to strategy Operation (and changes if appropriate) of the element Potential value of element and performance measures Maximum opportunity No salary increase will be awarded which results in a base salary which exceeds the competitive market range. Details of the current salaries for the Executive Directors are shown in the Annual Report on Remuneration on page 129. Base salary Base salary is the basic pay for doing the job. Its purpose is to provide a fair and competitive level of base pay to attract and retain individuals of the calibre required to lead the business. Base salaries will be reviewed annually and any changes normally take effect from 1st April each year. In determining salaries and salary increases, the Remuneration Committee will take account of the performance of the individual director against a broad set of parameters including financial, environmental, social and governance issues. The Remuneration Committee will further take into account the length of time in post and the level of salary increases awarded to the wider Johnson Matthey workforce. Salaries across the group are benchmarked against a comparator group of similarly sized companies within the FTSE, with a comparable international presence and geographic spread and operating in relevant industry sectors. New appointments or promotions will be paid at a level reflecting the Executive Director’s level of experience in the particular role and experience at board level. New or promoted Executive Directors may receive higher pay increases than typical for the group over a period of time following their appointment as their pay trends toward an appropriate level for their role. 114 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Purpose and link to strategy Operation (and changes if appropriate) of the element Potential value of element and performance measures Annual incentive The annual bonus provides a strong incentive aligned to strategy in the short term. The annual bonus allows the board to ensure that the company’s plans are properly reflected in stretching but achievable annual budgets. The annual bonus plays a key part in the motivation and retention of Executive Directors, one of the key requirements for long term growth. Bonus deferral as well as malus and clawback provisions ensure that longer term considerations are properly taken into account in the pursuit of annual targets. The Remuneration Committee sets annual bonus performance measures and targets for each new award cycle. At the end of the year, the Remuneration Committee determines the extent to which these have been achieved. The Remuneration Committee retains the discretion to reduce any bonus award if, in its opinion, the underlying financial performance of the company has not been satisfactory in the circumstances. Performance measures Bonuses are based on the achievement of demanding financial and, where appropriate, non-financial targets. The Remuneration Committee may use different performances and weightings for each performance cycle as appropriate to take into account the strategic needs of the business. However, a substantial proportion will be based on key financial measures, including budgeted underlying profit before tax (PBT). The budget is set on a robust bottom up process to achieve full accountability. The target budgeted underlying PBT is retrospectively published in the immediately following Annual Report on Remuneration. Details of last year’s bonus awards are on page 124. The performance period for annual bonus purposes matches the financial year (1st April to 31st March). Maximum opportunity and vesting thresholds Chief Executive – 180% of base salary. Other Executive Directors – 150% of base salary. Threshold vesting will result in a bonus of 15% of maximum opportunity. On target performance will result in 50% payment of the maximum opportunity. Deferral Of any bonus paid, 50% is paid in cash and the remaining 50% is deferred into shares for a three year period as an award under the deferred bonus plan. No further performance conditions apply to awards under the deferred bonus plan. Dividends that accrue on the deferred shares during the vesting period will be paid in either cash and / or shares at the time of vesting. Malus and clawback The cash and deferred elements of the bonus are subject to malus and clawback provisions such that they can be forfeited or recouped in part or in full in the event of a misstatement of results, error in the calculation or misconduct by the individual. Adjustments The Remuneration Committee retains discretion to change the performance targets if there is a significant or material event which causes the committee to believe the original targets are no longer appropriate (e.g. to reflect material acquisitions or disposals). The Remuneration Committee also retains discretion to amend the level of annual bonuses determined by the performance condition to seek to ensure that the incentive structure for Executive Directors does not raise environmental, social and governance risks by inadvertently motivating irresponsible behaviour. For example, reducing or eliminating bonuses where the company has suffered reputational damage or where other aspects of performance have been unacceptable. The Remuneration Committee retains the ability to increase bonus awards from the formulaic outcome where there is identifiable and exceptional performance by the Executive Director. Bonus payments in such circumstances would remain within the maximum bonus opportunity and shareholders would be fully informed of the justification. 115 Johnson Matthey / Annual Report and Accounts 2018 Governance Purpose and link to strategy Operation (and changes if appropriate) of the element Potential value of element and performance measures Performance measures PSP vesting is currently based on the compound annual growth rate (CAGR) of underlying EPS over a three year performance period, subject to a discretionary ROIC underpin. However, the Remuneration Committee retains discretion to amend the targets and the performance measures for future awards as appropriate to reflect the business strategy. Wherever possible, the views of major shareholders will be sought when it is proposed to make any substantive changes to the performance measures. The prospective targets and measures for the year commencing 1st April 2017 are shown on page 125. Long term incentive The Performance Share Plan (PSP) is a long term incentive plan designed to ensure that executives take decisions in the interest of the longer term success of the group. Having a measure that looks at profitable growth over the longer term ensures that the interests of executives are aligned with shareholder wishes for long term value. Shares may be awarded each year and are subject to performance conditions over a three year performance period. Subject to performance conditions being met, the shares will vest in equal instalments on the third, fourth and fifth anniversary of the date of award. The performance targets are set by the Remuneration Committee based on internal and external growth forecasts to ensure they remain appropriate and aligned with shareholder expectations. The awards are granted in accordance with the rules of the plan approved by shareholders. The maximum award level is 200% of base salary. Awards may be granted in the form of conditional shares, nil or nominal cost options or cash (where the awards cannot be settled in shares). Dividends that accrue between the third and fifth anniversary of the award date will be paid in either cash and / or shares at the time of vesting. Malus and clawback Long term incentive plan awards granted since 2014 are subject to malus and clawback provisions that can apply in the case of a misstatement of results, error in the calculation or misconduct by the individual. Adjustments The Remuneration Committee has power to adjust the vesting level of an award based on the underlying performance of the company. The Remuneration Committee may adjust the performance measure to reflect material changes (e.g. significant acquisitions or disposals, share consolidation, share buy-backs or special dividends). Any such change would be fully explained to shareholders. Benefits To provide a market aligned benefits package. The purpose of any benefit is to align with normal market practices and to remove certain day to day concerns from Executive Directors to allow them to concentrate on the task in hand. Benefits include medical, life and income protection insurance, medical assessments, company sick pay, and a company car (or equivalent). Other appropriate benefits may also be provided from time to time at the discretion of the Remuneration Committee. Benefits are not generally expected to be a significant part of the remuneration package in financial terms and are there to support the director in his or her performance in the role. In general benefits will be restricted to the typical level in the relevant market for an Executive Director. Directors’ and officers’ liability insurance is maintained for all directors. Car benefits will not exceed a total of £25,000 per annum. The cost of medical insurance for an individual Executive Director and dependents will not exceed £15,000 per annum. Company sick pay is 52 weeks’ full pay. Directors who are required to move for a business reason may, where appropriate, also be provided with benefits such as relocation benefits (e.g. the provision of accommodation, transport or medical insurance away from their country of residence) and schooling for dependents. The company may pay the tax on these benefits. Directors may be assisted with tax advice and tax compliance services. The company will reimburse all reasonable expenses (including any tax thereon) which the Executive Director is authorised to incur whilst carrying out executive duties. 116 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Purpose and link to strategy Operation (and changes if appropriate) of the element Potential value of element and performance measures Pension Provides for post-retirement remuneration, ensures that the total package is competitive and aids retention. All employee share plan Encourages share ownership. Shareholding requirements To encourage Executive Directors to build a shareholding in the company and ensure the interests of management are aligned with those of shareholders. Non-Executive Director fees Attracts, retains and motivates Non-Executive Directors with the required knowledge and experience. All Executive Directors will be paid a cash supplement in lieu of membership in a pension scheme. The maximum supplement is 25% of base salary. Executive Directors are entitled to participate up to the same limits in force from time to time for all employees. The minimum shareholding requirement is as follows: Chief Executive – 250% of base salary. Other Executive Directors – 200% of base salary. There is no requirement for Non-Executive Directors to hold shares but they are encouraged to acquire a holding over time. Details of the current fee levels for the Chairman and Non-Executive Directors are set out in the Annual Report on Remuneration on page 129. The fee levels are set subject to the maximum limits set out in the Articles of Association. Executive Directors are entitled to participate in the company’s all employee share incentive plan under which regular monthly share purchases are made and matched with the award of company shares, subject to retention conditions. Executive Directors would also be entitled to participate in any other all employee arrangements that may be established by the company on the same terms as all other employees. Executive Directors are expected to build up a shareholding in the company over a reasonable period of time. Shares that count towards achieving these guidelines include: all shares beneficially owned by an Executive Director or a person connected to the executive as recognised by the Remuneration Committee; deferred bonus shares and long term incentive awards which are no longer subject to performance conditions but have not yet vested. Executive Directors are expected to retain at least 50% of the net (after tax) vested shares that are released under the long term PSP and deferred bonus plans until the required levels of shareholding are achieved. Executive Directors are not required to make personal share purchases should awards not meet the performance conditions and so a newly appointed director may take longer to reach the expected level, depending on the company’s performance against targets over the period. Non-Executive Director fees are determined by the board. The Non-Executive Directors exclude themselves from such discussions. The fees for the Chairman are determined by the Remuneration Committee taking into account the views of the Chief Executive. The Chairman excludes himself from such discussions. Non-Executive Directors are paid a base fee each year with an additional fee for each committee chairmanship or additional role held. Non-Executive Director fees are reviewed every year. Any increase will take into account the market rate for the relevant positions within a comparator group of similarly sized companies with a comparable international presence and geographic spread and operating in relevant industry sectors, the experience of the individuals and the expected time commitment of the role. In exceptional circumstances, additional fees may be payable to reflect a substantial increase in time commitment. The company will also reimburse the Chairman and Non-Executive Directors for all reasonable expenses (including any tax thereon) incurred whilst carrying out duties for the company. 117 Johnson Matthey / Annual Report and Accounts 2018 Governance Selection of Performance Targets Annual incentive Long term incentive Financial performance targets under the annual bonus plan are set by the Remuneration Committee with reference to the prior year and to the budgets and business plans for the coming year, ensuring the levels to achieve threshold, target or maximum payout are appropriately challenging. The performance targets for 2018/19 are substantially based on financial measures (80% of maximum opportunity) including budgeted underlying PBT and working capital to ensure that there is strong attention paid to delivery of current operational plans and operational efficiency. In addition, an element of the bonus is attributable to the achievement of strategic objectives (20% of maximum opportunity) focusing on our strategy relating to science, customers, operations and people. Commercial sensitivity precludes the advance publication of the actual bonus targets but these targets will be retrospectively published in the Annual Report on Remuneration for 2018/19. EPS targets under the PSP are set to reflect the company’s longer term growth objectives at a level where the maximum represents genuine outperformance. Underlying EPS is considered a simple and clear measure of absolute growth in line with the company’s strategy. It is also a key objective of the company to achieve earnings growth only in the context of a satisfactory performance on ROIC. Accordingly, the Remuneration Committee makes an assessment of the group’s ROIC over the performance period to ensure underlying EPS growth has been achieved with ROIC in line with the group’s planned expectations. Group employee considerations The Remuneration Committee considers the directors’ remuneration in the context of the wider employee population and is kept regularly updated on pay and conditions across the group. The company has not consulted directly with employees with respect to directors’ remuneration. Increases in base salary for directors will take into account the level of salary increases granted to all employees within the group. The general principle for remuneration in Johnson Matthey is to pay a competitive package of pay and benefits in all markets and at all job levels in order to attract and retain high quality and diverse employees. The proportion of variable pay increases with progression through management levels with the highest proportion of variable pay at Executive Director level, as defined by the Remuneration Policy. The key elements of variable pay There are also a number of country and cascade down through the next tiers of senior management with appropriate reductions in opportunity levels based on seniority. The group’s senior executives plus senior and middle managers (1,300 employees) participate in the annual bonus plan (with performance conditions similar to those described in the Remuneration Policy). In addition, the group’s senior executives and certain senior management participate in the long term PSP in line with the same EPS based performance conditions. Executive Directors are subject to vesting in three tranches on their long term incentive plan awards, and Executive Directors, members of the Group Management Committee and senior management are subject to deferral of annual bonus. Certain senior management also participate in a long term Restricted Share Plan (RSP) which has no performance conditions attached. No Executive Director is eligible to participate in this RSP. business dependent arrangements under which bonuses may be paid to the entire business workforce where performance conditions associated with profitability are met. Johnson Matthey operates a number of pension arrangements around the world, relevant to the local conditions and arrangements. The key element of remuneration for those below senior management grades is base salary and Johnson Matthey’s policy is to ensure that base salaries are fair and competitive in the local markets. General pay increases take into account local salary norms, local inflation and business conditions. 118 Remuneration scenarios Below is an illustration of the potential future remuneration that could be received by each Executive Director for the year commencing 1st April 2018, both in absolute terms and as a proportion of the total package under different performance scenarios. The value of the PSP is based on the award that will be granted in August 2018. Value of package Composition of package Robert MacLeod Maximum Target Threshold Below threshold Maximum Target Threshold Below threshold 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 0 20 40 60 80 100 £ thousands % Anna Manz Maximum Target Threshold Below threshold Maximum Target Threshold Below threshold 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 0 20 40 60 80 100 £ thousands % t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O John Walker Maximum Target Threshold Below threshold Maximum Target Threshold Below threshold 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 0 20 40 60 80 100 £ thousands % Base salary Benefits Pension Bonus PSP 119 Johnson Matthey / Annual Report and Accounts 2018 Governance Approach to recruitment remuneration The recruitment policy provides an appropriate framework within which to attract individuals of the required calibre to lead a company of Johnson Matthey’s size, scale and complexity. The Remuneration Committee determines the remuneration package for any appointment to an Executive Director position, either from within or outside Johnson Matthey. The following table sets out the various components which would be considered for inclusion in the remuneration package for the appointment of an Executive Director and the approach to be adopted by the Remuneration Committee in respect of each component. Area Overall Policy and operation The policy of the board is to recruit the best candidate possible for any board position and to structure pay and benefits in line with the Remuneration Policy set out in this report. The ongoing structure of a new recruit’s package would be the same as for existing directors, with the possible exception of an identifiable buy-out provision, as set out below. Base salary or fees Salary or fees will be determined by the Remuneration Committee in accordance with the principles set out in the policy table on page 114. Benefits and pension An Executive Director shall be eligible for benefits and pension arrangements in line with the company’s policy for current Executive Directors, as set out in the policy table on pages 116 and 117. For new hires the cash supplement payable will be more aligned to that payable to other employees. Annual incentive The maximum level of opportunity is as set out in the policy table on page 115. The Remuneration Committee retains discretion to set different performance targets for a new externally appointed Executive Director, or adjust performance targets and measures in the case of an internal promotion, to be assessed over the remainder of the financial year. In this case any bonus payment would be made at the same time as for existing directors, and any such award would be pro-rated for the time served in the performance period. Long term incentive The maximum level of opportunity is as set out in the policy table on page 116. Replacement awards In order to achieve rapid alignment with the company’s and shareholder interests, the Remuneration Committee retains discretion to grant a PSP award to a new externally appointed Executive Director on or soon after appointment if they join outside of the normal grant period. The Remuneration Committee retains discretion to grant replacement buy-out awards (in cash or shares) to a new externally appointed Executive Director to reflect the loss of awards granted by a previous employer. Where this is the case, the Remuneration Committee will seek to structure the replacement award such that overall it is on an equivalent basis to broadly replicate that foregone, using appropriate performance terms. If granted, any replacement buy-out award would not exceed the maximum set out in the rules of the 2017 Performance Share Plan Rules (350% of base salary). If the Executive Director’s prior employer pays any portion of the remuneration that was anticipated to be forfeited, the replacement awards shall be reduced by an equivalent amount. Other The Remuneration Committee may agree that the company will meet certain mobility costs, relocation costs, including temporary living and transportation expenses, in line with the company’s prevailing mobility policy for senior executives as described in the policy table on page 116. In the case of an internal promotion to the board, the company will honour any contractual commitments made prior to the promotion. Service contracts and policy on payment for loss of office The following table summarises relevant key provisions of Executive Directors’ service contracts and the treatment of payments on termination of employment. The full contracts of service of the Executive Directors (as well as the terms and conditions of appointment of the Non-Executive Directors) are available for inspection at the registered office of the company during normal business hours as well as prior to and during the forthcoming AGM of the company. In exceptional circumstances, the Remuneration Committee may authorise, where it considers it to be in the best interests of the company and shareholders, entering into contractual arrangements with a departing Executive Director, for example a settlement, confidentiality, restrictive covenant or other arrangement, pursuant to which sums not set out in the following table may become payable. Full disclosure of the payments will be made in accordance with the remuneration reporting requirements. The following table describes the contractual conditions pertaining to the contracts for Robert MacLeod, Anna Manz and John Walker and for any future Executive Director. 120 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Summary of key provisions of executive directors’ service contracts and treatment of payments on termination Robert MacLeod Anna Manz John Walker1 Date of service agreement 31st January 2014 25th July 2016 31st January 2014 Date of appointment as director 22nd June 2009 17th October 2016 9th October 2013 Employing company Johnson Matthey Plc Contract duration No fixed term Notice period No more than 12 months’ notice, with equal notice from the company and director except for directors who joined before 1st January 2017 where the director’s notice period is six months and the notice period from the company is 12 months. Post-termination restrictions The contracts of employment contain the following restrictions on the director for the following periods from the date of termination of employment: • non-compete – six months; • non-dealing and non-solicitation of client / customers – 12 months; • non-solicitation of suppliers and non-interference with supply chain – 12 months; and • non-solicitation of employees – 12 months. Summary termination – payment The company may, in its absolute discretion, terminate the employment of the director with in lieu of notice (PILON) immediate effect by giving written notice together with payment of a sum equivalent to the director’s base salary and the value of their contractual benefits as at the date such notice is given, in respect of the director’s notice period, less any period of notice actually worked. The company may elect to pay the PILON in equal monthly instalments. The director is under a duty to seek alternative employment and to keep the company informed about whether they have been successful. If the director commences alternative employment, the monthly instalments shall be reduced (if appropriate to nil) by the amount of the director’s gross earnings from the alternative employment. A PILON paid to a director who is a US taxpayer (John Walker) would be in equal monthly instalments. Termination payment – change of control If, within one year after a change of control, the director’s service agreement is terminated by the company (other than in accordance with the summary termination provisions), the company shall pay, as liquidated damages, one year’s base salary, together with a sum equivalent to the value of the director’s contractual benefits, as at the date of termination, less the period of any notice given by the company to the director. Termination – treatment of annual Annual bonus awards are made at the discretion of the Remuneration Committee. Employees, incentive awards including Executive Directors, leaving the company’s employment will receive a bonus, pro-rata to service, unless the reason for leaving is resignation or misconduct. Any bonus awarded would continue to be subject to deferral as set out in the Remuneration Policy. In relation to deferred bonus awards which have already been made, shares will be released on the normal vesting date unless one of the following circumstances applies, and subject to the discretion of the Remuneration Committee: • the participant leaves as a result of misconduct; or • the participant, prior to vesting, breaches one of the post-termination restrictions or covenants provided for their employment contract, termination agreement or similar agreement. In which case the deferred awards will lapse on cessation of employment. The Remuneration Committee has the discretion to accelerate vesting of a deferred award if appropriate to do so to reflect the circumstances of the departure. It is intended that this would only be used in the event of a departure due to ill health (or death). Termination – treatment of long term Employees, including Executive Directors, leaving the company’s employment will normally lose incentive awards their long term incentive awards unless they leave for a specified ‘good leaver’ reason, in which case their shares will be released on the normal release dates, subject to the performance condition. The Remuneration Committee has discretion to accelerate vesting, in which case the performance condition would be assessed based on available information at the time. In either case, unless the Remuneration Committee determines otherwise, the level of vesting shall be pro-rated to reflect the proportion of the performance period which has elapsed to the date of leaving. In the post-vesting deferral period, only those who leave due to misconduct will lose their shares. Redundancy scheme The director is not entitled to any benefit under any redundancy payments scheme operated by the company. Holiday Upon termination for any reason, directors will be entitled to payment in lieu of accrued but untaken holiday entitlement. 1 John Walker is eligible for continuing post-retirement medical benefits provided he satisfies the conditions of this plan and retires directly from Johnson Matthey. 121 Johnson Matthey / Annual Report and Accounts 2018 Governance Chairman and Non-Executive Directors The Chairman and each of the Non-Executive Directors have letters of appointment. The letters of appointment do not contain any contractual entitlement to a termination payment and the Non-Executive Directors can be removed in accordance with the company’s Articles of Association. Directors are required to retire at each AGM and seek re-election by shareholders. The details of the service contracts, including notice periods, contained in the letters of appointment in relation to the Non-Executive Directors who served during the year are set out in the table below. Neither the Chairman or the Non-Executive Directors has provisions in his or her letter of appointment that relate to a change of control of the company. Committee Date of Expiry of Notice period Notice period Non-Executive Director appointments appointment current term by the individual by the company Tim Stevenson (Chairman) R, N 29th March 2011 31st December 2018 6 months 6 months Patrick Thomas1 R,N 1st June 2018 31st May 2021 6 months 6 months Odile Desforges A, R, N 1st July 2013 30th June 2019 1 month 1 month Alan Ferguson A, R, N 13th January 2011 13th January 2020 1 month 1 month Jane Griffiths A, R, N 1st January 2017 31st December 2019 1 month 1 month Chris Mottershead A, R, N 27th January 2015 26th January 2021 1 month 1 month John O’Higgins A, R, N 16th November 2017 15th November 2020 1 month 1 month A: Audit Committee R: Remuneration Committee N: Nomination Committee 1 Patrick Thomas was appointed as a Non-Executive Director and Chairman Designate subject to shareholder approval at the 2018 AGM. External appointments It is the board’s policy to allow Executive Directors to accept non-executive appointments provided there is no conflict of interest and that the time spent would not impinge on their work for Johnson Matthey. Details of external directorships held by Executive Directors, together with fees retained during the year are as follows: Fees retained Executive Director Company Role held £’000 Robert MacLeod RELX PLC, RELX NV and RELX Group plc Non-Executive Director 95 Anna Manz ITV plc Non-Executive Director 75 Annual Report on Remuneration This section provides details of how the 2017 Directors’ Remuneration Policy was implemented during the year and how we intend to apply the policy in the year ahead. About the Remuneration Committee The Remuneration Committee is a committee of the board and comprises all the independent Non-Executive Directors of the company as set out above including the group Chairman, Tim Stevenson. Details of attendance at committee meetings during the year ended 31st March 2018 is shown below. Meeting attendance 5th 31st 18th 16th 30th Committee Date of April May July November January role appointment 2017 2017 2017 2017 2018 Colin Matthews1 Chairman 4th October 2012 3 3 3 – – (until 15th November 2017) Chris Mottershead Chairman 27th January 2015 3 3 3 3 3 (from 16th November 2017) Odile Desforges Member 1st July 2013 3 3 3 3 3 Alan Ferguson Member 13th January 2011 3 3 3 3 3 Jane Griffiths Member 1st January 2017 3 3 3 3 3 John O’Higgins Member 16th November 2017 – – – 3 3 Tim Stevenson2 Member 29th March 2011 3 – 3 3 3 1 2 Colin Matthews stood down as Chairman of the Remuneration Committee and retired from the board on 15th November 2017. Tim Stevenson was unable to attend one meeting due to illness. Since the end of the year, the committee has met twice. All committee members attended both meetings. The Remuneration Committee’s terms of reference can be found in the Investors / Corporate governance section of our website and include determination on behalf of the board of fair remuneration for the Chief Executive, the other Executive Directors and the group Chairman (in which case the group Chairman does not participate). In addition, the committee receives recommendations from the Chief Executive on the remuneration of those reporting to him as well as advice from the Chief Human Resources Officer, who acts as secretary to the committee. 122 Advisers to the committee In determining the remuneration structure, the committee appoints and receives advice from independent remuneration consultants on the latest developments in corporate governance and the pay and incentive arrangements prevailing in comparably sized industrial companies. Following a review of services provided to the committee, Korn Ferry Hay Group was appointed on 18th December 2017. The total fees paid to Korn Ferry Hay Group in respect of its services to the committee during the year were £18,670 plus VAT. New Bridge Street (part of Aon Hewitt Limited) provided advice to the committee in the period 1st April 2017 to 17th December 2017. The total fees paid to New Bridge Street in respect of its services to the committee during the year were £3,598 plus VAT. Korn Ferry Hay Group also provides consultancy services to the company in relation to certain employee benefits to those below the board. Korn Ferry Hay Group is a signatory to the Remuneration Consultants Group Code of Conduct and the committee is satisfied that the advice that it receives from Korn Ferry Hay Group is objective and independent. Herbert Smith Freehills provided advice to the company in connection with the drafting of share plan rules and directors’ service contracts in accordance with the policy determined by the Remuneration Committee. This advice was charged on an hourly basis. The committee is aware that Herbert Smith Freehills is one of a number of legal firms that provide legal advice and services to the company on a range of matters. A statement regarding the use of remuneration consultants for the year ended 31st March 2018 is available on our website in the Investors / Corporate governance section. Remuneration for the year ended 31st March 2018 Single figure table of remuneration The table below sets out the total remuneration and breakdown of the elements each director received in relation to the year ended 31st March 2018, together with a prior year comparative. An explanation of how the figures are calculated follows the table. Base salary / fees Benefits Annual incentive Long term incentive Pension Total £’000 £’000 £’000 £’000 £’000 £’000 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 Executive Directors Robert MacLeod 798 769 21 21 994 569 – 417 200 195 2,013 1,971 Anna Manz1 490 222 16 7 509 123 – – 123 56 1,138 408 John Walker 457 442 22 20 470 273 – 192 114 110 1,063 1,037 Non-Executive Directors Tim Stevenson 351 343 – – – – – – – – 351 343 Odile Desforges 64 63 – – – – – – – – 64 63 Alan Ferguson 83 81 – – – – – – – – 83 81 Jane Griffiths2 64 16 – – – – – – – – 64 16 Colin Matthews3 50 73 – – – – – – – – 50 73 Chris Mottershead 71 63 – – – – – – – – 71 63 John O’Higgins4 24 – – – – – – – – – 24 – t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O 1 Anna Manz was appointed to the board on 17th October 2016. 2 3 4 Jane Griffiths was appointed to the board on 1st January 2017. Colin Matthews stepped down from the board on 15th November 2017. John O’Higgins was appointed to the board on 16th November 2017. 123 Johnson Matthey / Annual Report and Accounts 2018 Governance Explanation of figures Base salary / fees Salary paid during the year to Executive Directors and fees paid during the year to Non-Executive Directors. Benefits All taxable benefits such as medical and life insurance, service and car allowances, matching shares under the all employee share incentive plan and assistance with tax advice and tax compliance services where appropriate. Annual incentives Annual bonus awarded for the year ended 31st March 2018. The figure includes any amounts deferred and awarded as shares. Long term incentives The 2017 figure represents the value of shares that satisfied performance conditions on 31st March 2017 and will be released on 1st August 2017, 1st August 2018 and 1st August 2019. This value is calculated using the average share price from 1st January 2017 to 31st March 2017 which was 3,100 pence. The 2018 figure represents the value of the shares that satisfied performance conditions on 31st March 2018 and will be released on 1st August 2018, 1st August 2019 and 1st August 2020. This value is calculated using the average share price from 1st January 2018 to 31st March 2018 which was 3,184 pence. Pension The amounts shown represent the value of the increase over the year of any defined benefit pension the Executive Director may have in the Johnson Matthey Employees Pension Scheme (JMEPS) plus any cash supplements paid in lieu of pension membership. Variable pay – additional disclosures, including bases of calculation and outcomes 1 Annual bonus for the year ended 31st March 2018 The Executive Directors were eligible for a maximum annual bonus opportunity of 180% of base salary for the Chief Executive and 150% of base salary for the other Executive Directors. The on target bonus opportunity was set at 50% of the maximum opportunity and the threshold bonus opportunity was 15% of salary. The performance measures and weightings for the annual bonus were as follows: Chief Executive Chief Financial Officer Sector Chief Executive, Clean Air Group underlying PBT Clean Air underlying operating profit Group working capital days Percentage of bonus available 80% 80% 55% – – 25% 20% 20% 20% The annual targets are set when budgets are approved in early April, at the start of the new financial year. Budgets are built from the bottom up and are subject to a rigorous process of challenge before final proposals are considered by the board. Further information is used in the determination, including a consensus of industry analysts’ forecasts, provided by Vara Research. Achievement against targets for the year ended 31st March 2018 is set out in the table below: Actual % Performance measure Threshold Target Maximum Actual1 of budget Group underlying PBT2 £ million 458 482 530 497 103.18 (95% budget) (100% budget) (110% budget) Clean Air underlying £ million 341 359 395 369 102.49 operating profit2 (95% budget) (100% budget) (110% budget) Group working capital days days 37 35 32 32 92.00 (including metal3) (105% budget) (100% budget) (90% budget) Group working capital days days 68 65 59 62 95.08 (excluding metal3) (105% budget) (100% budget) (90% budget) 1 All figures in the table have been rounded to the nearest whole number except the actual % of budget. 2 For 2017/18 actual performance for group underlying PBT and Clean Air underlying operating profit is measured using budget foreign exchange rates. 3 Working capital days is measured 50% against total working capital days including precious metal and 50% against working capital days excluding precious metal. This was to ensure that appropriate focus was put on metal management. 124 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Based on performance against the above targets, bonuses for the year ended 31st March 2018 were: Robert MacLeod, Chief Executive Anna Manz, Chief Financial Officer John Walker, Sector Chief Executive, Clean Air £’000 994 509 470 % salary 124.54 103.79 103.00 In accordance with the rules of the plan, 50% of the bonus payable is awarded as shares and deferred for three years. There are no further performance conditions attached to the deferred element. 2 Long term incentive vesting for the three year performance period ended 31st March 2018 The table below sets out the performance targets for the long term incentive awards made in August 2015 with a three year performance period which ended 31st March 2018. Required underlying EPS performance Threshold 6% CAGR Maximum 15% CAGR Proportion of award which may vest 15% 100% The awards vest on a straight line basis between threshold and maximum. In addition to the EPS performance condition, the Remuneration Committee considers the performance of ROIC over the performance period to ensure that earnings growth is achieved in a sustainable and efficient manner. The performance over the period was a compound annual growth in underlying EPS of 5.1% per annum and so was below the performance range. The table below shows the vesting outcomes based on this performance. Executive Directors Robert MacLeod Anna Manz John Walker Former Executive Directors Den Jones1 Larry Pentz2 % of base salary awarded 200 – 175 175 175 Shares awarded 48,946 – 23,541 11,746 8,561 Estimated value % of award Shares on vesting to vest to vest £ – – – – – – – – – – – – – – – 2 Den Jones stood down from the board on 20th July 2016 and left the company on 31st July 2016. The long term incentive shares awarded to Mr Jones in August 2015 (26,412) were, on leaving, pro-rated to 11,746 based on his completed service since the start of the performance period. 3 Larry Pentz retired from the board on 31st March 2016. The long term incentive shares awarded to Mr Pentz in August 2015 (25,685) were, on leaving, pro-rated to 8,561 based on his completed service since the start of the performance period. 3 Variable pay awarded during the year ended 31st March 2018 (Long term incentive awards subject to future performance) In 2017/18 long term incentive awards were made to the Executive Directors in respect of the three year performance period to 31st March 2020. The table below sets out the opportunity and performance targets for these awards. Required underlying EPS performance Threshold 4% CAGR Maximum 10% CAGR Proportion of award which may vest 15% 100% Chief Executive Other Executive Director 30% 200% 26.25% 175% The table below sets out the details of the actual conditional long term incentive awards made as a percentage of base salary. Date of grant Robert MacLeod 1st August 2017 Anna Manz 1st August 2017 John Walker 1st August 2017 Award size (% of base salary) Number of shares awarded 200 175 175 52,955 28,451 26,521 Face value 1 £ 1,595,984 857,470 799,303 1 Face value is calculated using the award share price of 3,013.85 pence, which is the average closing share price over the four week period commencing on 1st June 2017. 125 Johnson Matthey / Annual Report and Accounts 2018 Governance 4 Prior year long term incentive awards and outcomes The table below shows the history of long term incentive awards granted since 2009. Compound % salary annual % salary awarded to Threshold Stretch growth in Year of Year of awarded to other Executive EPS growth EPS growth underlying EPS % of award award vesting 1 Chief Executive Directors target target in the period vested 2009 2012 120 100 3% 10% 19.7% 100 2010 2013 150 120 7% 16% 20.2% 100 2011 2014 175 140 7% 16% 13.3% 75 2012 2015 175 140 7% 16% 6.07% – 2013 2016 175 140 6% 15% 7.85% 33 2014 2017 200 175 6% 15% 7.39% 28 2015 2018 200 175 6% 12% 5.14% – 2016 2019 200 175 4% 10% n/a n/a 2017 2020 200 175 4% 10% n/a n/a 1 Awards from 2014 are subject to tranche vesting and so the year shown is the vesting of the first tranche. Pension entitlements No director is currently accruing any pension benefit in the group’s pension schemes. Instead they receive an annual cash payment in lieu of pension membership equal to 25% of base salary. However, Robert MacLeod and John Walker have each accrued a pension entitlement in respect of a prior period of pensionable service in one or more of the group’s pension arrangements. Robert MacLeod ceased pensionable service in JMEPS on 31st March 2011. John Walker joined JMEPS on 1st September 2012 and ceased pensionable service in this scheme on 9th October 2013. Prior to joining JMEPS Mr Walker was a member of the US Johnson Matthey Inc. Salaried Employees Pension Plan. Details of the accrued pension benefits of the Executive Directors as at 31st March 2018 in the UK and US pension schemes are given below: Robert MacLeod1 Anna Manz John Walker2 Total accrued annual pension entitlement at 31st March 2018 £’000 10 – 89 1 Pension payable from age 65 based on pensionable service in the UK pension scheme up to 31st March 2011. 2 Pension payable in respect of pensionable service in the UK and US pension schemes payable from age 65 and 62 respectively. The pension payable from the US pension scheme will be paid in local currency. Statement of directors’ shareholding The table below shows the directors’ interests in the shares of the company, together with their unvested scheme interests, as at 31st March 2018. Subject to ongoing Not subject to further Ordinary shares1 performance conditions2 performance conditions 3 Executive Directors Robert MacLeod 39,937 154,193 33,051 Anna Manz 2,217 57,448 2,041 John Walker 16,653 75,449 18,444 Non-Executive Directors Tim Stevenson 4,958 – – Odile Desforges 1,416 – – Alan Ferguson 2,078 – – Jane Griffiths 2,671 – – Colin Matthews4 1,888 – – Chris Mottershead 1,868 – – John O’Higgins 1,500 – – 1 Includes shares held by the director and / or connected persons, including those in the all employee share matching plan and 401k plan. Shares in the all employee share matching plan may be subject to forfeiture in accordance with the rules of the plan. 2 Represents unvested long term incentive shares within three years of the date of award. 3 Represents unvested deferred bonus shares and unvested long term incentive shares between the third and fifth anniversary of award, where performance conditions have been assessed but vesting has not occurred. 4 The figures for Colin Matthews are as at 15th November 2017 when he stepped down from the board. 126 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Directors’ interests as at 30th May 2018 were unchanged from those listed above, other than that the trustees of the all employee share matching plan have purchased a further 21 shares each for Robert MacLeod and John Walker and a further 24 shares for Anna Manz. Executive Directors are expected to build up a shareholding in the company. The minimum shareholding requirement for the year ended 31st March 2018 was 200% of base salary for the Chief Executive and 150% of base salary for the other Executive Directors. The table below shows the extent to which the proposed minimum shareholding requirements have been satisfied: Robert MacLeod Anna Manz3 John Walker Shares held as at 31st March 2018 (% of base salary)1,2 291% 28% 245% 1 Value of shares as a percentage of base salary is calculated using a share value of 3,184.48 pence, which was the average share price prevailing between 1st January 2018 and 31st March 2018. 2 The director’s total shareholding for the purposes of comparing it with the minimum shareholding requirement includes shares held beneficially by the director and any connected persons (as recognised by the Remuneration Committee) together with deferred shares awarded under the annual bonus rules for which there are no further performance conditions and any unvested long term incentive shares between the third and fifth anniversary of award, where performance conditions have been assessed but vesting has not occurred. 3 Anna Manz became an Executive Director on 17th October 2016. She will build her shareholding over time in line with the Remuneration Policy. Performance graph and comparison to Chief Executive’s remuneration Johnson Matthey and FTSE 100 Total Shareholder Return rebased to 100 The following chart illustrates the total cumulative shareholder return of the company for the nine year period from 31st March 2009 to 31st March 2018 against the FTSE 100 as the most appropriate comparator group, rebased to 100 at 1st April 2009. 450 400 350 300 250 200 150 100 50 0 March 2009 March 2010 March 2011 March 2012 March 2013 March 2014 March 2015 March 2016 March 2017 March 2018 Johnson Matthey FTSE 100 As at 31st March 2018, Johnson Matthey was ranked 79 by market capitalisation in the FTSE 100. Historical data regarding Chief Executive’s remuneration 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 1 2015/16 1 2016/17 2017/18 Single total figure 1,596 2,095 1,870 3,025 3,855 1,594 1,429 1,971 2,013 of remuneration Annual incentives 100 100 75 – 71 54 15 40 69 (% of maximum) Long term incentives – 52 100 100 75 – 33 28 – (% of award vesting)2 1 The figures for 2014/15 onwards are in respect of Robert MacLeod who was appointed as Chief Executive on 5th June 2014. Prior to this, the figures shown are for the previous Chief Executive, Neil Carson. 2 Vesting of long term incentive awards whose three year performance period ended in the financial year shown. The above data is calculated according to the same methodology as applied in the single figure table on page 123. 127 Johnson Matthey / Annual Report and Accounts 2018 Governance Change in Chief Executive’s remuneration The table below shows how the remuneration of the Chief Executive has changed over the year ended 31st March 2018. This is then compared to a group of appropriate employees, being those based in the UK. This comparator group was used because the Remuneration Committee believes it gives a reasonable understanding of the underlying increases, based on similar annual bonus performance measures, while at the same time reducing the distortion from currency fluctuations and the distortions that would arise from including all of the many countries in which the group operates with their different economic conditions. Chief Executive Salary An increase of 2.5% Bonus An increase of 74.8% Benefits No change in benefits policy. No change on overall costs between 2016/17 and 2017/18. Comparator group 1 An increase of 5.9% An increase of 54.5% No change in benefits policy. No change on overall costs between 2016/17 and 2017/18. 1 Including promotions. Relative spend on pay The table below shows the absolute and relative amounts of distributions to shareholders and the total remuneration for the group for the years ended 31st March 2017 and 31st March 2018. Payments to shareholders – special dividends Payments to shareholders – ordinary dividends Total remuneration (all employees)1 1 Excludes termination benefits. Year ended 31st March 2018 £ million Year ended 31st March 2017 £ million – 146 693 – 139 645 % change – 5 7 128 Implementation of the Directors’ Remuneration Policy for 2018/19 The table below sets out how the Remuneration Committee intends to apply the Directors’ Remuneration Policy for the year ended 31st March 2019. Salary Salaries for the Executive Directors for 2018/19 have been increased in line with the budgeted increase for all other UK employees. The salaries of Robert MacLeod and John Walker have increased by 2.5% (to £818,000 and £468,250 respectively) and Anna Manz’s salary has increased by 5% (to £515,000) to bring her in line with market and reflect her strong performance in role. Benefits and pension No change to policy applied in 2018/19. The maximum limit on pensions has been retained at 25%, the level paid to the current Executive Directors. However, as set out in the recruitment section of the Directors’ Remuneration Policy, it is the committee’s intention that pension for future hires would be aligned with the level for other senior managers. Annual incentives The maximum bonus opportunity for 2018/19 remains unchanged at 180% of salary for the Chief Executive and 150% of salary for the other Executive Directors. As explained in the Chairman’s introductory letter, a 20% weighting to non-financial objectives has been introduced to the 2018/19 bonuses. The remainder of the bonus will be based on underlying profit before tax (60%) and working capital (20%). Targets for the Chief Executive and Chief Financial Officer will be based on group performance. For the Sector Chief Executive, Clean Air, targets will be based on a mix of group and Clean Air Sector performance. The Remuneration Committee considers the forward looking targets to be commercially sensitive, but full details of the targets and performance against them will be disclosed in next year’s report. As set out in the Policy Report, 50% of any bonus paid will be deferred in shares for three years and the payment of any bonus is subject to appropriate malus and clawback provisions. Long term incentives Award levels remain unchanged at 200% of salary for the Chief Executive and 175% of salary for the other Executive Directors. The long term Performance Share Plan awards will be based on EPS growth targets, subject to achieving a satisfactory level of return on capital employed. The EPS targets will be the same as those applying to the 2017 awards, namely 15% vesting for 4% p.a. underlying EPS growth, increasing on a straight line basis to 100% vesting for 10% p.a. underlying EPS growth or above. Awards vest in equal tranches over three, four and five years. Chairman and Fees for the Non-Executive Directors for 2018/19 have been increased by 2.5% which is broadly in line with the Non-Executive budgeted increase for all other UK employees. The fees for each Non-Executive Director are shown below. Director fees Tim Stevenson £360,000 Chairman Odile Desforges £65,400 Alan Ferguson £84,950 Senior Independent Director and Chairman of Audit Committee Jane Griffiths £65,400 Chris Mottershead £81,900 Chairman of Remuneration Committee John O’Higgins £65,400 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O 129 Johnson Matthey / Annual Report and Accounts 2018 Governance Statement of shareholder voting We monitor carefully shareholder voting on our Remuneration Policy and its implementation. We recognise the importance of ensuring that our shareholders continue to support our remuneration arrangements. The table below shows the results of the poll taken on the resolution to receive and approve the Directors’ Remuneration Policy and the Annual Report on Remuneration at the July 2017 AGM. Resolution Number of votes cast For Against Votes withheld Remuneration Policy 136,108,674 125,583,227 (92.3%)1 10,525,447 (7.7%)1 3,139,449 Remuneration Report 139,189,906 136,587,858 (98.1%)1 2,602,048 (1.9%)1 60,561 1 Percentage of votes cast, excluding votes withheld. The Remuneration Committee believes that the 92.3% vote in favour of the Directors’ Remuneration Policy and the 98.1% vote in favour of the Annual Report on Remuneration showed very strong shareholder support for the group’s remuneration arrangements at that time. This Remuneration Report was approved by the Board of Directors on 30th May 2018 and signed on its behalf by: Chris Mottershead Chairman of the Remuneration Committee 130 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Directors’ Report for the year ended 31st March 2018 Directors The names of the directors who held office during the year are set out on page 92. The biographies of all the directors serving at the date of this annual report are shown on pages 84 and 85. Indemnification of directors Details of indemnities granted in favour of each director of the company and each director of the company’s subsidiaries, which were in force during the year and which remain in force as at the date of approval of this annual report, can be found in the Corporate Governance Report on page 94. Appointment and replacement of directors The rules about the appointment and replacement of directors are contained in our Articles of Association, which are available on our website. These include: • • directors may be appointed by a resolution of the members or a resolution of the directors; and if appointed by the directors, the newly appointed director must retire at the next Annual General Meeting (AGM) and is not taken into account in determining the directors who are to retire by rotation at the meeting. At least one third of the board must retire by rotation at each AGM. The Articles of Association may only be amended by a special resolution at a general meeting of the company. Notwithstanding the provisions of the Articles of Association, the board has agreed that all directors will seek election or re-election at each AGM in accordance with the UK Corporate Governance Code 2016. www.matthey.com/investors/corporate- governance Powers of the directors The powers of the directors are determined by the Articles of Association, UK legislation including the Companies Act 2006 (the 2006 Act) and any directions given by the company in general meeting. The directors have been authorised by the company’s Articles of Association to issue and allot ordinary shares and to make market purchases of its own shares. These powers are referred to shareholders for renewal at each AGM. Further information is set out under ‘Purchase by the company of its own shares’ opposite. Directors’ interests in the company’s shares Share capital Capital structure The interests of persons who were directors of the company (and of their connected persons) at 31st March 2018 in the issued shares of the company (or in related derivatives or other financial instruments), which have been notified to the company in accordance with the Market Abuse Regulation, are set out in the Remuneration Report on page 126. The Remuneration Report also sets out details of any changes in those interests between 31st March 2018 and 30th May 2018. Directors’ interests in contracts Other than service contracts, no director had any interest in any material contract with any group company at any time during the year. There were no contracts of significance (as defined in the Financial Conduct Authority’s Listing Rules) during the year to which any group undertaking was a party and in which a director of the company is or was materially interested. Dividends The interim dividend of 21.75 pence per share (2017: 20.5 pence) was paid in February 2018. The directors recommend a final dividend of 58.25 pence per share in respect of the year (2017: 54.5 pence), making a total for the year of 80.0 pence per share (2017: 75.0 pence), payable on 7th August 2018 to shareholders on the register at the close of business on 8th June 2018. Other than as referred to under ‘Employee share schemes’ on page 132, during the year there were no arrangements under which a shareholder has waived or agreed to waive any dividends nor any agreement by a shareholder to waive future dividends. Dividend payments and DRIP Dividends can be paid directly into shareholders’ bank accounts. A Dividend Reinvestment Plan is also available. This allows shareholders to purchase additional shares in Johnson Matthey with their dividend payment. Further information and a mandate can be obtained from our registrar, Equiniti, whose details are set out on page 207 and on our website. As at 31st March 2018, the issued share capital of the company was 193,533,430 ordinary shares of 11049⁄53 pence each (excluding treasury shares) and 5,407,176 treasury shares. There were no purchases, sales or transfers of treasury shares during the year. Share allotments There were no share allotments during the year. Purchase by the company of its own shares At the 2017 AGM shareholders authorised the company to make market purchases of up to 19,353,343 ordinary shares of 11049⁄53 pence each, representing 10% of the issued share capital of the company (excluding treasury shares). Any shares so purchased by the company may be cancelled or held as treasury shares. This authority will cease at the date of the 2018 AGM. During the year and up until the date of approval of this annual report, the company did not make any purchases of its own shares or propose to, or enter into any options or contracts to, purchase its own shares (either through the market or by an offer made to all shareholders or otherwise), nor did the company acquire any of its own shares other than by purchase. Rights and obligations attaching to shares The rights and obligations attaching to the ordinary shares in Johnson Matthey are set out in the Articles of Association. As at 31st March 2018 and as at the date of approval of this annual report, except as referred to below, there were no restrictions on the transfer of ordinary shares in the company, no limitations on the holding of securities and no requirements to obtain the approval of the company, or of other holders of securities in the company, for a transfer of securities. The directors may, in certain circumstances, refuse to register the transfer of a share in certificated form which is not fully paid up, where the instrument of transfer does not comply with the requirements of the company’s Articles of Association, or if entitled under the Uncertificated Securities Regulations 2001. 131 Johnson Matthey / Annual Report and Accounts 2018 Governance Also as at 31st March 2018 and as at the date of approval of this annual report: • • • • no person held securities in the company carrying any special rights with regard to control of the company; there were no restrictions on voting rights (including any limitations on voting rights of holders of a given percentage or number of votes or deadlines for exercising voting rights) except that a shareholder has no right to vote in respect of a share unless all sums due in respect of that share are fully paid; there were no arrangements by which, with the company’s cooperation, financial rights carried by shares in the company are held by a person other than the holder of the shares; and there were no agreements known to the company between holders of securities that may result in restrictions on the transfer of securities or on voting rights. Nominees, financial assistance and liens During the year: • no shares in the company were acquired by the company’s nominee, or by a person with financial assistance from the company, in either case where the company has a beneficial interest in the shares (and no person acquired shares in the company in any previous financial year in its capacity as the company’s nominee or with financial assistance from the company); and • the company did not obtain or hold a lien or other charge over its own shares. Allotment of securities for cash and placing of equity securities During the year the company has not allotted, nor has any major subsidiary undertaking of the company (broadly an undertaking that represents at least 25% of the group’s aggregate gross assets or profit) allotted, equity securities for cash. During the year the company has not participated in any placing of equity securities. Listing of the company’s shares Employee share schemes Johnson Matthey’s shares have a Premium Listing on the London Stock Exchange and trade as part of the FTSE 100 index under the symbol JMAT. American Depositary Receipt programme Johnson Matthey has a sponsored Level 1 American Depositary Receipt (ADR) programme which BNY Mellon administers and for which it acts as Depositary. Each ADR represents two ordinary shares of the company. The ADRs trade on the US over-the-counter market under the symbol JMPLY. When dividends are paid to shareholders, the Depositary converts such dividends into US dollars, net of fees and expenses, and distributes the net amount to ADR holders. Contact details for BNY Mellon are set out on page 207. At 31st March 2018, 4,460 current and former employees were shareholders in the company through the group’s employee share schemes. Through these schemes, current and former employees held 2,599,390 ordinary shares (1.34% of issued share capital, excluding treasury shares as at 31st March 2018). Also as at 31st March 2018, 1,807,792 ordinary shares had been awarded but had not yet vested under the company’s long term incentive plan to 1,269 current and former employees. Shares acquired by employees through the company’s employee share schemes rank equally with the other shares in issue and have no special rights. Voting rights in respect of shares held through the company’s employee share schemes are not exercisable directly by employees. However, employees can direct the trustee of the schemes to exercise voting rights on their behalf. The trustee of the company’s employee share ownership trust (ESOT) has waived its right to dividends on shares held by the ESOT which have not yet vested unconditionally to employees. Interests in voting rights The following information has been disclosed to the company under the FCA’s Disclosure and Transparency Rules (DTR 5) in respect of notifiable interests in the voting rights in the company’s issued share capital: Total % of total Nature of holding voting rights 1 voting rights 2 As at 31st March 2018: Ameriprise Financial Inc. Direct 84,408 0.04% Indirect 9,727,409 5.03% BlackRock, Inc. Indirect 20,181,149 9.85% Financial Instrument (CFD) 209,763 0.10% Standard Life Investments (Holdings) Limited Indirect 10,829,249 5.60% 1 Total voting rights attaching to the issued ordinary share capital of the company (excluding treasury shares) at the time of disclosure to the company. 2 % of total voting rights at the date of disclosure to the company. Other than as stated above, as far as the company is aware, there is no person with a significant direct or indirect holding of securities in the company. The information provided above was correct at the date of notification. However, it should be noted that these holdings are likely to have changed since the company was notified. Notification of any change is not required until the next notifiable threshold is crossed. 132 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Employment of disabled persons Information on the company’s policy applied during the year relating to the recruitment, employment, training, career development and promotion of disabled employees. Page 53 Research and development activities An indication of the activities of the group in the field of research and development. Pages 25 to 31 Likely future developments An indication on likely future developments in our business. Pages 12 and 65 to 69 Greenhouse gas emissions Disclosures relating to greenhouse gas emissions. Pages 39, 40 and 45 Use of financial instruments Information on the group’s financial risk management objectives and policies, its exposure to credit risk, liquidity risk, interest rate risk and foreign currency risk and its use of financial instruments. Pages 174 to 180 Contracts with controlling shareholders During the year there were no contracts of significance (as defined in the FCA’s Listing Rules) between any group undertaking and a controlling shareholder and no contracts for the provision of services to any group undertaking by a controlling shareholder. Change of control As at 31st March 2018 and as at the date of approval of this annual report, there were no significant agreements to which the company or any subsidiary was or is a party that take effect, alter or terminate on a change of control of the company, whether following a takeover bid or otherwise. However, the company and its subsidiaries were, as at 31st March 2018 and as at the date of approval of this annual report, party to a number of commercial agreements that may allow the counterparties to alter or terminate the agreements on a change of control of the company following a takeover bid. Other than the matters referred to below, these are not deemed by the company to be significant in terms of their potential effect on the group as a whole. The group has a number of loan notes and borrowing facilities which may require prepayment of principal and payment of accrued interest and breakage costs if there is change of control of the company. The group has also entered into a series of financial instruments to hedge its currency, interest rate and metal price exposures which provide for termination or alteration if a change of control of the company materially weakens the creditworthiness of the group. The Executive Directors’ service contracts each contain a provision to the effect that if the contract is terminated by the company within one year after a change of control of the company, the company will pay to the director as liquidated damages an amount equivalent to one year’s gross base salary and other contractual benefits less the period of any notice given by the company to the director. The rules of the company’s employee • • • • • share schemes set out the consequences of a change of control of the company on participants’ rights under the schemes. Generally such rights will vest and become exercisable on a change of control subject to the satisfaction of relevant performance conditions. As at 31st March 2018 and as at the date of approval of this annual report, there were no other agreements between the company or any subsidiary and its or their directors or employees providing for compensation for loss of office or employment (whether through resignation, purported redundancy or otherwise) that occurs because of a takeover bid. Branches The company and its subsidiaries have established branches in a number of different countries in which they operate. Political donations and expenditure It is the group’s policy not to make political donations or to incur political expenditure. During the year, there were no political donations made to any EU or non-EU political party, EU or non-EU political organisation or to any EU or non-EU independent election candidate. During the year, no EU or non-EU political expenditure was incurred. Information set out in the Strategic Report In accordance with section 414C(11) of the 2006 Act, the directors have chosen to set out in the Strategic Report the following information required to be included in the Directors’ Report: • Employee involvement A description of the action taken by the company during the year relating to employee involvement. Pages 52 to 57 133 Johnson Matthey / Annual Report and Accounts 2018 Governance Disclosures required by Listing Rule 9.8.4R Disclosures required by the FCA’s Listing Rule 9.8.4R, can be found on the following pages: Sub-section of Information required Listing Rule 9.8.4R Page reference 1. Capitalised interest (1) Page 168 2. Publication of unaudited financial information (2) Not applicable 3. Details of long term incentive schemes established to specifically recruit or retain a director (4) Not applicable 4. Waiver of emoluments by a director (5) (6) Not applicable 5. Allotments of equity securities for cash (7) (8) Page 132 6. Participation in a placing of equity securities (9) Not applicable 7. Contracts of significance (10) Not applicable 8. Contracts for the provisions of services by a controlling shareholder (11) Not applicable 9. Dividend waiver (12) (13) Pages 131 to 132 10. Agreements with controlling shareholder (14) Not applicable Important events since 31st March 2018 There have been no important events affecting the company or any subsidiary since 31st March 2018. 2018 Annual General Meeting Our 2018 AGM will be held at 11.00 am on Thursday 26th July 2018 at The Institute of Civil Engineering, One Great George Street, Westminster, London SW1P 3AA. The notice of the 2018 AGM, together with an explanation of the resolutions to be considered at the meeting, is set out in a separate circular to shareholders. This circular is published on our website. Auditor and disclosure of information KPMG LLP will sign the 2018 Annual Report and Accounts and then retire as external auditors. Following a comprehensive tender, described in full on pages 108 and 109, PricewaterhouseCoopers LLP will be recommended for appointment as the company’s external auditors at the AGM on 26th July 2018. So far as each person serving as a director of the company is aware, at the date this Directors’ Report was approved by the board there is no relevant audit information (that is, information needed by the auditor in connection with preparing its report) of which the company’s auditor is unaware. Each such director confirms that he or she has taken all the steps that he or she ought to have taken as a director in order to make himself or herself aware of any relevant audit information and to establish that the company’s auditor is aware of that information. Management report The Strategic Report and the Directors’ Report together include the ‘management report’ for the purposes of the FCA’s Disclosure and Transparency Rules (DTR 4.1.8R). The Directors’ Report was approved by the board on 30th May 2018 and is signed on its behalf by: Simon Farrant Company Secretary 134 Responsibility of Directors The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent company’s transactions and disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its accounts comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the group and to detect fraud and other irregularities. Under applicable law and regulations, the directors are also responsible for preparing a Strategic Report, Directors’ Report, Remuneration Report and Corporate Governance statement that comply with that law and those regulations. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company’s website. Legislation in the UK governing the preparation and dissemination of accounts may differ from legislation in other jurisdictions. Statement of directors’ responsibilities in respect of the Annual Report and Accounts The directors are responsible for preparing the annual report and the group and parent company accounts in accordance with applicable law and regulations. Company law requires the directors to prepare group and parent company accounts for each financial year. Under company law they are required to prepare the group accounts in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU) and other applicable law and have elected to prepare the parent company accounts on the same basis. Under company law the directors must not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs of the group and parent company and of their profit or loss for that period. In preparing each of the group and parent company accounts, the directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable, relevant and reliable; • • • state whether they have been prepared in accordance with IFRS as adopted by the EU; assess the group and parent company’s ability to continue as a going concern, disclosing as applicable, matters related to going concern; and use the going concern basis of accounting unless they either intend to liquidate the group or the parent company or to cease operations, or have no realistic alternative but to do so. t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Responsibility statement of the directors in respect of the Annual Report and Accounts Each of the directors as at the date of the Annual Report and Accounts, whose names and functions are set out below: • • • • • • • • • Tim Stevenson, Chairman Robert MacLeod, Chief Executive Anna Manz, Chief Financial Officer Odile Desforges, Non-Executive Director Alan Ferguson, Non-Executive Director Jane Griffiths, Non-Executive Director Chris Mottershead, Non-Executive Director John O’Higgins, Non-Executive Director John Walker, Executive Director states that to the best of his or her knowledge: • • the group and parent company accounts, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole; and the management report (which comprises the Strategic Report and the Directors’ Report) includes a fair review of the development and performance of the business and the position of the company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. This responsibility statement was approved by the board on 30th May 2018 and is signed on its behalf by: Tim Stevenson Chairman 135 Accounts 136 Contents 138 Consolidated Income Statement 138 Consolidated Statement of Total Comprehensive Income 139 Consolidated and Parent Company Balance Sheets 140 Consolidated and Parent Company Cash Flow Statements 141 Consolidated Statement of Changes in Equity 142 Parent Company Statement of Changes in Equity 143 Accounting policies 150 Notes on the accounts 191 Reconciliation of non-GAAP measures to GAAP measures 192 Independent auditor’s report Johnson Matthey / Annual Report and Accounts 2018 The Accounts include the consolidated and parent company accounts and related notes, prepared in accordance with International Financial Reporting Standards, as well as the independent auditor’s report. t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O 137 Johnson Matthey / Annual Report and Accounts 2018 Accounts Consolidated Income Statement for the year ended 31st March 2018 Revenue Cost of sales Gross profit Distribution costs Administrative expenses Loss on disposal of businesses Loss on significant legal proceedings Amortisation of acquired intangibles Major impairment and restructuring charges Operating profit Finance costs Finance income Share of loss of joint venture and associate Profit before tax Income tax expense Profit for the year Attributable to: Equity shareholders Non-controlling interests Earnings per ordinary share attributable to equity shareholders Basic Diluted Consolidated Statement of Total Comprehensive Income for the year ended 31st March 2018 Profit for the year Other comprehensive income: Items that will not be reclassified to profit or loss: Remeasurements of post-employment benefit assets and liabilities Tax on above items taken directly to or transferred from equity Items that may be reclassified subsequently to profit or loss: Currency translation differences Share of currency translation differences of joint venture and associate Cash flow hedges Fair value gains / (losses) on net investment hedges Fair value gains on available-for-sale investments Other comprehensive (loss) / income for the year Total comprehensive income for the year Attributable to: Equity shareholders Non-controlling interests The notes on pages 150 to 190 form an integral part of the accounts. 138 Notes 1,2 2018 £ million 2017 £ million 14,122 (13,214) 12,031 (11,169) 5 6 7 8 1,9 11 11 12 908 (123) (260) (7) (50) (19) (90) 359 (43) 5 (1) 320 (22) 298 298 – 298 862 (124) (225) – – (20) – 493 (38) 7 – 462 (77) 385 386 (1) 385 pence pence 13 13 155.2 155.0 201.2 200.8 Notes 2018 £ million 298 2017 £ million 385 17 35 36 36 36 36 36 103 (31) 72 (95) – 5 6 – (84) (12) 286 286 – 286 (18) 2 (16) 163 2 (2) (21) 7 149 133 518 519 (1) 518 Consolidated and Parent Company Balance Sheets as at 31st March 2018 Assets Non-current assets Property, plant and equipment Goodwill Other intangible assets Investments in subsidiaries Investments in joint venture and associate Deferred income tax assets Available-for-sale investments Interest rate swaps Other receivables Post-employment benefit net assets Total non-current assets Current assets Inventories Current income tax assets Trade and other receivables Cash and cash equivalents – cash and deposits Other financial assets Total current assets Total assets Liabilities Current liabilities Trade and other payables Current income tax liabilities Cash and cash equivalents – bank overdrafts Other borrowings and related swaps Other financial liabilities Provisions Total current liabilities Non-current liabilities Borrowings and related swaps Deferred income tax liabilities Employee benefit obligations Provisions Other payables Total non-current liabilities Total liabilities Net assets Equity Share capital Share premium account Shares held in employee share ownership trust (ESOT) Other reserves Retained earnings Total equity attributable to equity shareholders Non-controlling interests Total equity t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Group Parent company Notes 2018 £ million 2017 £ million 2018 £ million 2017 £ million 18 19 20 21 22 33 23 28 25 17 24 25 28 30 26 28 28 30 32 28 33 17 32 26 34 36 1,155 574 295 – 20 48 56 6 38 236 2,428 783 35 1,228 329 15 2,390 4,818 1,235 607 288 – 22 26 58 17 28 117 2,398 772 20 1,139 330 8 2,269 4,667 278 123 166 1,997 – – 7 6 1,013 226 3,816 124 – 1,377 218 15 1,734 5,550 282 123 137 2,063 – – 7 17 1,120 107 3,856 124 – 1,139 248 8 1,519 5,375 (1,012) (149) (53) (10) (12) (37) (968) (134) (32) (20) (15) (21) (2,552) (56) (11) (4) (14) (5) (2,579) (15) (16) (2) (16) (4) (1,273) (1,190) (2,642) (2,632) (951) (94) (103) (14) (5) (1,011) (113) (112) (18) (6) (951) (43) (9) (17) (492) (1,011) (27) (10) (18) (509) (1,167) (1,260) (1,512) (1,575) (2,440) (2,450) (4,154) (4,207) 2,378 2,217 1,396 1,168 221 148 (48) 63 1,994 2,378 – 2,378 221 148 (55) 147 1,776 2,237 (20) 2,217 221 148 (48) – 1,075 1,396 – 1,396 221 148 (55) (1) 855 1,168 – 1,168 The accounts were approved by the Board of Directors on 30th May 2018 and signed on its behalf by: R J MacLeod A O Manz Directors The notes on pages 150 to 190 form an integral part of the accounts. 139 Johnson Matthey / Annual Report and Accounts 2018 Accounts Consolidated and Parent Company Cash Flow Statements for the year ended 31st March 2018 Group Parent company Notes 2018 £ million 2017 £ million 2018 £ million 2017 £ million 320 462 332 150 1 7 245 10 (66) (144) 62 15 (20) (5) – 38 (77) 386 1 – 3 (157) (59) – 7 – 5 (200) – 2 – (14) – (146) (1) (45) (204) (18) (4) 298 276 (18) 12 (6) – 43 37 (716) (679) – – 177 11 (37) (111) 121 (27) (42) (3) – 31 (59) 523 – – 5 (194) (66) – 4 (20) – (271) (6) – 80 (129) (4) (139) (7) (42) (247) 5 9 284 298 5 53 58 (5) (94) (41) (675) (716) – – 113 7 – (138) (88) – (19) (5) (264) (16) (10) (88) – 264 63 (37) (36) – 5 – – 259 – – – – – (146) (1) (49) (196) (25) – 232 207 (25) – (25) – 47 22 (764) (742) – – 41 7 – 303 (137) (3) (24) (4) (38) (19) (9) 267 – 38 66 (36) (64) (13) – – – (9) (6) – 80 (116) – (139) (7) (52) (240) 18 – 214 232 18 36 54 – (101) (47) (717) (764) 5 14 28 28 Cash flows from operating activities Profit before tax Adjustments for: Share of loss of joint venture and associate Loss on disposal of businesses Depreciation, amortisation, impairment losses and loss / (profit) on sale of non-current assets and investments Share-based payments Increase in inventories (Increase) / decrease in receivables Increase / (decrease) in payables Increase / (decrease) in provisions Contributions in excess of employee benefit obligations charge Changes in fair value of financial instruments Dividends received from subsidiaries Net finance costs / (income) Income tax paid Net cash inflow / (outflow) from operating activities Cash flows from investing activities Dividends received from joint venture Dividends received from subsidiaries Interest received Purchases of property, plant and equipment Purchases of intangible assets Purchases of subsidiaries Proceeds from sale of non-current assets and investments Purchases of businesses net of cash acquired Net proceeds from sale of businesses Net cash (outflow) / inflow from investing activities Cash flows from financing activities Purchase of own shares by ESOT Proceeds from borrowings falling due within one year Proceeds from borrowings falling due after more than one year Repayment of borrowings falling due within one year Repayment of borrowings falling due after more than one year Dividends paid to equity shareholders Settlement of currency swaps Interest paid Net cash outflow from financing activities (Decrease) / increase in cash and cash equivalents in the year Exchange differences on cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Reconciliation to net debt (Decrease) / increase in cash and cash equivalents in the year Decrease in borrowings Change in net debt resulting from cash flows Borrowings acquired with subsidiaries Exchange differences on net debt Movement in net debt in year Net debt at beginning of year Net debt at end of year The notes on pages 150 to 190 form an integral part of the accounts. 140 Consolidated Statement of Changes in Equity for the year ended 31st March 2018 Share capital £ million Share premium account £ million Shares Other held in reserves ESOT (note 36) £ million £ million Total Retained attributable to equity holders earnings £ million £ million Non- controlling interests £ million At 1st April 2016 221 148 (55) Profit for the year Remeasurements of post-employment benefit assets and liabilities Cash flow hedges Net investment hedges Available-for-sale investments Currency translation differences Tax on other comprehensive income Total comprehensive income Dividends paid (note 14) Purchase of own shares by ESOT Share-based payments Cost of shares transferred to employees Tax on share-based payments – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – (6) – 6 – At 31st March 2017 221 148 (55) Profit for the year Remeasurements of post-employment benefit assets and liabilities Cash flow hedges Net investment hedges Currency translation differences Tax on other comprehensive income Total comprehensive income Dividends paid (note 14) Purchase of non-controlling interests Share-based payments Cost of shares transferred to employees – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 7 (2) – – (2) (21) 7 165 – 149 – – – – – 147 – – 5 6 (95) – (84) – – – – t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O 1,541 1,853 386 (18) – – – – 2 370 (139) – 17 (12) (1) 386 (18) (2) (21) 7 165 2 519 (139) (6) 17 (6) (1) (19) (1) – – – – – – (1) – – – – – Total equity £ million 1,834 385 (18) (2) (21) 7 165 2 518 (139) (6) 17 (6) (1) 1,776 2,237 (20) 2,217 298 103 – – – (31) 370 (146) (9) 17 (14) 298 103 5 6 (95) (31) 286 (146) (9) 17 (7) – – – – – – – – 20 – – – 298 103 5 6 (95) (31) 286 (146) 11 17 (7) 2,378 At 31st March 2018 221 148 (48) 63 1,994 2,378 The notes on pages 150 to 190 form an integral part of the accounts. 141 Johnson Matthey / Annual Report and Accounts 2018 Accounts Parent Company Statement of Changes in Equity for the year ended 31st March 2018 Other reserves (note 36) £ million Retained earnings £ million Total equity £ million 1,187 133 (21) (2) 2 3 115 (139) (6) 15 (4) 1,168 282 98 4 (3) (17) 364 (146) 15 (5) 874 133 (21) – – 3 115 (139) – 15 (10) 855 282 98 – – (17) 363 (146) 15 (12) 1,075 1,396 (1) – – (2) 2 – – – – – – (1) – – 4 (3) – 1 – – – – At 1st April 2016 Profit for the year Remeasurements of post-employment benefit assets and liabilities Cash flow hedges Currency translation differences Tax on other comprehensive income Total comprehensive income Dividends paid (note 14) Purchase of own shares by ESOT Share-based payments Cost of shares transferred to employees Share capital £ million 221 Share premium account £ million 148 Shares held in ESOT £ million (55) – – – – – – – – – – – – – – – – – – – – – – – – – – – (6) – 6 At 31st March 2017 221 148 (55) Profit for the year Remeasurements of post-employment benefit assets and liabilities Cash flow hedges Currency translation differences Tax on other comprehensive income Total comprehensive income Dividends paid (note 14) Share-based payments Cost of shares transferred to employees – – – – – – – – – – – – – – – – – – – – – – – – – – 7 At 31st March 2018 221 148 (48) The notes on pages 150 to 190 form an integral part of the accounts. 142 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Accounting policies for the year ended 31st March 2018 Basis of accounting and preparation The accounts are prepared in accordance with International Financial Reporting Standards (IFRS) and interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) or the Standing Interpretations Committee (SIC) as adopted by the European Union. For Johnson Matthey, there are no differences between IFRS as adopted by the European Union and full IFRS as published by the International Accounting Standards Board (IASB) and so the accounts comply with IFRS. The accounts are prepared on the historical cost basis, except for certain assets and liabilities which are measured at fair value as explained below. The parent company has not presented its own income statement, statement of total comprehensive income and related notes as permitted by section 408 of the Companies Act 2006. Expenses within 2017’s Consolidated Income Statement have been reclassified as follows: increase administrative expenses £22 million, reduce cost of sales £19 million and reduce distribution costs £3 million. Basis of consolidation The consolidated accounts comprise the accounts of the parent company and all its subsidiaries, including the employee share ownership trust, and include the group’s interest in joint ventures and associates. Entities the group controls are accounted for as subsidiaries. Entities that are joint ventures or associates are accounted for using the equity method of accounting. Transactions and balances between group companies are eliminated. No profit is taken on transactions between group companies. The results of businesses acquired or disposed of in the year are consolidated from or up to the effective date of acquisition or disposal, respectively. The net assets of businesses acquired are recognised in the consolidated accounts at their fair values at the date of acquisition. In the parent company balance sheet, businesses acquired from other group companies are recognised at book value at the date of acquisition. The difference between the consideration paid and the book value of the net assets acquired is reflected in retained earnings. Significant accounting policies The group’s and parent company’s significant accounting policies are: Foreign currencies Foreign currency transactions are recorded in the functional currency of the relevant subsidiary, joint venture, associate or branch at the exchange rate at the date of the transaction. Foreign currency monetary assets and liabilities are retranslated into the relevant functional currency at the exchange rate at the balance sheet date. Income statements and cash flows of overseas subsidiaries, joint ventures, associates and branches are translated into sterling at the average rates for the year. Balance sheets of overseas subsidiaries, joint ventures, associates and branches, including any fair value adjustments and related goodwill, are translated into sterling at the exchange rates at the balance sheet date. Exchange differences arising on the translation of the net investment in overseas subsidiaries, joint ventures, associates and branches, less exchange differences arising on related foreign currency financial instruments which hedge the group’s net investment in these operations, are taken to other comprehensive income. On disposal of the net investment, the cumulative exchange difference is reclassified from equity to operating profit. The group has taken advantage of the exemption allowed in IFRS 1 ‘First-time Adoption of International Reporting Standards’ to deem the cumulative translation difference for all overseas subsidiaries and branches to be zero at 1st April 2004. Other exchange differences are taken to operating profit. Revenue Revenue comprises all sales of goods and rendering of services at the fair value of consideration received or receivable after the deduction of any trade discounts and excluding sales taxes. Revenue is recognised when it can be measured reliably and the significant risks and rewards of ownership are transferred to the customer. With the sale of goods, this occurs: • • • when the goods are despatched or delivered in line with the International Chamber of Commerce’s International Commercial Terms (Incoterms®) as detailed in the relevant contract; when the goods are made available to the customer and ownership transfers before despatch; or on notification that the goods have been used when they are consignment products located at customers’ premises. With the rendering of services, revenue is recognised by reference to the stage of completion as measured by costs incurred to date as a proportion of estimated total costs. With royalty and licence income, revenue is recognised in accordance with the substance of the relevant agreement. Where royalties or licences are part of a long-term contract with a single overall profit margin, revenue is recognised by reference to the stage of completion of the contract. 143 Johnson Matthey / Annual Report and Accounts 2018 Accounts Accounting policies for the year ended 31st March 2018 Long-term contracts Where the outcome of a long-term contract can be estimated reliably, revenue and costs are recognised by reference to the stage of completion. This is measured by contract costs incurred to date as a proportion of estimated total contract costs. Where the outcome of a long-term contract cannot be estimated reliably, contract revenue is recognised to the extent of contract costs incurred that it is probable will be recoverable. Contract costs are recognised as expenses in the period in which they are incurred. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately. Finance costs and finance income Finance costs that are directly attributable to the construction of an asset that necessarily takes a substantial period of time to get ready for its intended use are capitalised as part of the cost of that asset. Other finance costs and finance income are recognised in the income statement in the year incurred. Grants Grants related to assets are included in deferred income and released to the income statement in equal instalments over the expected useful lives of the related assets. Grants related to income are deducted in reporting the related expense. Research and development Research expenditure is charged to the income statement in the year incurred. Development expenditure is charged to the income statement in the year incurred unless it meets the recognition criteria for capitalisation. When the recognition criteria have been met, any further development expenditure is capitalised as an intangible asset. Property, plant and equipment Property, plant and equipment is stated at cost less accumulated depreciation and any provisions for impairment. Depreciation is provided at rates calculated to write-off the cost less estimated residual value of each asset over its useful life. Certain freehold buildings and plant and equipment are depreciated using the units of production method as this more closely reflects their expected consumption. All other assets are depreciated using the straight-line method. The useful lives vary according to the class of the asset, but are typically: • • • leasehold property – 30 years (or the life of the lease if shorter); freehold buildings – 30 years; and plant and equipment – 4 to 10 years. Freehold land is not depreciated. Goodwill and other intangible assets Goodwill arises on the acquisition of a business when the fair value of the consideration exceeds the fair value attributed to the net assets acquired (including contingent liabilities). It is subject to annual impairment reviews. Acquisition-related costs are charged to the income statement as incurred. The group and parent company have taken advantage of the exemption allowed under IFRS 1 and, therefore, goodwill arising on acquisitions made before 1st April 2004 is included at the carrying amount at that date less any subsequent impairments. Other intangible assets are stated at cost less accumulated amortisation and any provisions for impairment. Customer contracts are amortised when the relevant income stream occurs using either a straight-line method or, where they relate to a long-term contract, a stage of completion method. All other intangible assets are amortised by using the straight-line method over the useful lives from the time they are first available for use. The estimated useful lives vary according to the specific asset, but are typically: • • • • • customer contracts and relationships – 1 to 15 years; capitalised computer software – 3 to 10 years; patents, trademarks and licences – 3 to 20 years; acquired research and technology – 4 to 10 years; and capitalised development currently being amortised – 3 to 8 years. Intangible assets which are not yet being amortised are subject to annual impairment reviews. Investments in subsidiaries Investments in subsidiaries are stated in the parent company’s balance sheet at cost less any provisions for impairment. If a distribution is received from a subsidiary, the investment in that subsidiary is assessed for an indication of impairment. 144 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Accounting policies for the year ended 31st March 2018 Leases Leases are classified as finance leases whenever they transfer substantially all the risks and rewards of ownership to the group. The assets are included in property, plant and equipment and the capital elements of the leasing commitments are shown as obligations under finance leases. The assets are depreciated on a basis consistent with similar owned assets or the lease term if shorter. The interest element of the lease rental is included in the income statement. All other leases are classified as operating leases and the lease costs are expensed on a straight-line basis over the lease term. Precious metal inventories Inventories of gold, silver and platinum group metals are valued according to the source from which the metal is obtained. Metal which has been purchased and committed to future sales to customers or hedged in metal markets is valued at the price at which it is contractually committed or hedged, adjusted for unexpired contango and backwardation. Other precious metal inventories owned by the group, which are unhedged, are valued at the lower of cost and net realisable value using the weighted average cost formula. Other inventories Non-precious metal inventories are valued at the lower of cost, including attributable overheads, and net realisable value. Except where costs are specifically identified, the first-in, first-out cost formula is used to value inventories. Cash and cash equivalents Cash and deposits comprise cash at bank and in hand, including short-term deposits with a maturity date of three months or less from the date of acquisition. The group and parent company routinely use short-term bank overdraft facilities, which are repayable on demand, as an integral part of their cash management policy and, therefore, cash and cash equivalents in the cash flow statements are cash and deposits less bank overdrafts. Offset arrangements across group businesses have been applied to arrive at the net cash and overdraft figures. Derivative financial instruments The group and parent company use derivative financial instruments, in particular forward currency contracts and currency swaps, to manage the financial risks associated with their underlying business activities and the financing of those activities. The group and parent company do not undertake any speculative trading activity in derivative financial instruments. Derivative financial instruments are measured at their fair value. Derivative financial instruments may be designated at inception as fair value hedges, cash flow hedges or net investment hedges if appropriate. Derivative financial instruments which are not designated as hedging instruments are classified as held for trading, but are used to manage financial risk. The vast majority of forward precious metal price contracts are entered into and held for the receipt or delivery of precious metal and, therefore, are not recorded at fair value. If a forward precious metal price contract will be settled net in cash then it is designated and accounted for as a cash flow hedge. Changes in the fair value of any derivative financial instruments that are not designated as, or are not determined to be, effective hedges are recognised immediately in the income statement. Changes in the fair value of derivative financial instruments designated as fair value hedges are recognised in the income statement, together with the related changes in the fair value of the hedged asset or liability. Fair value hedge accounting is discontinued if the hedging instrument expires or is sold, terminated or exercised, the hedge no longer meets the criteria for hedge accounting or the designation is revoked. Changes in the fair value of derivative financial instruments designated as cash flow hedges are recognised in other comprehensive income to the extent that the hedges are effective. Ineffective portions are recognised in the income statement immediately. If the hedged item results in the recognition of a non-financial asset or liability, the amount previously recognised in other comprehensive income is transferred out of equity and included in the initial carrying amount of the asset or liability. Otherwise, the amount previously recognised in other comprehensive income is transferred to the income statement in the same period that the hedged item is recognised in the income statement. If the hedging instrument expires or is sold, terminated or exercised, the hedge no longer meets the criteria for hedge accounting or the designation is revoked, amounts previously recognised in other comprehensive income remain in equity until the forecast transaction occurs. If a forecast transaction is no longer expected to occur, the amounts previously recognised in other comprehensive income are transferred to the income statement. For hedges of net investments in foreign operations, the effective portion of the gain or loss on the hedging instrument is recognised in other comprehensive income, while the ineffective portion is recognised in the income statement. Amounts taken to other comprehensive income are reclassified from equity to the income statement when the foreign operations are sold or liquidated. 145 Johnson Matthey / Annual Report and Accounts 2018 Accounts Accounting policies for the year ended 31st March 2018 Other financial instruments All other financial instruments are initially recognised at fair value plus transaction costs. Subsequent measurement is as follows: • • • • Borrowings are measured at amortised cost unless they are designated as being fair value hedged, in which case they are remeasured for the fair value changes in respect of the hedged risk with these changes recognised in the income statement. Available-for-sale investments which are investments in equity instruments that have a quoted market price in an active market are fair valued at that price with the gain or loss recognised in other comprehensive income. Investments in equity instruments that do not have a quoted market price in an active market are valued at fair value if it can be measured reliably with the gain or loss recognised in other comprehensive income. If the fair value cannot be measured reliably, they are measured at cost. Other available-for-sale investments are measured at fair value with interest calculated using the effective interest method recognised in finance income and the remaining gain or loss recognised in other comprehensive income until the investment is derecognised. At that time, the cumulative gain or loss recognised in other comprehensive income will be transferred to the income statement. All other financial assets and liabilities, including short term receivables and payables, are measured at amortised cost less any impairment provision. Taxation Current and deferred tax are recognised in the income statement, except when they relate to items recognised directly in equity, in which case the related tax is also recognised in equity. Current tax is the amount of income tax expected to be paid in respect of taxable profits using the tax rates that have been enacted or substantively enacted at the balance sheet date. Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the balance sheet. It is provided using the tax rates that are expected to apply in the period when the asset or liability is settled, based on tax rates that have been enacted or substantively enacted at the balance sheet date. Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilised. No deferred tax asset or liability is recognised in respect of temporary differences associated with investments in subsidiaries and branches where the group is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Provisions and contingencies Provisions are recognised when the group has a present obligation as a result of a past event and a reliable estimate can be made of a probable adverse outcome, for example warranties, environmental claims and restructuring. Otherwise, material contingent liabilities are disclosed unless the probability of the transfer of economic benefits is remote. Contingent assets are only disclosed if an inflow of economic benefits is probable. The parent company considers financial guarantees of its subsidiaries’ borrowings and precious metal leases to be insurance contracts. These are treated as contingent liabilities unless it becomes probable that it will be required to make a payment under the guarantee. Share-based payments and employee share ownership trust (ESOT) The fair value of shares awarded to employees under the Performance Share Plan, Restricted Share Plan, long term incentive plan and deferred bonus is calculated by adjusting the share price on the date of allocation for the present value of the expected dividends that will not be received. The resulting cost is charged to the income statement over the relevant performance periods, adjusted to reflect actual and expected levels of vesting where appropriate. The group and parent company provide finance to the ESOT to purchase company shares in the open market. Costs of running the ESOT are charged to the income statement. The cost of shares held by the ESOT is deducted in arriving at equity until they vest unconditionally with employees. 146 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Accounting policies for the year ended 31st March 2018 Post-employment benefits The costs of defined contribution plans are charged to the income statement as they fall due. For defined benefit plans, the group and parent company recognise the net assets or liabilities of the plans in their balance sheets. Assets are measured at their fair value at the balance sheet date. Liabilities are measured at present value using the projected unit credit method and a discount rate reflecting yields on high quality corporate bonds. The changes in plan assets and liabilities, based on actuarial advice, are recognised as follows: • • • • • The current service cost is deducted in arriving at operating profit. The net interest cost, based on the discount rate at the beginning of the year, contributions paid in and the present value of the net defined benefit liabilities during the year, is included in finance costs. Past service costs and curtailment gains and losses are recognised in operating profit at the earlier of when the plan amendment or curtailment occurs and when any related restructuring costs or termination benefits are recognised. Gains or losses arising from settlements are included in operating profit when the settlement occurs. Remeasurements, representing returns on plan assets, excluding amounts included in interest, and actuarial gains and losses arising from changes in financial and demographic assumptions, are recognised in other comprehensive income. Critical accounting policies Certain of the group’s and parent company’s significant accounting policies are considered to be critical because of the level of complexity, judgement or estimation involved in their application and their impact on the accounts. Post-employment benefits The group’s and parent company’s defined benefit plans are assessed annually by qualified independent actuaries. The estimate of the liabilities of the plans is based on a number of actuarial assumptions. There is a range of possible values for each actuarial assumption and the point within that range is estimated to most appropriately reflect the group’s and parent company’s circumstances. Small changes in these assumptions can have a significant impact on the estimate of the liabilities of the plans and, therefore, may result in a material change to the group’s and parent company’s financial position in the year ending 31st March 2019. Goodwill, other intangible assets and other assets The group and parent company have significant intangible assets from both business acquisitions and investments in new products and technologies. Some of those acquisitions and investments are at an early stage of commercial development and, therefore, carry a greater risk that they will not be commercially viable. Goodwill and intangible assets not yet ready for use are not amortised, but are subject to annual impairment reviews. Other intangible assets are amortised from the time they are first ready for use. Other assets are assessed for impairment when there is a triggering event that provides evidence that an asset may be impaired. The impairment reviews require the use of estimates of future profit and cash generation based on financial budgets and plans approved by management covering a three-year period and the pre-tax discount rates used in discounting projected cash flows. The group does not consider that there is a significant risk that changes in goodwill and other intangible assets could result in a material adjustment to its financial position in the year ending 31st March 2019. Tax provisions Tax provisions are determined based on the tax laws and regulations that apply in each of the jurisdictions in which the group operates. Tax provisions are recognised where the impact of those laws and regulations is unclear and it is probable that there will be a tax adjustment representing a future outflow of funds to a tax authority or a consequent adjustment to the carrying value of a tax asset. Provisions are measured using the best estimate of the most likely amount, being the most likely amount in a range of possible outcomes. The resolution of tax positions taken by the group can take a considerable period of time to conclude and, in some cases, it is difficult to predict the outcome. Group current income tax liabilities at 31st March 2018 of £149 million (2017: £134 million) include tax provisions of £86 million (2017: £89 million) and the estimation of the range of possible outcomes is an increase in those liabilities by £61 million (2017: £64 million) to a decrease of £50 million (2017: £51 million). The estimates made reflect where the group: faces routine tax audits or is in ongoing disputes with tax authorities; has identified potential tax exposures relating to transfer pricing; or is contesting the tax deductibility of certain business costs. The group does not consider that there is a significant risk that changes in tax provisions could result in a material adjustment to its financial position in the year ending 31st March 2019. 147 Johnson Matthey / Annual Report and Accounts 2018 Accounts Accounting policies for the year ended 31st March 2018 Refining process The group’s and parent company’s refining businesses process significant quantities of precious metal and there are uncertainties regarding the actual amount of metal in the refining system at any one time. The group’s refining businesses process over four million ounces of platinum group metals per annum with a market value of around £3.4 billion. The majority of metal processed is owned by customers and the group and parent company must return pre-agreed quantities of refined metal based on assays of starting materials and other contractual arrangements, such as, the timing of the return of metal. The group and parent company calculate the profits or losses of their refining operations based on estimates, including the extent to which process losses are expected during refining. The risk of process losses or gains depends on the nature of the starting material being refined, the specific refining processes applied, the efficiency of those processes and the contractual arrangements. Stock takes are performed to determine the volume and value of metal within the refining system compared with the calculated estimates, with the variance being a profit or a loss. Stock takes are, therefore, a key control in the assessment of the accuracy of the profit or loss of refining operations. Whilst refining is a complex, large scale industrial process, the group and parent company have appropriate processes and controls over the movement of material in their refineries and, historically, have not recorded material stock take gains or losses. During the year ended 31st March 2018, the group and parent company did not perform a full stock take in their UK refineries due to high levels of customer demand and potential palladium shortages in the market. As a consequence, a stocktake of input materials and finished goods was performed, as in prior years, alongside additional procedures to support the estimates made as part of calculating the value of work in progress. The group and parent company do not consider that there is a significant risk of a material adjustment to its financial position in the year ending 31st March 2019 in respect of refining process gains or losses. Sources of estimation uncertainty Determining the carrying amounts of certain assets and liabilities at the balance sheet date requires estimation of the effects of uncertain future events. In the event that actual outcomes differ from those estimated, there may be an adjustment to the carrying amounts of those assets and liabilities within the next financial year. The group and parent company have made appropriate estimates and the only significant risks of material adjustments to their financial position during the year ending 31st March 2019 relate to the determination of the discount rate and inflation assumptions underpinning the valuation of the liabilities of the group’s and parent company’s defined benefit pension plans and, for the group, to the crystallisation of the contingent liability disclosed in note 32. A description of the discount rate and inflation assumptions, together with sensitivity analysis, is set out in note 17 to the group and parent company accounts. The group is unable to make a reliable estimate of any possible financial impact of the contingent liability at this stage. Judgements made in applying accounting policies In the course of preparing the financial statements, no judgements have been made in the process of applying the group’s and parent company’s accounting policies, other than those involving estimations, that have had a significant effect on the amounts recognised in the financial statements. Adoption of revised standards and interpretations In September 2017, the IFRS Interpretations Committee clarified that finance expenses on income tax balances should be reported within finance costs and certain penalties arising on settlements with tax authorities within administrative expenses. The group had previously reported finance expenses and penalties on income tax balances as part of income tax expense. With effect from 1st April 2017, the group has updated its treatment of these balances in accordance with this new guidance. Comparative information has not been restated on the basis that the impact of the change is not material. In accordance with amendments to IAS 7 ‘Statement of Cash Flows’, the group and parent company have provided reconciliations between the opening and closing balances for assets and liabilities arising from financing activities (note 29). 148 Accounting policies for the year ended 31st March 2018 Standards issued but not yet applied Standards effective from 1st April 2018 IFRS 9 ‘Financial Instruments’ will be adopted from 1st April 2018. IFRS 9 introduces new requirements for recognition, classification and measurement, a new impairment model for financial assets based on expected credit losses and simplified hedge accounting, replacing the requirements of IAS 39 ‘Financial Instruments: Recognition and Measurement’. The group and parent company have completed their reviews of the financial instruments they hold and the way in which those instruments are used. They have identified differences in accounting treatment, where applicable, and have updated their hedging documentation. The review has concluded that the new standard is not expected to have a significant impact on the group’s and parent company’s equity on transition. The key impact of adopting IFRS 9 is to change the group’s and parent company’s financial asset impairment provision processes from the current ‘incurred loss’ model to a forward looking ‘expected loss’ approach, resulting in earlier recognition of impairments. Other less significant differences in the group relate to the reclassification of certain financial assets from being valued at amortised cost to fair value through other comprehensive income. Changes to the classification and measurement of financial assets are applied retrospectively by adjusting opening retained earnings at 1st April 2018. The group has chosen not to restate comparative information for prior periods. The provisional impact of adopting IFRS 9 on the group’s equity as at 1st April 2018 is a decrease of less than £5 million. IFRS 15 ‘Revenue from Contracts with Customers’ will be adopted from 1st April 2018, superseding all revenue standards and interpretations in IFRS. IFRS 15 provides a principles-based approach for revenue recognition and requires that revenue is recognised as the distinct performance obligations promised within the contract are satisfied either at a point in time or over time. Whilst some timing differences have been identified as a result of allocating revenue to distinct performance obligations or where the criteria set out in IFRS 15 for recognising revenue over time are not met, the group and parent company have completed their reviews of major existing contracts and have concluded that applying IFRS 15 will not have a significant impact on the timing and recognition of revenue once it is applied. The group has chosen to apply IFRS 15 on a modified retrospective basis, recognising the cumulative effect of initial application as an adjustment to opening retained earnings for contracts which are not completed at the adoption date. This means that the comparative information continues to be recognised under existing revenue accounting requirements. The provisional impact of adopting IFRS 15 on the group’s equity as at 1st April 2018 is an increase of less than £5 million. Standards effective from 1st April 2019 IFRS 16 ‘Leases’, which replaces IAS 17 ‘Leases’, was EU endorsed in October 2017. Whilst lessor accounting is similar to IAS 17, lessee accounting is significantly different. Under IFRS 16, the group will recognise on the balance sheet a right-of-use asset and a lease liability for future lease payments in respect of all leases unless the underlying assets are of low value or the lease term is 12 months or less. In the income statement, rental expense on the impacted leases will be replaced with depreciation on the right-of-use asset and interest expense on the lease liability. As set out in note 39, the group has operating lease commitments totalling £93 million at 31st March 2018 and, therefore, IFRS 16 will have a material impact on the group’s balance sheet. The implications of the standard are currently under review and the group has not yet determined which transition option will be applied. As the impact of transition is dependent on the option chosen, the group is unable to quantify the effect at this time. The group and parent company do not consider that any other standards or interpretations issued by the IASB, but not yet applicable, will have a significant impact on their reported results or net assets. t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O 149 Johnson Matthey / Annual Report and Accounts 2018 Accounts Notes on the accounts for the year ended 31st March 2018 1 Segmental information Effective 1st April 2017, the group was reorganised into four operating sectors – Clean Air, Efficient Natural Resources, Health and New Markets. Segmental information for the year ended 31st March 2017 has been restated to reflect a change in group structure. The Group Management Committee (the chief operating decision maker as defined by IFRS 8 ‘Operating Segments’) monitors the results of these operating sectors to assess performance and make decisions about the allocation of resources. Each operating sector is represented by a member of the Group Management Committee. These operating sectors represent the group’s reportable segments. Their principal activities are described on pages 62 to 69. The performance of the operating sectors is assessed on sales excluding precious metals and underlying operating profit (see note 4). Sales between segments are made at market prices, taking into account the volumes involved. The group received £1,810 million of revenue from one external customer (2017: £1,835 million) which is 13% (2017: 15%) of the group’s revenue from external customers. The revenue is generated by the group’s precious metal management activities so has a low margin due to high precious metal content and is reported in the Efficient Natural Resources sector. Year ended 31st March 2018 Revenue from external customers Inter-segment revenue Total revenue External sales excluding precious metals Inter-segment sales Sales excluding precious metals Segmental underlying operating profit Unallocated corporate expenses Underlying operating profit (note 4) Loss on disposal of businesses (note 5) Loss on significant legal proceedings (note 6) Amortisation of acquired intangibles (note 7) Major impairment and restructuring charges (note 8) Operating profit / (loss) Segmental net assets Net debt Post-employment benefit net assets and liabilities Deferred income tax net liabilities Provisions and non-current other payables Investments in joint venture and associate Unallocated corporate net assets Net assets Segmental capital expenditure Other additions to non-current assets (excluding financial, deferred tax and post-employment benefit net assets) Segmental total additions to non-current assets Corporate capital expenditure Total additions to non-current assets Segment depreciation and amortisation Amortisation of acquired intangibles (note 7) Corporate depreciation Total depreciation and amortisation 150 Efficient Natural Resources £ million 9,237 2,342 Clean Air £ million 4,248 260 4,508 11,579 2,454 – 2,454 845 111 956 Health £ million New Markets £ million Eliminations £ million 252 – 252 247 – 247 385 18 403 300 12 312 Total £ million 14,122 – – (2,620) (2,620) 14,122 – (123) 3,846 – (123) 3,846 349 158 44 17 – – (50) (3) – 296 – – (7) (13) 138 – – – (56) (12) (7) – (9) (21) (20) 1,133 1,083 481 208 – 71 11 82 74 3 77 49 – 49 47 7 54 40 – 40 21 – 21 18 – 18 8 9 17 – – – – – – 568 (43) 525 (7) (50) (19) (90) 359 2,905 (679) 133 (46) (56) 20 101 2,378 178 11 189 39 228 150 19 169 6 175 Notes on the accounts for the year ended 31st March 2018 1 Segmental information (continued) Year ended 31st March 2017 Revenue from external customers Inter-segment revenue Total revenue External sales excluding precious metals Inter-segment sales Sales excluding precious metals Segmental underlying operating profit Unallocated corporate expenses Underlying operating profit (note 4) Amortisation of acquired intangibles (note 7) Operating profit Segmental net assets Net debt Post-employment benefit net assets and liabilities Deferred income tax net liabilities Provisions and non-current other payables Investments in joint venture and associate Unallocated corporate net assets Net assets Segmental capital expenditure Other additions to non-current assets (excluding financial, deferred tax and post-employment benefit net assets) Segmental total additions to non-current assets Corporate capital expenditure Total additions to non-current assets Segment depreciation and amortisation Amortisation of acquired intangibles (note 7) Corporate depreciation Total depreciation and amortisation t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Efficient Natural Resources £ million 7,643 1,724 9,367 826 93 919 Clean Air £ million 3,779 175 3,954 2,224 – 2,224 318 163 (3) 315 (8) 155 Health £ million New Markets £ million Eliminations £ million Total £ million 12,031 – – (1,917) (1,917) 12,031 241 – 241 236 – 236 52 – 52 368 18 386 292 16 308 12 (9) 3 – (109) (109) – 1,090 1,132 526 209 – 89 3 92 69 3 72 53 – 53 47 8 55 57 – 57 19 – 19 26 24 50 11 9 20 – – – – – – 3,578 – 3,578 545 (32) 513 (20) 493 2,957 (716) 5 (87) (45) 22 81 2,217 225 27 252 40 292 146 20 166 6 172 151 Johnson Matthey / Annual Report and Accounts 2018 Accounts Notes on the accounts for the year ended 31st March 2018 1 Segmental information (continued) The group’s country of domicile is the UK. Revenue from external customers based on the customer’s location and non-current assets based on the location of the assets are presented below: Revenue from external customers Non-current assets 2018 £ million 2017 £ million 2018 £ million 2017 £ million UK Germany Rest of Europe USA Rest of North America China (including Hong Kong) Rest of Asia Rest of World Sub-total Deferred income tax assets Available-for-sale investments Interest rate swaps Post-employment benefit net assets Total 2 Revenue Sale of goods Rendering of services Royalties and licence income Total revenue 4,613 1,347 1,597 2,870 232 1,347 1,295 821 3,640 1,118 1,655 2,216 319 1,124 1,320 639 14,122 12,031 849 276 236 399 33 159 112 18 2,082 48 56 6 236 2,428 839 260 240 495 38 164 124 20 2,180 26 58 17 117 2,398 2018 £ million 13,950 133 39 14,122 2017 £ million 11,853 129 49 12,031 3 Effect of exchange rate changes on translation of foreign subsidiaries’ sales excluding precious metals and underlying operating profit Average exchange rates used for translation of results of foreign operations are as follows: US dollar / £ Euro / £ Chinese renminbi / £ 2018 2017 1.328 1.134 8.79 1.308 1.191 8.79 The main impact of exchange rate movements on the group’s sales and operating profit comes from the translation of foreign subsidiaries’ results into sterling. Sales excluding precious metals Clean Air Efficient Natural Resources Health New Markets Inter-segment sales Sales excluding precious metals Underlying operating profit Clean Air Efficient Natural Resources Health New Markets Unallocated corporate expenses Underlying operating profit 152 Year ended 31st March 2018 £ million Year ended 31st March 2017 At this year’s rates £ million At last year’s rates (restated) £ million Change at this year’s rates % 2,454 956 247 312 (123) 3,846 349 158 44 17 (43) 525 2,224 919 236 308 (109) 3,578 318 163 52 12 (32) 513 2,249 922 234 317 (111) 3,611 326 165 51 12 (32) 522 +9 +4 +6 –2 +7 +7 –4 –13 +34 – t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Notes on the accounts for the year ended 31st March 2018 3 Effect of exchange rate changes on translation of foreign subsidiaries’ sales excluding precious metals and underlying operating profit (continued) The group believes that sales excluding precious metals is a better measure of the underlying performance of the group than revenue. Total revenue can be heavily distorted by year on year fluctuations in the market prices of precious metals. In addition, in many cases, the value of precious metals is passed directly on to our customers. Underlying profit and earnings are measures that the group believes provide a better guide to the underlying performance of the group. These measures exclude amortisation of acquired intangibles, major impairment and restructuring charges, profit or loss on disposal of businesses, gain or loss on significant legal proceedings together with associated legal costs, significant tax rates changes and, where relevant, related tax effects, and are reconciled to their equivalent GAAP measures in note 4. 4 Underlying profit reconciliations Underlying operating profit (note 1) Loss on disposal of businesses (note 5) Loss on significant legal proceedings (note 6) Amortisation of acquired intangibles (note 7) Major impairment and restructuring charges (note 8) Operating profit Underlying profit before tax Loss on disposal of businesses (note 5) Loss on significant legal proceedings (note 6) Amortisation of acquired intangibles (note 7) Major impairment and restructuring charges (note 8) Profit before tax Tax on underlying profit before tax Tax on loss on significant legal proceedings (note 6) Tax on amortisation of acquired intangibles (note 7) Tax on major impairment and restructuring charges (note 8) Tax thereon Tax rate changes (note 12) Income tax expense Underlying profit for the year Loss on disposal of businesses (note 5) Loss on significant legal proceedings (note 6) Amortisation of acquired intangibles (note 7) Major impairment and restructuring charges (note 8) Tax thereon Tax rate changes (note 12) Profit for the year attributable to equity shareholders 2018 £ million 2017 £ million 525 (7) (50) (19) (90) 359 486 (7) (50) (19) (90) 320 513 – – (20) – 493 482 – – (20) – 462 (86) (82) 16 4 21 41 23 – 5 – 5 – (22) (77) 400 (7) (50) (19) (90) 41 23 298 401 – – (20) – 5 – 386 5 Loss on disposal of businesses Profit or loss on disposal of businesses is shown separately on the face of the income statement and excluded from underlying operating profit. On 31st January 2018, the group sold its UK automotive battery systems business. After costs the net proceeds were £5 million which resulted in a loss on sale of £7 million. 6 Loss on significant legal proceedings Gains or losses on significant legal proceedings, together with associated legal costs, are shown separately on the face of the income statement and excluded from underlying operating profit. The group has recognised a charge of £50 million in connection with the resolution of a contract dispute lawsuit related to a component supplied by the group in the US. 153 Johnson Matthey / Annual Report and Accounts 2018 Accounts Notes on the accounts for the year ended 31st March 2018 7 Amortisation of acquired intangibles The amortisation of intangible assets which arise on the acquisition of businesses, together with any subsequent impairment of these intangible assets, is shown separately on the face of the income statement and excluded from underlying operating profit. 8 Major impairment and restructuring charges Major impairment and restructuring charges are shown separately on the face of the income statement and excluded from underlying operating profit. As part of the group’s operational efficiency programme announced on 31st March 2017, a restructuring and impairment charge of £90 million has been incurred in the year (2017: nil). The £90 million comprises £66 million asset write offs, £11 million provisions and £13 million cash costs incurred. Contained within this £90 million are costs for redundancies and business or plant closures as part of the optimisation of the manufacturing footprint in Health (including £36 million relating to the closure of the Riverside, US manufacturing facility and £17 million relating to the exit of certain operations in Portugal). 9 Operating profit Operating profit is arrived at after charging / (crediting): Total research and development expenditure less development expenditure capitalised Research and development charged less external funding received – from government grants – from other organisations Net research and development Inventories recognised as an expense Write-down of inventories recognised as an expense Reversal of write-down of inventories arising from increases in net realisable value Net losses on foreign exchange Net gains on foreign currency forwards held for trading Depreciation of property, plant and equipment Amortisation of internally generated intangible assets included in cost of sales Amortisation and impairment of other intangible assets included in – cost of sales – distribution costs – administrative expenses – amortisation of acquired intangibles – major impairment and restructuring charges (note 8) (note 7) Operating lease rentals payable – minimum lease payments 10 Fees payable to auditors Fees payable to the company’s auditor and its associates for: The audit of these accounts The audit of the accounts of the company’s subsidiaries Total audit Audit-related assurance services Total audit and audit-related services Taxation compliance services All other assurance services All other services Total fees payable to the company’s auditor and its associates 2018 £ million 2017 £ million 193 (18) 175 (8) (4) 163 201 (19) 182 (9) (5) 168 12,261 26 (5) 10,275 12 (8) 10 (9) 143 9 4 1 2 19 4 19 8 (6) 139 8 2 1 2 20 – 19 2018 £ million 2017 £ million 0.8 1.4 2.2 0.1 2.3 – 0.4 0.3 3.0 0.7 1.4 2.1 0.1 2.2 0.1 0.4 0.1 2.8 Fees payable for services to the group's pension plans for the audit of the pension plan accounts were £0.1 million (2017: £0.1 million). Audit fees paid to other auditors were £0.1 million (2017: £0.1 million). 154 Notes on the accounts for the year ended 31st March 2018 11 Net finance costs Net loss on remeasurement of foreign currency swaps held for trading Net loss on remeasurement of fair value hedges and related hedged items to fair value Interest payable on financial liabilities measured at amortised cost Interest on post-employment benefits Unwinding of discount on provisions and non-current payables Total finance costs Interest receivable on interest rate swaps Interest receivable on available-for-sale investments, loans and receivables Total finance income Net finance costs 12 Taxation Current tax Corporation tax on profits for the year Benefit from previously unrecognised tax losses, tax credits or temporary differences Adjustment for prior years Total current tax Deferred tax Origination and reversal of temporary differences Tax rate adjustments Write-downs, or reversal of previous write-downs, of deferred tax assets Adjustment for prior years Total deferred tax Income tax expense The tax charge for the year can be reconciled to the profit per the income statement as follows: Profit before tax Tax expense at UK corporation tax rate of 19% (2017: 20%) Effects of: Overseas tax rates Expenses not deductible for tax purposes Unutilised losses Utilisation of tax losses and incentives Adjustments for prior years Innovation – tax incentives Tax rate adjustments Disposal of businesses Irrecoverable withholding tax Other Tax expense for the year t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O 2018 £ million 2017 £ million (3) – (39) (1) – (43) – 5 5 (5) (1) (31) – (1) (38) 4 3 7 (38) (31) 2018 £ million 2017 £ million 104 (1) (11) 92 (35) (25) (9) (1) (70) 22 82 (1) (12) 69 9 (4) 1 2 8 77 2018 £ million 2017 £ million 320 61 – 13 8 (7) (12) (20) (25) 1 1 2 22 462 92 13 5 3 (10) (10) (17) (3) – 5 (1) 77 155 Johnson Matthey / Annual Report and Accounts 2018 Accounts Notes on the accounts for the year ended 31st March 2018 12 Taxation (continued) Expenses not deductible for tax purposes in the year ended 31st March 2018 include certain non-deductible costs related to asset write-downs. Utilisation of tax losses and incentives is mainly the benefit of tax incentives in Macedonia and the recognition of certain other previously unrecognised tax losses. Adjustments for prior years includes some overseas tax provision releases following the successful conclusion of overseas tax audit negotiations and the expiry of relevant statute of limitations. Tax rate adjustments include £24 million and £1 million relating to the US and UK respectively. The US federal tax rate was reduced from 35% to 21% with effect from 1st January 2018. In line with this change, the rate applying to US deferred tax assets and liabilities at 31st March 2018 has been reduced from 37% to 23% (including state taxes), creating a US tax rate adjustment which is partly reflected in the Consolidated Income Statement and partly in the Consolidated Statement of Total Comprehensive Income. The net non-underlying benefit in the Consolidated Income Statement is £23 million (note 4). 13 Earnings per ordinary share Basic Diluted 2018 pence 155.2 155.0 2017 pence 201.2 200.8 Earnings per ordinary share have been calculated by dividing the profit attributable to equity shareholders by the weighted average number of shares in issue during the year. Weighted average number of shares in issue Basic Dilution for long-term incentive plans Diluted 2018 2017 191,985,992 191,850,710 350,862 246,916 192,232,908 192,201,572 Underlying earnings per ordinary share have been calculated by dividing the underlying profit for the year (note 4) by the weighted average number of shares in issue during the year. Underlying earnings per share Basic Diluted 14 Dividends 2015/16 final ordinary dividend paid – 52.0 pence per share 2016/17 interim ordinary dividend paid – 20.5 pence per share 2016/17 final ordinary dividend paid – 54.5 pence per share 2017/18 interim ordinary dividend paid – 21.75 pence per share Total dividends 2018 pence 2017 pence 208.4 208.1 209.1 208.7 2018 £ million 2017 £ million – – 104 42 146 100 39 – – 139 A final dividend of 58.25 pence per ordinary share has been proposed by the board which will be paid on 7th August 2018 to shareholders on the register at the close of business on 8th June 2018, subject to shareholders’ approval. The estimated amount to be paid is £112 million and has not been recognised in these accounts. 156 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Notes on the accounts for the year ended 31st March 2018 15 Employee numbers and costs The average monthly number of employees during the year was: Clean Air Efficient Natural Resources Health New Markets Corporate and Central Research Average number of employees 2018 5,302 3,670 992 1,538 817 2017 (restated) 4,911 3,846 1,012 1,751 694 12,319 12,214 The number of temporary employees included above at 31st March 2018 is 367 (2017: 359). The actual number of staff is: Clean Air Efficient Natural Resources Health New Markets Corporate and Central Research At 31st March 2018 At 31st March 2017 (restated) Actual employees Agency staff Total headcount Actual employees Agency staff Total headcount 5,470 3,711 964 1,714 856 554 171 113 429 148 6,024 3,882 1,077 2,143 1,004 4,948 3,821 1,031 1,770 736 416 182 101 374 46 5,364 4,003 1,132 2,144 782 Total 12,715 1,415 14,130 12,306 1,119 13,425 Restated to reflect a change in group structure – see note 1. Employee benefits expense Wages and salaries Social security costs Pension and other post-employment costs Termination benefits Share-based payments Total employee benefits expense 2018 £ million 2017 £ million 548 59 69 5 17 698 526 56 46 5 17 650 157 Johnson Matthey / Annual Report and Accounts 2018 Accounts Notes on the accounts for the year ended 31st March 2018 16 Share-based payments After considering expected lapses due to leavers and the probability that performance conditions will not be met, the total expense recognised during the year in respect of equity-settled share-based payments, was £17 million (2017: £17 million). Further details of the directors’ remuneration under share-based payment plans are given in the Remuneration Report. Performance Share Plan (PSP) From 2017, shares are awarded to certain of the group’s executive directors and senior managers under the PSP based on a percentage of salary and are subject to performance targets over a three-year period. At 31st March 2018, 357,562 shares awarded in 2017 were outstanding. The minimum release of 15% of the award is subject to achieving underlying earnings per share (uEPS) growth of 4% compound per annum over the three-year period to 31st March 2020 and the full release is subject to uEPS growing by at least 10% compound per annum. The number of awarded shares released will vary on a straight-line basis between these points. Awards will lapse if the uEPS growth is less than the minimum. Awards to the executive directors are also subject to a deferred release whereby a third is released on the third anniversary of the award date and the remaining vested shares are released in equal instalments on the fourth and fifth anniversaries of the award date. The Remuneration Committee is entitled to claw back the awards to the executive directors in cases of misstatement or misconduct. Activity relating to the PSP during the year was: Outstanding at the start of the year Awarded during the year Forfeited during the year Outstanding at the end of the year 2018 Number of allocated shares – 370,505 (12,943) 357,562 2017 Number of allocated shares – – – – The fair value of the shares awarded during the year under the PSP was 2,548.9 pence per share. The fair value was based on the share price at the date of award of 2,764.0 pence adjusted for the present value of the expected dividends that will not be received at an expected dividend rate of 2.71%. Restricted Share Plan (RSP) From 2017, shares are awarded to certain of the group’s senior managers below the board under the RSP based on a percentage of salary. Awards under the RSP are not subject to performance targets. The shares are subject only to the condition that the employee remains employed by the group on the vesting date (three years after the award date). Activity relating to the RSP during the year was: Outstanding at the start of the year Awarded during the year Forfeited during the year Released during the year Outstanding at the end of the year 2018 Number of allocated shares 2017 Number of allocated shares – 85,203 (4,858) (298) 80,047 – – – – – The fair value of the shares awarded during the year under the RSP was 2,548.9 pence per share. The fair value was based on the share price at the date of award of 2,764.0 pence adjusted for the present value of the expected dividends that will not be received at an expected dividend rate of 2.71%. 158 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Notes on the accounts for the year ended 31st March 2018 16 Share-based payments (continued) Long term incentive plan (LTIP) Prior to 2017, shares were awarded to approximately 1,300 of the group’s executive directors, senior managers and middle managers under the LTIP based on a percentage of salary and were subject to performance targets over a three-year period. At 31st March 2018, 1,350,170 shares awarded in 2015 and 2016 (at 31st March 2017: 2,175,761 shares awarded in 2014, 2015 and 2016) were outstanding, together with 20,013 shares awarded in 2014 subject to deferred release as explained below. For the 2016 awards, the minimum release of 15% of the award is subject to achieving underlying earnings per share (uEPS) growth of 4% compound per annum over the three-year period to 31st March 2019 and the full release is subject to uEPS growing by at least 10% compound per annum. The number of awarded shares released will vary on a straight-line basis between these points. Awards will lapse if the uEPS growth is less than the minimum. For the 2015 awards, the minimum release of 15% of the award was subject to achieving uEPS growth of 6% compound per annum over the three-year period to 31st March 2018 and the full release was subject to uEPS growing by at least 12% compound per annum. An underpin applies to the 2015 award for certain senior employees below the board who are key to supporting and implementing the group’s strategy. Actual uEPS growth was 5.1% and therefore was below the performance range. However, 65,876 shares will vest in August 2018 as a result of the underpin awarded to certain employees. All other awards will lapse in full. From 2014 onwards, awards to the executive directors are also subject to a deferred release whereby a third is released on the third anniversary of the award date and the remaining vested shares are released in equal instalments on the fourth and fifth anniversaries of the award date. The Remuneration Committee is entitled to claw back the awards to the executive directors in cases of misstatement or misconduct. Activity relating to the LTIP during the year was: Outstanding at the start of the year Awarded during the year Forfeited during the year Released during the year Expired during the year Outstanding at the end of the year 2018 Number of awarded shares 2017 Number of awarded shares 2,175,761 – (194,782) (156,849) (453,947) 2,138,725 881,548 (144,373) (226,858) (473,281) 1,370,183 2,175,761 The fair value of the shares awarded during the prior year under the LTIP was 3,066.3 pence per share. The fair value was based on the share price at the date of award of 3,273.0 pence adjusted for the present value of the expected dividends that will not be received at an expected dividend rate of 2.18%. Deferred bonus A proportion of the bonus payable to executive directors and members of the Group Management Committee is awarded as shares and deferred for three years. The Remuneration Committee is entitled to claw back the deferred element in cases of misstatement or misconduct or other relevant reason as determined by it. Activity relating to the deferred bonus during the year was: Outstanding at the start of the year Awarded during the year Released during the year Outstanding at the end of the year 2018 Number of awarded shares 83,956 24,831 (27,006) 2017 Number of awarded shares 69,237 16,008 (1,289) 81,781 83,956 The fair value of the shares awarded during the year under the deferred bonus was 2,481.0 pence per share award (2017: 3,000.4 pence per share award). The fair value was based on the share price at the date of award of 2,764.0 pence (2017: 3,273.0 pence) adjusted for the present value of the expected dividends that will not be received at an expected dividend rate of 2.71% (2017: 2.18%). 159 Johnson Matthey / Annual Report and Accounts 2018 Accounts Notes on the accounts for the year ended 31st March 2018 16 Share-based payments (continued) All employee share incentive plan (SIP) – UK and Overseas Under the SIP, all employees with at least one year of service with the group and who are employed by a participating group company are entitled to contribute up to 2.5% of base pay each month, subject to a £125 per month limit. The SIP trustees buy shares (partnership shares) at market value each month with the employees’ contributions. For each partnership share purchased, the group purchases two shares (matching shares) which are awarded to the employee. In the UK SIP, if the employee sells or transfers partnership shares within three years of the date of award, the linked matching shares are forfeited. In the overseas SIP, partnership shares and matching shares are subject to a three-year holding period and cannot be sold or transferred during that time. During the year, 201,476 (2017: 196,276) matching shares under the SIP were awarded to employees. These are nil cost awards on which performance conditions are substantially completed at the date of grant and, consequently, the fair value of these awards is based on the market value of the shares at that date. 401k approved savings investment plans (401k plans) In the US, there are two 401k plans, one for salaried employees and one for hourly employees. Salaried employees may contribute up to 50% of their base pay and hourly employees up to 20% of their base pay, both subject to a statutory limit. Salaried employees choosing Johnson Matthey Plc share matching are matched 100% of the first 4% contributed and hourly employees are matched 50% of the first 6% contributed. Employees may contribute after one month of service and are eligible for matching after one year of service. During the year, 6,560 (2017: 14,870) shares under the 401k plans were awarded to employees. These are nil cost awards on which performance conditions are substantially completed at the date of grant and, consequently, the fair value of these awards is based on the market value of the shares at that date. 17 Post-employment benefits 17a Group Background Pension plans The group operates a number of post-employment retirement and medical benefit plans around the world, the forms of which vary with conditions and practices in the countries concerned. The retirement plans in the UK, US and other countries include both defined contribution and defined benefit plans. For defined contribution plans, retirement benefits are determined by the value of funds arising from contributions paid in respect of each employee and the investment returns on those contributions prior to retirement. The group also makes payments to employees’ personal pension plans. For defined benefit plans, which include final salary, career average and other types of plans with committed pension payments, the retirement benefits are based on factors such as the employee’s pensionable salary and length of service. The majority of the group’s final salary and career average defined benefit retirement plans are closed to new entrants but remain open to ongoing accrual for current members. Regulatory framework and governance The UK pension plan, the Johnson Matthey Employees Pension Scheme (JMEPS), is a registered arrangement established under trust law and, as such, is subject to UK pension, tax and trust legislation. It is managed by a corporate trustee, JMEPS Trustees Limited. The trustee board includes representatives appointed by both the parent company and employees, and includes an independent chairman. Although the parent company bears the financial cost of the plan, the trustee directors are responsible for the overall management and governance of JMEPS, including compliance with all applicable legislation and regulations. The trustee directors are required by law to act in the interests of all relevant beneficiaries and: to set certain policies; to manage the day to day administration of the benefits; and to set the plan’s investment strategy following consultation with the parent company. UK pensions are regulated by the Pensions Regulator whose statutory objectives and regulatory powers are described on its website: www.thepensionsregulator.gov.uk. The US pension plans are qualified pension arrangements and are subject to the requirements of the Employee Retirement Income Security Act, the Pension Protection Act 2006 and the Department of Labor and Internal Revenue. The plans are managed by a pension committee which acts as the fiduciary and, as such, is ultimately responsible for: the management of the plans’ investments; compliance with all applicable legislation and regulations; and overseeing the general management of the plans. Other trustee or fiduciary arrangements that have similar responsibilities and obligations are in place for the group’s other funded defined benefit pension plans outside of the UK and US. 160 Notes on the accounts for the year ended 31st March 2018 17 Post-employment benefits (continued) 17a Group (continued) Background (continued) Benefits The UK pension plan is segregated into two sections – a legacy section which provides final salary and career average pension benefits and a cash balance section. The final salary element of the legacy section was closed to future accrual of benefits from 1st April 2010 and the career average element of the legacy section was closed to new entrants on 1st October 2012 but remains open to future accrual for existing members. All new entrants join the cash balance section of the plan. The legacy section provides benefits to members in the form of a set level of pension payable for life based on the member’s length of service and final pensionable salary at retirement or averaged over their career with the company. The benefits attract inflation-related increases both before and after retirement. The cash balance section provides benefits to members at the point of retirement in the form of a cash lump sum. The benefits attract inflation-related increases before retirement but, following the payment of the retirement lump sum benefit, the plan has no obligation to pay any further benefits to the member. The group operates two defined benefit pension plans in the US. The hourly pension plan is for unionised employees and provides a fixed retirement benefit for life based upon years of service. The salaried pension plan provides retirement benefits for life based on the member’s length of service and final pensionable salary (averaged over the last five years). The salaried plan benefits attract inflation-related increases before leaving, but are non-increasing thereafter. On retirement, members in either plan have the option to take the cash value of their benefit instead of a lifetime annuity in which case the plan has no obligation to pay any further benefits to the member. The US salaried pension plan was closed to new entrants on 1st September 2013 but remains open to future accrual for existing members. All new non-unionised US employees now join a defined contribution plan. Other post-employment benefits The group’s principal post-employment medical plans are in the UK and US, and are unfunded arrangements that have been closed to new entrants for over ten years. Maturity profile The estimated weighted average durations of the defined benefit obligations of the main plans as at 31st March 2018 are: t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Pensions: UK US Post-retirement medical benefits: UK US Funding Weighted average duration years 19 12 12 14 Introduction The group’s principal defined benefit retirement plans are funded through separate fiduciary or trustee administered funds that are independent of the sponsoring company. The contributions paid to these arrangements are jointly agreed by the sponsoring company and the relevant trustee or fiduciary body after each funding valuation and in consultation with independent qualified actuaries. The plans’ assets, together with the agreed funding contributions, should be sufficient to meet the plans’ future pension obligations. 161 Johnson Matthey / Annual Report and Accounts 2018 Accounts Notes on the accounts for the year ended 31st March 2018 17 Post-employment benefits (continued) 17a Group (continued) Funding (continued) UK valuations UK legislation requires that pension plans are funded prudently and that, when undertaking a funding valuation (every three years), assets are taken at their market value and liabilities are determined based on a set of prudent assumptions set by the trustee following consultation with their appointed actuary. The assumptions used for funding valuations may, therefore, differ to the actuarial assumptions used for IAS 19 accounting purposes. The last funding valuation of JMEPS was carried out as at 1st April 2015. This valuation showed that there was a deficit of £69 million in the legacy section of the plan, or £28 million after taking account of the future additional deficit funding contributions from the special purpose vehicle (SPV) set up in January 2013 called Johnson Matthey (Scotland) Limited Partnership. To address the deficit, the parent company agreed to continue to make deficit contributions of £23 million per year up to 31st December 2019. The valuation also revealed a surplus of £2 million in the defined benefit cash balance section. The SPV was set up to provide additional deficit reduction contributions and to provide greater security to the trustee. The group invested £50 million in a bond portfolio which is beneficially held by the SPV. The income generated by the SPV is used to make annual distributions of £3.5 million to JMEPS for a period of up to 25 years. These annual distributions are only payable if the legacy section of JMEPS continues to be in deficit. This bond portfolio is held as a non-current available-for-sale investment (note 23) and the group’s liability to pay the income to the plan is not a plan asset under IAS 19, although it is for actuarial funding valuation purposes. The SPV is exempt from the requirement to prepare audited annual accounts as it is included on a consolidated basis in these accounts. In accordance with the governing documentation of JMEPS, any future plan surplus would be returned to the parent company by way of a refund assuming gradual settlement of the liabilities over the lifetime of the plan. As such, there are no adjustments required in respect of IFRIC 14 – ‘IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction’. US valuations The last annual review of the US defined benefit pension plans was carried out by a qualified actuary as at 1st July 2017 and showed a deficit of $16 million on the projected funding basis. The assumptions used for funding valuations may differ to the actuarial assumptions used for IAS 19 accounting purposes. Other valuations Similar funding valuations are undertaken on the group’s other defined benefit pension plans outside of the UK and US in accordance with prevailing local legislation. Risk management The group is exposed to a number of risks relating to its post-retirement pension plans, the most significant of which are: Risk Mitigation Market (investment) risk Asset returns may not move in line with the liabilities and may be subject to volatility. Interest (discount) rate risk Liabilities are sensitive to movements in bond yields (interest rates), with lower interest rates leading to an increase in the valuation of liabilities, albeit the impact on the plan’s funding level will be partially offset by an increase in the value of its bond holdings. Inflation risk Liabilities are sensitive to movements in inflation, with higher inflation leading to an increase in the valuation of liabilities. The group’s various plans have highly diversified investment portfolios, investing in a wide range of assets that provide reasonable assurance that no single security or type of security could have a material adverse impact on the plan. A de-risking strategy is in place to reduce volatility in the plans as a result of the mismatch between the assets and liabilities. As the funding level of the plans improve and hit pre-agreed triggers, plan investments are switched from return-seeking assets to liability-matching assets. The plans implement partial currency hedging on their overseas assets to mitigate currency risk. The group’s defined benefit plans hold a high proportion of their assets in government or corporate bonds, which provide a natural hedge against falling interest rates. In the UK, this interest rate hedge is extended by the use of interest rate swaps, such that approximately 70% of the plan’s interest rate risk is currently hedged. The swaps are held with several banks to reduce counterparty risk. Where plan benefits provide inflation-related increases, the plan holds some inflation-linked assets which provide a natural hedge against higher than expected inflation increases. In the UK, this inflation hedge is extended by the use of inflation swaps, such that approximately 70% of the plan’s inflation risk is currently hedged. The swaps are held with several banks to reduce counterparty risk. During the year ended 31st March 2018, 34% of eligible pensioners in the UK plan accepted the offer of a pension increase exchange, which reduced the amount of future inflationary pension payable in exchange for higher non-increasing pension. 162 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Notes on the accounts for the year ended 31st March 2018 17 Post-employment benefits (continued) 17a Group (continued) Funding (continued) Risk management (continued) Risk Mitigation Longevity risk The majority of the group’s defined benefit plans provide benefits for the life of the member, so the liabilities are sensitive to life expectancy, with increases in life expectancy leading to an increase in the valuation of liabilities. The group has closed most of its defined benefit pension plans to new entrants, replacing them with either a cash balance plan or defined contribution plans, both of which are unaffected by life expectancy. For the plans where a benefit for life continues to be payable, prudent mortality assumptions are used that appropriately allow for a future improvement in life expectancy. These assumptions are reviewed on a regular basis. Contributions During the year, total contributions to the group’s post-employment defined benefit plans were £69 million (2017: £70 million), including deficit contributions of £23 million (2017: £23 million) in respect of JMEPS. It is estimated that the group will contribute about £65 million to the post-employment defined benefit plans during the year ending 31st March 2019. IAS 19 accounting Principal actuarial assumptions Qualified independent actuaries have updated the IAS 19 valuations of the group’s major defined benefit plans to 31st March 2018. The assumptions used are chosen from a range of possible actuarial assumptions which, due to the long term nature of the plans, may not necessarily be borne out in practice. Financial assumptions First year's rate of increase in salaries Ultimate rate of increase in salaries Rate of increase in pensions in payment Discount rate Inflation – UK Retail Prices Index (RPI) – UK Consumer Prices Index (CPI) Current medical benefits cost trend rate Ultimate medical benefits cost trend rate 2018 UK plans % 2018 US plans % 2018 Other plans % 2017 UK plans % 2017 US plans % 2017 Other plans % 3.75 3.75 2.85 2.70 3.00 2.00 5.40 5.40 3.00 3.00 – 4.00 2.20 2.95 2.95 2.50 2.50 1.50 2.33 1.60 – – 3.10 3.85 3.05 2.60 3.10 2.10 5.40 5.40 3.00 3.00 – 4.10 2.20 2.95 2.95 2.59 2.59 1.50 2.15 1.61 – – Demographic assumptions The mortality assumptions are based on country-specific mortality tables and, where appropriate, include an allowance for future improvements in life expectancy. In addition, where credible data exists, actual plan experience is taken into account. The group’s most substantial pension liabilities are in the UK and the US where, using the mortality tables adopted, the expected lifetime of average members currently at age 65 and average members at age 65 in 25 years’ time (i.e. members who are currently aged 40 years) is respectively: Male Female Currently aged 65 Aged 65 in 25 years UK plan US plans UK plan US plans 87 89 86 88 89 91 88 90 163 Johnson Matthey / Annual Report and Accounts 2018 Accounts Notes on the accounts for the year ended 31st March 2018 17 Post-employment benefits (continued) 17a Group (continued) Financial information Plan assets Movements in the fair value of plan assets during the year were: At 1st April 2016 Interest income Return on plan assets excluding interest Employee contributions Company contributions Benefits paid Exchange adjustments At 31st March 2017 Administrative expenses Interest income Return on plan assets excluding interest Employee contributions Company contributions Benefits paid Exchange adjustments At 31st March 2018 The fair values of plan assets are analysed as follows: Quoted corporate bonds Inflation and interest rate swaps Quoted government bonds Cash and cash equivalents Quoted equity Unquoted equity Property Insurance policies UK pension £ million 1,581 59 303 4 56 (55) – 1,948 – 51 (11) 3 56 (68) – 1,979 UK post- retirement medical benefits £ million US pensions £ million US post- retirement medical benefits £ million Other £ million Total £ million – – – – – – – – – – – – – – – – 255 11 (2) 1 9 (21) 39 292 (1) 11 8 1 10 (15) (34) 272 – – – – 2 (2) – – – – – 1 1 (2) – – 39 1 2 – 3 (2) 4 47 – 1 (2) – 2 (2) 1 47 1,875 71 303 5 70 (80) 43 2,287 (1) 63 (5) 5 69 (87) (33) 2,298 2018 UK pension £ million 2018 US pensions £ million 2018 Other £ million 2017 UK pension £ million 2017 US pensions £ million 2017 Other £ million 1,093 63 22 60 630 47 64 – 1,979 137 – 87 – 48 – – – 272 5 – – – 2 – – 40 47 1,069 73 26 52 654 17 57 – 1,948 143 – 97 1 51 – – – 292 1 – – – 2 – – 44 47 The UK plan’s unquoted equities are assets within a pooled infrastructure fund where the underlying assets are a broad range of private infrastructure investments, diversified by geographic region, infrastructure sector, underlying asset type and development stage. These infrastructure assets are valued using widely recognised valuation techniques which use market data and discounted cash flows. The same valuation approach is used to determine the value of the swaps and insurance policies. The UK plan’s property is a unitised fund where the underlying assets are taken at market value. The valuation of the fund is periodically independently audited. The defined benefit pension plans do not invest directly in Johnson Matthey Plc shares and no property or other assets owned by the pension plans are used by the group. The assets for the cash balance section of the UK plan are held separately from the assets of the legacy section. At 31st March 2018, the defined benefit obligation related to the contributory cash balance section was £43 million (2017: £33 million) and the fair value of the plan assets was £44 million (2017: £32 million). 164 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Notes on the accounts for the year ended 31st March 2018 17 Post-employment benefits (continued) 17a Group (continued) Financial information (continued) Defined benefit obligation Movements in the defined benefit obligation during the year were: At 1st April 2016 Current service cost – in operating profit Current service cost – capitalised Past service (cost) / credit Interest cost Employee contributions Remeasurements due to changes in: Financial assumptions Demographic assumptions Benefits paid Exchange adjustments At 31st March 2017 Current service cost – in operating profit Past service credit Interest cost Employee contributions Remeasurements due to changes in: Financial assumptions Demographic assumptions Benefits paid Exchange adjustments At 31st March 2018 UK pension £ million (1,480) (28) (1) (3) (55) (4) (402) 77 55 – (1,841) (41) 4 (48) (3) 93 15 68 – UK post- retirement medical benefits £ million US pensions £ million US post- retirement medical benefits £ million Other £ million (11) – – – – – (1) 2 – – (10) – – – – – 1 – – (276) (10) – – (12) (1) 2 6 21 (42) (312) (8) – (12) (1) (7) (2) 15 35 (48) (1) – 17 (2) – (3) – 2 (7) (42) (1) – (2) (1) 4 1 2 5 (70) (2) – – (2) – (5) 2 2 (7) (82) (3) 1 (2) – 3 – 2 (1) Total £ million (1,885) (41) (1) 14 (71) (5) (409) 87 80 (56) (2,287) (53) 5 (64) (5) 93 15 87 39 (1,753) (9) (292) (34) (82) (2,170) The past service credit in the UK pension plan during the year ended 31st March 2018 is a result of the pension increase exchange exercise, partially offset by a past service cost in respect of pension enhancements for eligible employees who have been made redundant. In the year ended 31st March 2017, a past service credit arose in the US post-retirement medical benefits plan due to plan amendments capping the group’s contribution towards medical coverage by limiting the increase in medical inflation to a cost of living increase and giving retirees a choice between the current Platinum plan and a Gold plan. The remeasurement gain due to changes in financial assumptions in the UK pension plan during the year ended 31st March 2018 mainly reflects a 20 basis-point increase in the real (after inflation) discount rate caused by rising corporate bond yields and falling market-implied inflation. Reimbursement rights A government subsidy is receivable under the US Medicare legislation as the US post-retirement medical benefits plan is actuarially equivalent to the Medicare Prescription Drug Act and there is an insurance policy taken out to reinsure the pension commitments of one of the small pension plans which does not meet the definition of a qualifying insurance policy. These are accounted for as reimbursement rights and are shown on the balance sheet in post-employment benefit net assets. Movements in the reimbursement rights during the year were: At 1st April 2016 Return on assets excluding interest Exchange adjustments At 31st March 2017 and 31st March 2018 UK pension £ million – – – – UK post- retirement medical benefits £ million – – – – US pensions £ million – – – – US post- retirement medical benefits £ million 6 1 1 8 Other £ million Total £ million 1 – – 1 7 1 1 9 165 Johnson Matthey / Annual Report and Accounts 2018 Accounts Notes on the accounts for the year ended 31st March 2018 17 Post-employment benefits (continued) 17a Group (continued) Financial information (continued) Net post-employment benefit assets and liabilities The net post-employment benefit assets and liabilities are: At 31st March 2018 Defined benefit obligation Fair value of plan assets Reimbursement rights Net post-employment benefit assets and liabilities At 31st March 2017 Defined benefit obligation Fair value of plan assets Reimbursement rights Net post-employment benefit assets and liabilities These are included in the balance sheet as follows: UK pension plan UK post-retirement medical benefits plan US pension plans US post-retirement medical benefits plan Other plans Total post-employment plans Other long-term employee benefits Total long term employee benefit obligations UK pension £ million (1,753) 1,979 – 226 (1,841) 1,948 – 107 2018 Post- employment benefit net assets £ million 226 – – 8 2 236 UK post- retirement medical benefits £ million US pensions £ million US post- retirement medical benefits £ million Other £ million Total £ million (9) – – (9) (10) – – (10) (292) 272 – (20) (312) 292 – (20) 2018 2018 Employee benefit net obligations £ million – (9) (20) (34) (36) (99) (4) (103) Total £ million 226 (9) (20) (26) (34) 137 (34) – 8 (26) (42) – 8 (34) 2017 Post- employment benefit net assets £ million 107 – – 8 2 117 (82) 47 1 (34) (82) 47 1 (34) (2,170) 2,298 9 137 (2,287) 2,287 9 9 2017 2017 Employee benefit net obligations £ million – (10) (20) (42) (36) (108) (4) (112) Total £ million 107 (10) (20) (34) (34) 9 2018 £ million 2017 £ million (1) (53) 5 (49) (19) (1) (69) (1) (70) – (41) 14 (27) (18) (1) (46) – (46) Income statement Amounts recognised in the income statement for long term employment benefits were: Administrative expenses Current service cost Past service credit Defined benefit post-employment costs charged to operating profit Defined contribution plans’ expense Other long term employee benefits Charge to operating profit Interest on post-employment benefits charged to finance costs Charge to profit before tax Sensitivity analysis The calculations of the defined benefit obligations are sensitive to the assumptions used. The following summarises the estimated impact on the group’s main plans of a change in the assumption while holding all other assumptions constant. This sensitivity analysis may not be representative of the actual change as it is unlikely that the change in assumptions would occur in isolation of one another. 166 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Notes on the accounts for the year ended 31st March 2018 17 Post-employment benefits (continued) 17a Group (continued) Sensitivity analysis (continued) Financial assumptions A 0.1% change in the discount rate and inflation assumptions would (increase) / decrease the UK and US pension plans’ defined benefit obligations at 31st March 2018 as follows: Effect of discount rate Effect of inflation 0.1% increase UK plan £ million US plans £ million 0.1% decrease UK plan £ million US plans £ million 34 (32) 2 – (35) 21 (5) – Demographic assumptions A one-year increase in life expectancy would increase the UK and US pension plans' defined benefit obligation by £58 million and £6 million, respectively. 17b Parent company The parent company is the sponsoring employer of the group’s UK defined benefit pension plan and the UK post-retirement medical benefits plan. There is no contractual agreement or stated policy for charging the net defined benefit cost for the plans to the individual group entities. The parent company recognises the net defined benefit cost for these plans and information is disclosed in note 17a. 18 Property, plant and equipment 18a Group Cost At 1st April 2016 Additions Acquisitions Reclassifications Disposals Exchange adjustments At 31st March 2017 Additions Reclassifications Disposals Disposal of businesses (note 5) Exchange adjustments At 31st March 2018 Accumulated depreciation and impairment At 1st April 2016 Charge for the year Reversal of impairment losses Disposals Exchange adjustments At 31st March 2017 Charge for the year Impairment losses Disposals Disposal of businesses (note 5) Exchange adjustments At 31st March 2018 Carrying amount at 31st March 2018 Carrying amount at 31st March 2017 Carrying amount at 1st April 2016 Freehold land and buildings £ million Long and short leasehold £ million Plant and machinery £ million Assets in the course of construction £ million Total £ million 524 4 – 15 (1) 46 588 7 21 (12) – (26) 578 207 19 – (1) 19 244 20 7 (8) – (13) 250 328 344 317 23 – – 2 – 2 27 – – – – (2) 25 12 2 – – 1 15 1 – – – (1) 15 10 12 11 1,660 38 1 70 (23) 136 1,882 40 114 (25) (3) (89) 1,919 1,051 118 (2) (21) 88 1,234 122 30 (24) (1) (59) 1,302 617 648 609 154 2,361 156 198 – 1 (87) – – (24) 14 198 237 2,734 114 161 (135) – (1) (38) – (3) (6) (123) 209 2,731 5 1,275 – 139 – (2) – (22) 1 109 6 1,499 – 143 3 40 – (32) – (1) – (73) 9 1,576 200 1,155 231 1,235 149 1,086 167 Johnson Matthey / Annual Report and Accounts 2018 Accounts Notes on the accounts for the year ended 31st March 2018 18 Property, plant and equipment (continued) 18a Group (continued) Finance costs capitalised were £4 million (2017: £5 million) and the capitalisation rate used to determine the amount of finance costs eligible for capitalisation was 3.3% (2017: 3.5%). The impairment losses for the year ended 31st March 2018 of £40 million were included in major impairment and restructuring charges (note 8). The impairment includes £30 million as a result of the closure of the Riverside, US manufacturing facility in the Health Sector. The recoverable amount of the plant is estimated to be nil based on fair value less costs to sell using level 2 inputs (see note 30) reflecting its specialised nature. The reversal of impairment losses in the prior year represented adjustments to major impairment and restructuring charges. 18b Parent company Cost At 1st April 2016 Additions Reclassifications Disposals At 31st March 2017 Additions Reclassifications Disposals At 31st March 2018 Accumulated depreciation and impairment At 1st April 2016 Charge for the year Disposals At 31st March 2017 Charge for the year Impairment losses Disposals At 31st March 2018 Carrying amount at 31st March 2018 Carrying amount at 31st March 2017 Carrying amount at 1st April 2016 Freehold land and buildings £ million Long and short leasehold £ million Plant and machinery £ million Assets in the course of construction £ million Total £ million 124 2 – – 126 1 6 (3) 130 50 4 – 54 4 – – 58 72 72 74 2 – – – 2 – – – 2 1 – – 1 – – – 1 1 1 1 514 14 7 (7) 528 13 17 (2) 556 322 33 (6) 349 33 1 (1) 382 174 179 192 17 20 (7) – 30 26 (23) (2) 31 – – – – – – – – 31 30 17 657 36 – (7) 686 40 – (7) 719 373 37 (6) 404 37 1 (1) 441 278 282 284 Finance costs capitalised were £2 million (2017: £2 million) and the capitalisation rate used to determine the amount of finance costs eligible for capitalisation was 3.3% (2017: 3.5%). 168 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Notes on the accounts for the year ended 31st March 2018 19 Goodwill Cost At 1st April 2016 Acquisitions (note 37) Exchange adjustments At 31st March 2017 Disposal of businesses (note 5) Exchange adjustments At 31st March 2018 Impairment At 1st April 2016 and 31st March 2017 Impairment losses At 31st March 2018 Carrying amount at 31st March 2018 Carrying amount at 31st March 2017 Carrying amount at 1st April 2016 Group £ million Parent company £ million 570 7 30 607 (9) (13) 585 – 11 11 574 607 570 123 – – 123 – – 123 – – – 123 123 123 The impairment losses for the year ended 31st March 2018 of £11 million were included in major impairment and restructuring charges (note 8). Goodwill arising on the acquisition of businesses is allocated, at acquisition, to the cash-generating units (CGUs) that are expected to benefit from that business combination. Goodwill is allocated as follows: Clean Air – Non-light Duty Catalysts Efficient Natural Resources – Process Technologies – Other Health – Macfarlan Smith – Pharmaceutical Materials and Services New Markets – Water Technologies – Other Group 2017 (restated) £ million 2018 £ million Parent company 2018 £ million 2017 (restated) £ million 85 85 – – 314 3 117 26 – 29 574 325 3 117 29 11 37 607 113 – 113 – – 2 – 8 – 2 – 8 123 123 Restated to reflect a change in group structure (see note 1). New Markets – Other comprises CGUs with goodwill balances individually less than £10 million. The group's UK automotive battery systems business was sold in January 2018 (note 5). The net assets disposed of included goodwill of £9 million. The group and parent company test goodwill annually for impairment or more frequently if there are indications that goodwill might be impaired. The recoverable amounts of the CGUs are determined using value in use calculations which use cash flow projections based on financial budgets and plans covering a three-year period approved by management. The budgets and plans are based on a number of key assumptions. Assumptions on the likelihood and timing of new product launches are based on management’s best estimate of what may happen. Foreign exchange rates are based on actual forward rates at the time the budgets were prepared and are held constant over the budget and plan years. Other assumptions, such as market share, expected changes to selling prices, product profitability, precious metal prices and other direct input costs, are based on past experience and management’s expectations of future changes in the markets using external sources of information where appropriate. These cash flows are then extrapolated using the long term average growth rates for the relevant products, industries and countries in which the CGUs operate. The cash flows are discounted at the group’s estimated pre-tax weighted average cost of capital adjusted for the estimated tax cash flows and risk applicable to each CGU. 169 Johnson Matthey / Annual Report and Accounts 2018 Accounts Notes on the accounts for the year ended 31st March 2018 19 Goodwill (continued) The key assumptions are: Clean Air – Non-light Duty Catalysts Efficient Natural Resources – Process Technologies Health - Macfarlan Smith - Pharmaceutical Materials and Services New Markets – Water Technologies Discount rate 2018 2017 Long term growth rate 2017 2018 9.9% 10.5% 8.1% 8.8% 13.5% 9.5% 9.9% 7.4% 9.2% 11.5% 0.0% 2.4% 2.8% 2.8% 3.0% 1.6% 2.9% 3.2% 3.2% 5.0% The growth rate for the Clean Air – Non-light Duty Catalysts CGU for years four to ten is expected to be 1.5% (2017: 3.0%). After that, growth is expected to slow and, therefore, the long term growth rate above is used for year 11 onwards. With the exception of the Water Technologies CGU, the impairment tests result in headroom of at least 35% over the carrying value of the relevant CGU’s net assets. The Water Technologies CGU represents a portfolio of water purification products and services, including the MIOX and Finex businesses acquired during 2016. Goodwill totalling £11 million has been fully impaired reflecting lower growth rate assumptions for these businesses. The total intangibles impairment in respect of the Water Technologies CGU is £15 million, which has been allocated against goodwill (£11 million) and other intangible assets (£4 million). Following the impairments, the residual carrying value of the Water Technologies CGU is £15 million. 20 Other intangible assets 20a Group Cost At 1st April 2016 Additions Acquisitions (note 37) Disposals Exchange adjustments At 31st March 2017 Additions Disposals Disposal of businesses Exchange adjustments At 31st March 2018 Accumulated amortisation and impairment At 1st April 2016 Charge for the year Disposals Exchange adjustments At 31st March 2017 Charge for the year Impairment losses Disposals Disposal of businesses Exchange adjustments At 31st March 2018 Carrying amount at 31st March 2018 Carrying amount at 31st March 2017 Carrying amount at 1st April 2016 170 Customer contracts and relationships £ million Computer software £ million Patents, trademarks and licences £ million Acquired research and technology £ million Development expenditure £ million Total £ million 150 – 1 – 13 164 – – (5) (7) 152 89 9 – 8 106 9 1 – (5) (4) 107 45 58 61 116 35 – (1) 4 154 38 (1) – (3) 188 45 5 (1) 3 52 5 – (1) – (2) 54 134 102 71 41 13 13 – 4 71 – – – (2) 69 24 4 – 2 30 3 3 – – (1) 35 34 41 17 61 – 1 – 2 64 – – (11) – 53 26 7 – 2 35 6 1 – (11) – 31 22 29 35 141 19 – – 16 176 18 – – (14) 180 100 8 – 10 118 9 2 – – (9) 120 60 58 41 509 67 15 (1) 39 629 56 (1) (16) (26) 642 284 33 (1) 25 341 32 7 (1) (16) (16) 347 295 288 225 Notes on the accounts for the year ended 31st March 2018 20 Other intangible assets (continued) 20b Parent company Cost At 1st April 2016 Additions At 31st March 2017 Additions At 31st March 2018 Accumulated amortisation and impairment At 1st April 2016 Charge for the year At 31st March 2017 Charge for the year Impairment losses At 31st March 2018 Carrying amount at 31st March 2018 Carrying amount at 31st March 2017 Carrying amount at 1st April 2016 21 Investments in subsidiaries At 1st April 2016 Additions At 31st March 2017 Impairment losses At 31st March 2018 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Computer software £ million Patents, trademarks and licences £ million Acquired research and technology £ million Development expenditure £ million Total £ million 80 33 113 35 148 19 2 21 2 – 23 125 92 61 7 26 33 – 33 1 1 2 1 3 6 27 31 6 11 – 11 – 11 1 1 2 1 1 4 7 9 10 12 1 13 3 16 8 – 8 1 – 9 7 5 4 110 60 170 38 208 29 4 33 5 4 42 166 137 81 Cost of investments in subsidiaries £ million Accumulated impairment £ million 2,242 13 2,255 – 2,255 (192) – (192) (66) (258) Carrying amount £ million 2,050 13 2,063 (66) 1,997 Impairment losses in the year ended 31st March 2018 have been recognised following changes to the group’s structure. The subsidiaries are shown in note 41. 171 Johnson Matthey / Annual Report and Accounts 2018 Accounts Notes on the accounts for the year ended 31st March 2018 22 Investments in joint venture and associate Investment in joint venture Investment in associate At end of year The movements in the year were: At 1st April 2016 Group’s share of profit / (loss) for the year Group’s share of other comprehensive income – currency translation differences Group’s share of total comprehensive income At 31st March 2017 Group’s share of total comprehensive income – loss for the year Dividends received At 31st March 2018 2018 £ million 2017 £ million 5 15 20 6 16 22 Joint venture £ million Associate £ million Total £ million 4 1 1 2 6 – (1) 5 16 (1) 1 – 16 (1) – 15 20 – 2 2 22 (1) (1) 20 The group has an 11.1% interest in the ordinary share capital of Shanghai Bi Ke Clean Energy Technology Co Ltd (CECC) and has significant influence in this entity as CECC requires unanimous board decisions. As a result, this investment is accounted for as an investment in an associate in the group accounts. In addition, the parent company has a revenue share agreement with CECC which is accounted for as a non-current available-for-sale investment (note 23). 23 Non-current available-for-sale investments Quoted bonds purchased to fund pension deficit Unquoted investments Group Parent company 2018 £ million 2017 £ million 2018 £ million 2017 £ million 53 3 56 54 4 58 – 7 7 – 7 7 The quoted bonds are measured at fair value using level 1 inputs (note 30). There is no active market for the unquoted investments since they are investments in a company that is in the start-up phase and in investment vehicles that invest in start-up companies and are categorised as level 3 (note 30). The parent company’s investment is the revenue share agreement with CECC (note 22). Movements in the unquoted investments in the year are shown below (given their size, no additional detail has been provided): Group £ million Parent company £ million 6 (2) 4 (1) 3 7 – 7 – 7 At 1st April 2016 Impairment losses At 31st March 2017 Impairment losses At 31st March 2018 172 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Notes on the accounts for the year ended 31st March 2018 24 Inventories Raw materials and consumables Work in progress Finished goods and goods for resale Group Parent company 2018 £ million 2017 £ million 2018 £ million 2017 £ million 232 259 292 783 235 257 280 772 31 18 75 124 28 27 69 124 The group also holds customers’ materials in the process of refining and fabrication and for other reasons. 25 Trade and other receivables Current Trade receivables Amounts receivable from long-term contract customers Amounts receivable from subsidiaries Prepayments and accrued income Value added tax and other sales tax receivable Other receivables Current trade and other receivables Non-current Amounts receivable from subsidiaries Prepayments and accrued income Non-current other receivables 26 Trade and other payables Current Trade payables Amounts payable to long term contract customers Amounts payable to subsidiaries Accruals and deferred income Other payables Current trade and other payables Non-current Amounts payable to subsidiaries Other payables Non-current other payables 27 Long-term contracts Contract revenue recognised Contracts in progress at the year end: Costs incurred plus recognised profits less recognised losses to date Amount of advances received Group Parent company 2018 £ million 2017 £ million 2018 £ million 2017 £ million 1,049 16 – 85 34 44 1,228 – 38 38 951 14 – 86 44 44 1,139 – 28 28 165 – 1,149 19 11 33 1,377 1,013 – 1,013 164 1 908 16 14 36 1,139 1,120 – 1,120 Group Parent company 2018 £ million 2017 £ million 2018 £ million 2017 £ million 597 21 – 306 88 1,012 – 5 5 529 31 – 314 94 968 – 6 6 205 – 2,198 110 39 2,552 489 3 492 160 – 2,295 96 28 2,579 506 3 509 Group Parent company 2018 £ million 2017 £ million 2018 £ million 2017 £ million 42 237 30 61 265 28 2 2 – 1 1 1 173 Johnson Matthey / Annual Report and Accounts 2018 Accounts Notes on the accounts for the year ended 31st March 2018 28 Net debt 28a Cash and cash equivalents Cash and deposits Bank overdrafts Cash and cash equivalents 28b Net debt Non-current borrowings and related swaps Current borrowings and related swaps Total borrowings Cash and deposits Non-current interest rate swap assets Net debt Bank and other loans 1.945% €124 million European Investment Bank (EIB) loan 2019 $50 million KfW IPEX-Bank GmbH (KfW) loan 2020 4.66% €100 million Bonds 2021 €166 million EIB loan 2022 3.26% $150 million Bonds 2022 2.99% $165 million Bonds 2023 2.44% €20 million Bonds 2023 3.57% £65 million Bonds 2024 3.565% $50 million KfW loan 2024 3.14% $130 million Bonds 2025 3.39% $180 million Bonds 2028 Cross currency interest rate swaps designated as net investment hedges Cross currency interest rate swaps designated as fair value hedges Interest rate swaps designated as fair value hedges Non-current borrowings and related swaps Cash and cash equivalents – bank overdrafts Other current borrowings and related swaps Current borrowings and related swaps Other bank and other loans Cross currency interest rate swaps designated as net investment hedges Cross currency interest rate swaps designated as fair value hedges Other current borrowings and related swaps Cross currency interest rate swaps designated as cash flow hedges Interest rate swaps designated as fair value hedges Non-current interest rate swap – assets Group Parent company 2018 £ million 2017 £ million 2018 £ million 2017 £ million 329 (53) 276 330 (32) 298 (951) (63) (1,014) 329 6 (1,011) (52) (1,063) 330 17 (679) (716) (109) (36) (87) (145) (106) (117) (17) (65) (36) (97) (128) (7) – (1) (951) (53) (10) (63) (8) (2) – (10) 6 – 6 (107) (40) (86) (142) (123) (132) (17) (65) (40) (104) (148) (7) – – (1,011) (32) (20) (52) (20) – – (20) 15 2 17 218 (11) 207 (951) (15) (966) 218 6 (742) (109) (36) (87) (145) (106) (117) (17) (65) (36) (97) (128) – (7) (1) (951) (11) (4) (15) (2) – (2) (4) 6 – 6 248 (16) 232 (1,011) (18) (1,029) 248 17 (764) (107) (40) (86) (142) (123) (132) (17) (65) (40) (104) (148) – (7) – (1,011) (16) (2) (18) (2) – – (2) 15 2 17 The 3.26% $150 million Bonds 2022 have been swapped into floating rate US dollars. $100 million of the 3.14% $130 million Bonds 2025 have been swapped into sterling at 2.83%. All borrowings bear interest at fixed rates with the exception of the 2020 KfW loan, the 2022 EIB loan, a loan with a book value of £2 million and the bank overdrafts, which bear interest at commercial floating rates. The cross currency and interest rate swaps are measured at fair value using level 2 inputs (note 30). The bonds which are designated as being fair value hedged are remeasured for the fair value changes in respect of the hedged risk using level 2 inputs. The fair values are estimated by discounting the future contractual cash flows using appropriate market sourced data at the balance sheet date. 174 Notes on the accounts for the year ended 31st March 2018 29 Movements in assets and liabilities arising from financing activities 29a Group Non-cash movements 2017 £ million Cash outflow £ million Transfers £ million Foreign exchange Fair value and movements other movements £ million £ million Non-current assets Interest rate swaps Non-current liabilities Borrowings and related swaps Current liabilities Other borrowings and related swaps Dividends paid to equity shareholders Interest paid Net cash outflow from financing activities 29b Parent company 17 (1,011) (20) – 1 12 13 146 45 204 (2) 4 (2) – (9) 56 – 47 – (1) – (1) Non-cash movements 2017 £ million Cash outflow £ million Transfers £ million Foreign exchange Fair value and movements other movements £ million £ million Non-current assets Interest rate swaps Non-current liabilities Borrowings and related swaps Current liabilities Other borrowings and related swaps Dividends paid to equity shareholders Interest paid Net cash outflow from financing activities 17 (1,011) (2) – 1 – 1 146 49 196 (2) 4 (2) – (9) 56 – 47 – (1) – (1) t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O 2018 £ million 6 (951) (10) 2018 £ million 6 (951) (4) 30 Other financial assets and liabilities Other financial assets Forward foreign exchange contracts designated as cash flow hedges Forward foreign exchange contracts and currency swaps held for trading Other financial assets Other financial liabilities Forward foreign exchange contracts designated as cash flow hedges Forward precious metal price contracts designated as cash flow hedges Forward foreign exchange contracts and currency swaps held for trading Foreign exchange swaps designated as hedges of a net investment in foreign operations Other financial liabilities Group Parent company 2018 £ million 2017 £ million 2018 £ million 2017 £ million 6 9 15 (2) (3) (7) – 4 4 8 (6) (2) (6) (1) 6 9 15 (4) (3) (7) – 4 4 8 (7) (2) (7) – (12) (15) (14) (16) 175 Johnson Matthey / Annual Report and Accounts 2018 Accounts Notes on the accounts for the year ended 31st March 2018 30 Other financial assets and liabilities (continued) Fair values are measured using a hierarchy where the inputs are: • • • Level 1 – quoted prices in active markets for identical assets or liabilities. Level 2 – not level 1 but are observable for that asset or liability either directly or indirectly. Level 3 – not based on observable market data (unobservable). Of the other financial assets listed above, all are measured at fair value using level 2 inputs. All other financial liabilities are measured at fair value using level 2 inputs. The fair value of forward foreign exchange contracts, forward precious metal price contracts and currency swaps is estimated using appropriate market sourced data at the balance sheet date. 31 Financial risk management The group’s and parent company’s activities expose them to a variety of financial risks including credit risk, market risk and liquidity risk. Market risk includes foreign currency risk, interest rate risk and price risk. The main financial risks managed by the group and parent company, under policies approved by the board, are credit risk, foreign currency risk, interest rate risk and liquidity risk. The group and parent company use derivative financial instruments, in particular forward currency contracts and currency swaps, to manage their financial risks associated with their underlying business activities and the financing of those activities. Some derivative financial instruments used to manage financial risk are not designated as hedges and, therefore, are classified as ‘held for trading’. The group and parent company do not undertake any speculative trading activity in financial instruments. 31a Credit risk Within certain businesses, the group and parent company derive a significant proportion of their revenue from sales to major customers. Sales to individual customers are frequently high if the value of precious metals is included in the price. The failure of any such company to honour its debts could materially impact the group’s and parent company’s results. The group and parent company derive significant benefit from trading with their large customers and manage the risk at many levels. Each sector has a credit committee that regularly monitors its exposure. The Audit Committee receives a report every six months that details all significant credit limits, amounts due and amounts overdue within the group and the relevant actions being taken. At 31st March 2018, trade receivables for the group amounted to £1,049 million (2017: £951 million) (parent company £165 million (2017: £164 million)). £799 million (2017: £691 million) of these receivables at group level (£115 million (2017: £101 million) at parent company level) arose in Clean Air which mainly supplies the automotive industry including car and truck manufacturers and component suppliers. Although Clean Air has a wide spread of available customers, the concentrated nature of this industry means that amounts owed by individual customers can be large. Other parts of the group tend to sell to a larger number of customers and amounts owed tend to be lower. At 31st March 2018, for the group as a whole, no single outstanding balance exceeded 2% (2017: 2%) of revenue. No assets have been taken possession of as collateral. The credit profiles of the group’s and parent company’s customers are obtained from credit rating agencies where possible and are closely monitored. The scope of these reviews includes amounts overdue and credit limits. Generally, payments in the automotive industry and in the other markets in which the group operates, are made promptly. Trade receivables are considered impaired when the amount is in dispute, customers are in financial difficulty or for other reasons which imply there is doubt over the recoverability of the debt. Trade receivables can be analysed as: Group Parent company 2018 £ million 2017 £ million 2018 £ million 2017 £ million 966 885 152 149 62 19 2 83 9 (9) – 50 9 6 65 7 (6) 1 7 6 – 13 3 (3) – 11 2 2 15 1 (1) – 1,049 951 165 164 Amounts neither past due nor impaired Amounts past due but not impaired less than 30 days 30 – 90 days more than 90 days Total past due but not impaired Amounts impaired Specific allowances for bad and doubtful debts Carrying amount of impaired receivables Trade receivables net of allowances 176 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Notes on the accounts for the year ended 31st March 2018 31 Financial risk management (continued) 31a Credit risk (continued) Movements in the allowances for impairments were: At beginning of year Charge for year Released Utilised Exchange adjustments At end of year Group Parent company 2018 £ million 2017 £ million 2018 £ million 2017 £ million 6 5 (2) – – 9 7 2 (2) (2) 1 6 1 2 – – – 3 1 – – – – 1 The group’s financial assets included in sundry receivables are all current and not impaired. Of the parent company’s amounts receivable from subsidiaries £128 million is impaired (2017: £128 million). The credit risk on cash and deposits and derivative financial instruments is limited because the counterparties with significant balances are banks with strong credit ratings. The exposure to individual banks is monitored frequently against internally-defined limits, together with the bank’s credit ratings and credit default swap prices. As at 31st March 2018, the maximum net exposure with a single bank for cash and deposits was £67 million (2017: £49 million) for the group and £12 million (2017: £22 million) for the parent company, whilst the largest mark to market exposure for derivative financial instruments to a single bank was £3 million (2017: £10 million) for the group and parent company. The group and parent company also use money market funds to invest surplus cash thereby further diversifying credit risk and, at 31st March 2018, the group’s and parent company’s exposure to these funds was £171 million (2017: £211 million). The amounts on deposit at the year end represent the group’s and parent company’s maximum exposure to credit risk on cash and deposits. The parent company also guarantees some of its subsidiaries’ borrowings, partly through interest netting arrangements, payables and precious metal leases, and its exposure at 31st March 2018 was £32 million (2017: £28 million). 31b Foreign currency risk The group operates globally with a significant amount of its profit earned outside the UK. In order to protect the group’s sterling balance sheet and reduce cash flow risk, the group has financed most of its investment in the US and Europe by borrowing US dollars and euros, respectively. Although much of this funding is obtained by directly borrowing the relevant currency, a part is achieved through currency swaps which can be more efficient and reduce costs. To a lesser extent, the group has also financed a portion of its investment in China using a currency swap. The group has designated the currency swaps, a US dollar loan and euro loans (fair value of the loans was £167 million (2017: a US dollar loan and a euro loan with a fair value of £67 million)) as hedges of net investments in foreign operations as they hedge the changes in values of the subsidiaries' net assets against movements in exchange rates. The change in the value of the net investment hedges from movements in foreign currency exchange rates is recognised in equity and is offset by an equal and opposite movement in the carrying value of the net assets of the subsidiaries. The main currencies of the net debt after taking into account the effect of the currency swaps were: Sterling US dollar Euro Chinese renminbi Hong Kong dollar Swedish krona Other currencies Group Group Parent company Parent company Borrowings 2018 £ million Borrowings 2017 £ million Cash 2018 £ million Cash 2017 £ million Borrowings 2018 £ million Borrowings 2017 £ million Cash 2018 £ million Cash 2017 £ million 976 608 473 68 53 53 154 911 658 526 68 23 66 124 596 547 273 30 132 – 128 678 500 239 43 94 – 106 977 608 476 45 53 53 125 898 662 526 68 23 66 99 588 537 260 2 132 – 76 689 486 234 2 94 – 73 2,385 2,376 1,706 1,660 2,337 2,342 1,595 1,578 177 Johnson Matthey / Annual Report and Accounts 2018 Accounts Notes on the accounts for the year ended 31st March 2018 31 Financial risk management (continued) 31b Foreign currency risk (continued) The group’s objective is to match foreign currency assets and liabilities at an entity level in order to avoid any impact on the income statement of the entity resulting from movements in exchange rates. The group and parent company use forward exchange contracts to hedge foreign exchange exposures arising on forecast receipts and payments in foreign currencies. These are designated and accounted for as cash flow hedges. The majority of the cash flows are expected to occur in the year ending 31st March 2019. The main impact of movements in exchange rates on the group’s results arises on translation of overseas subsidiaries’ profits into sterling. The group’s largest exposure is to the US dollar and a 5% (6.6 cent (2017: 6.5 cent)) movement in the average exchange rate for the US dollar against sterling would have had an £11 million (2017: £10 million) impact on underlying operating profit. The group is also exposed to the euro and a 5% (5.7 cent (2017: 6.0 cent)) movement in the average exchange rate for the euro against sterling would have had a £10 million (2017: £10 million) impact on underlying operating profit. This exposure is part of the group’s economic risk of operating globally which is essential to remain competitive in the markets in which it operates. 31c Interest rate risk The group’s and parent company’s interest rate risk arises from their fixed rate borrowings (fair value risk) and floating rate borrowings (cash flow risk). Their policy is to optimise interest cost and reduce volatility in reported earnings and equity. They manage their risk by reviewing the profile of their debt regularly and by selectively using interest rate and cross currency swaps to maintain borrowings in appropriate currencies and at competitive rates. The group and parent company have designated one (2017: one) US dollar fixed rate to US dollar floating rate swap as a fair value hedge as it hedges the changes in the fair value of bonds attributable to changes in interest rates. The losses on the interest rate swaps in the year ended 31st March 2018 were £3 million (2017: £8 million) and the gains on the bonds attributable to the hedged risk were £3 million (2017: £6 million). The group and parent company have designated the US dollar fixed interest rate to sterling fixed interest rate cross currency swap as a cash flow hedge as it hedges the movement in the cash flows of the hedged bond attributable to changes in the US dollar / sterling exchange rate. Its cash flows are expected to occur in 2025 when the bond which it hedges matures and, therefore, the exchange effect on it is expected to be realised in the income statement in 2025. The interest element is realised in the income statement each year. At 31st March 2018, 99% (2017: 99%) of the group’s net debt and 90% (2017: 92%) of the parent company’s net debt were at fixed rates with an average interest rate of 3.1% (2017: 3.1%). The remaining debt is funded on a floating rate basis. Based on the group’s net debt funded at floating rates, after taking into account the effect of the swaps, a 1% change in all interest rates would have an immaterial impact on the group’s profit before tax. 31d Fair value of financial instruments The fair value of financial instruments is approximately equal to book value except for: Group US Dollar Bonds 2022, 2023, 2025 and 2028 Euro Bonds 2021 and 2023 Euro EIB loan 2019 Sterling Bonds 2024 KfW US dollar loan 2024 Parent company Amounts receivable from subsidiaries Amounts payable to subsidiaries US Dollar Bonds 2022, 2023, 2025 and 2028 Euro Bonds 2021 and 2023 Euro EIB loan 2019 Sterling Bonds 2024 KfW US dollar loan 2024 2018 2017 Carrying amount £ million Fair value £ million Carrying amount £ million Fair value £ million (448) (104) (109) (65) (36) Carrying amount £ million 2,162 (2,687) (448) (104) (109) (65) (36) (420) (118) (113) (71) (35) (507) (103) (107) (65) (40) (503) (120) (112) (74) (42) 2018 2017 Fair value £ million 2,232 (2,701) (420) (118) (113) (71) (35) Carrying amount £ million 2,028 (2,801) (507) (103) (107) (65) (40) Fair value £ million 2,145 (2,829) (503) (120) (112) (74) (42) The fair values are calculated using level 2 inputs (note 30) by discounting future cash flows to net present values using appropriate market interest rates prevailing at the year end. There were no transfers of any financial instrument between the levels of the fair value hierarchy (note 30) during the year. 178 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Notes on the accounts for the year ended 31st March 2018 31 Financial risk management (continued) 31e Liquidity risk The group’s and parent company’s policy on funding capacity is to ensure that they always have sufficient long term funding and committed bank facilities in place to meet foreseeable peak borrowing requirements. At 31st March 2018, the group and parent company had borrowings under committed bank facilities of nil (2017: nil). The group and parent company also have a number of uncommitted facilities, including metal leases, and overdraft lines at their disposal. Undrawn committed bank facilities Expiring in more than one year but not more than two years Expiring in more than two years Group Parent company 2018 £ million 2017 £ million 2018 £ million 2017 £ million 362 148 510 399 100 499 362 148 510 399 100 499 The maturity analyses for financial liabilities showing the remaining contractual undiscounted cash flows, including future interest payments, are: Group as at 31st March 2018 Bank overdrafts Bank and other loans – principal Bank and other loans – interest payments Financial liabilities in trade and other payables Total non-derivative financial liabilities Foreign exchange forwards and swaps – payments Foreign exchange forwards and swaps – receipts Total derivative financial liabilities Group as at 31st March 2017 Bank overdrafts Bank and other loans – principal Bank and other loans – interest payments Financial liabilities in trade and other payables Total non-derivative financial liabilities Foreign exchange forwards and swaps – payments Foreign exchange forwards and swaps – receipts Total derivative financial liabilities Parent company as at 31st March 2018 Bank overdrafts Bank and other loans – principal Bank and other loans – interest payments Financial liabilities in trade and other payables Total non-derivative financial liabilities Foreign exchange forwards and swaps – payments Foreign exchange forwards and swaps – receipts Total derivative financial liabilities Within 1 year £ million 1 to 2 years £ million 2 to 5 years £ million After 5 years £ million Total £ million 53 10 26 952 1,041 736 (727) 9 – 109 24 1 134 28 (28) – – 375 55 2 432 – – – – 461 34 – 495 – – – 53 955 139 955 2,102 764 (755) 9 Within 1 year £ million 1 to 2 years £ million 2 to 5 years £ million After 5 years £ million Total £ million 32 20 34 890 976 991 (977) 14 – 2 26 – 28 – – – – 232 70 2 304 – – – – 760 55 1 816 – – – 32 1,014 185 893 2,124 991 (977) 14 Within 1 year £ million 1 to 2 years £ million 2 to 5 years £ million After 5 years £ million Total £ million 11 4 25 2,539 2,579 789 (783) 6 – 109 24 – 133 29 (29) – – 375 55 1 431 – – – – 461 34 489 984 – – – 11 949 138 3,029 4,127 818 (812) 6 179 Johnson Matthey / Annual Report and Accounts 2018 Accounts Notes on the accounts for the year ended 31st March 2018 31 Financial risk management (continued) 31e Liquidity risk (continued) Parent company as at 31st March 2017 Bank overdrafts Bank and other loans – principal Bank and other loans – interest payments Financial liabilities in trade and other payables Total non-derivative financial liabilities Foreign exchange forwards and swaps – payments Foreign exchange forwards and swaps – receipts Total derivative financial liabilities Within 1 year £ million 1 to 2 years £ million 2 to 5 years £ million After 5 years £ million Total £ million 16 2 30 2,574 2,622 1,050 (1,038) 12 – 2 26 – 28 2 (2) – – 232 70 2 304 – – – – 760 55 506 1,321 – – – 16 996 181 3,082 4,275 1,052 (1,040) 12 31f Offsetting financial assets and liabilities The group and parent company only offset financial assets and liabilities when they currently have a legally enforceable right to offset the recognised amounts and they intend to either settle on a net basis or realise the asset and settle the liability simultaneously. The following financial assets and liabilities are subject to offsetting, enforceable master netting arrangements or similar agreements: Gross financial assets / (liabilities) £ million 396 15 (120) (12) Gross financial assets / (liabilities) £ million 401 8 (103) (15) Gross financial assets / (liabilities) £ million 254 15 (47) (14) Gross financial assets / (liabilities) £ million 267 8 (35) (16) Amounts set off £ million Net amounts in balance sheet £ million Related amounts not set off £ million (67) – 67 – 329 15 (53) (12) – (7) – 7 Amounts set off £ million Net amounts in balance sheet £ million Related amounts not set off £ million (71) – 71 – 330 8 (32) (15) – (7) – 7 Amounts set off £ million Net amounts in balance sheet £ million Related amounts not set off £ million (36) – 36 – 218 15 (11) (14) – (7) – 7 Amounts set off £ million Net amounts in balance sheet £ million Related amounts not set off £ million (19) – 19 – 248 8 (16) (16) – (8) – 8 Net £ million 329 8 (53) (5) Net £ million 330 1 (32) (8) Net £ million 218 8 (11) (7) Net £ million 248 – (16) (8) Group as at 31st March 2018 Cash and cash equivalents – cash and deposits Other financial assets Cash and cash equivalents – bank overdrafts Other financial liabilities Group as at 31st March 2017 Cash and cash equivalents – cash and deposits Other financial assets Cash and cash equivalents – bank overdrafts Other financial liabilities Parent company as at 31st March 2018 Cash and cash equivalents – cash and deposits Other financial assets Cash and cash equivalents – bank overdrafts Other financial liabilities Parent company as at 31st March 2017 Cash and cash equivalents – cash and deposits Other financial assets Cash and cash equivalents – bank overdrafts Other financial liabilities 180 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Notes on the accounts for the year ended 31st March 2018 31 Financial risk management (continued) 31g Capital management The group's policy for managing capital is to maintain an efficient balance sheet to ensure that the group always has sufficient resources to be able to invest in future growth. The group has a long term target of a return on invested capital (underlying operating profit divided by average capital employed over the year) of 20% to ensure focus on efficient use of the group's capital. See the section on return on invested capital in the Financial Review. The group also has a long term target of net debt (including post tax pension deficits) to EBITDA of between 1.5 and 2.0 times, although in any given year it may fall outside this range depending on future plans. See the section on capital structure in the Financial Review. Net debt (including post-tax pension deficits) is reduced for the quoted bonds purchased to fund the UK pension deficit. Since the UK pension plan is in surplus, the pension deficits do not include the UK plan and, therefore, an amendment has been made to the definition of net debt (including post-tax pension deficits) to reduce it for these bonds (net of the related deferred tax) only when the UK pension plan is in deficit. Average net debt Average equity Average capital employed Net debt Pension deficits Related deferred taxation Net debt (including post-tax pension deficits) Profit for the year Add back: Depreciation and amortisation Income tax expense Share of loss of joint venture and associate Net finance costs Loss on disposal of businesses Loss on significant legal proceedings Major impairment and restructuring charges Earnings before interest, tax, depreciation and amortisation (EBITDA) 2018 £ million 923 2,276 3,199 (679) (56) 10 (725) 298 175 22 1 38 7 50 90 681 2017 £ million 879 1,937 2,816 (716) (56) 13 (759) 385 172 77 – 31 – – – 665 Return on invested capital (underlying operating profit (note 4) divided by average capital employed) Net debt (including post tax pension deficits) to EBITDA 16.4% 1.1 times 18.2% 1.1 times 32 Provisions and contingent liabilities 32a Group provisions At 1st April 2017 Charge for year Utilised Released Disposal of businesses (note 5) Exchange adjustments At 31st March 2018 Restructuring provisions £ million Warranty and technology provisions £ million Other provisions £ million Total £ million 12 14 (10) (1) – – 15 11 2 – (3) (1) – 9 16 28 (13) (2) – (2) 27 39 44 (23) (6) (1) (2) 51 181 Johnson Matthey / Annual Report and Accounts 2018 Accounts Notes on the accounts for the year ended 31st March 2018 32 Provisions and contingent liabilities (continued) 32a Group provisions (continued) Current Non-current Total provisions 2018 £ million 2017 £ million 37 14 51 21 18 39 The restructuring provisions arise across the group and the majority are expected to be fully utilised by 31st March 2019. The warranty and technology provisions represent management’s best estimate of the group’s liability under warranties granted and remedial work required under technology licences, based on past experience in Clean Air, Efficient Natural Resources and New Markets. Warranties generally cover a period of up to three years. The other provisions include environmental, onerous contract and legal provisions arising across the group. Amounts provided reflect management's best estimate of the expenditure required to settle the obligations at the balance sheet date. They are expected to be fully utilised within the next 15 years. The group has recognised a charge in connection with the resolution of a contract dispute lawsuit related to a component supplied by the group in the US (note 6). At 31st March 2018, there is a provision of £18 million in respect of this settlement agreement which is estimated to be fully utilised over the next two years. 32b Group contingent liabilities Johnson Matthey has been informed of failures in certain engine systems for which the group supplied a particular coated substrate as a component for emissions after-treatment. The extent to which, if any, the reported failures are due to the coated substrate supplied by Johnson Matthey group companies has not been demonstrated. Potential solutions for the reported engine system issues and any associated costs have not yet been notified to the group. Johnson Matthey has not been contacted by any regulatory authority and no Johnson Matthey group company has been served with any contract dispute lawsuit, nor has any formal claim for recovery of identified costs been made at this point. Having reviewed its contractual obligations and the information currently available to it, the group believes that were it to be served with a contract dispute lawsuit, it would have defensible warranty positions in respect of its supplies of coated substrate for the after-treatment systems in the affected engines. If required, it will vigorously assert its available contractual protections and defences. The outcome of any discussions is not certain, nor is the group able to make a reliable estimate of the possible financial impact at this stage, if any. 32c Parent company At 1st April 2017 Charge for year Utilised At 31st March 2018 Current Non-current Total provisions Restructuring provisions £ million Other provisions £ million Total £ million 2 4 (2) 4 20 2 (4) 18 22 6 (6) 22 2018 £ million 2017 £ million 5 17 22 4 18 22 The restructuring provisions are expected to be fully utilised by 31st March 2019. The other provisions include onerous contracts, legal provisions and provisions to buy metal to cover positions created by the parent company selling metal belonging to subsidiaries. Amounts provided reflect management's best estimate of the expenditure required to settle the obligations at the balance sheet date. Details of guarantees given by the parent company are disclosed in note 31a. 182 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Notes on the accounts for the year ended 31st March 2018 33 Deferred taxation 33a Group At 1st April 2016 (Credit) / charge to income Acquisitions (note 37) Tax on items taken directly to or transferred from equity Exchange adjustments At 31st March 2017 (Credit) / charge to income Tax on items taken directly to or transferred from equity Exchange adjustments At 31st March 2018 Deferred tax assets Deferred tax liabilities Property, plant and equipment £ million Post- employment benefits £ million Provisions £ million Inventories £ million Intangibles £ million Other £ million 52 (5) – – 7 54 (29) – (4) 21 (2) 8 – (2) (4) – (3) 31 2 30 (17) (1) (1) – (3) (22) (5) – 2 (13) 1 – – (1) (13) 2 – 1 (25) (10) 38 (9) – – 5 34 (11) – (2) 21 19 14 (1) 1 1 34 (24) – (1) 9 Total deferred tax (assets) / liabilities £ million 77 8 (2) (1) 5 87 (70) 31 (2) 46 2018 £ million 2017 £ million (48) 94 46 (26) 113 87 Deductible temporary differences, unused tax losses and unused tax credits not recognised on the balance sheet total £147 million (2017: £120 million) of which £40 million is expected to expire within 5 years, £5 million within 5 to 10 years and £102 million carry no expiry date. Deferred tax liabilities have not been recognised on temporary differences of £1,416 million (2017: £1,328 million) associated with investments in subsidiaries. 33b Parent company At 1st April 2016 (Credit) / charge to income Tax on items taken directly to or transferred from equity At 31st March 2017 (Credit) / charge to income Tax on items taken directly to or transferred from equity At 31st March 2018 Property, plant and equipment £ million Post- employment benefits £ million Provisions £ million Inventories £ million Other £ million Total deferred tax liabilities £ million 8 (6) – 2 (6) – (4) 25 3 (3) 25 3 17 45 – (1) – (1) (1) – (2) (7) – – (7) 2 – (5) 9 (1) – 8 1 – 9 35 (5) (3) 27 (1) 17 43 Deductible temporary differences, unused tax losses and unused tax credits not recognised on the balance sheet are £2 million (2017: £2 million) and have no expiry date. 183 Johnson Matthey / Annual Report and Accounts 2018 Accounts Notes on the accounts for the year ended 31st March 2018 34 Share capital Issued and fully paid ordinary shares At 1st April 2016, 31st March 2017 and 31st March 2018 Number £ million 198,940,606 221 Details of outstanding allocations under the company’s long-term incentive plans and awards under the deferred bonus which have yet to mature are disclosed in note 16. At the last annual general meeting on 28th July 2017, shareholders approved a resolution for the company to make purchases of its own shares up to a maximum number of 19,353,343 ordinary shares of 11049⁄53 pence each. The resolution remains valid until the conclusion of this year's annual general meeting. The company will purchase its own shares when the board believes it to be in the best interests of the shareholders generally and will result in an increase in earnings per share. The group and parent company’s employee share ownership trust (ESOT) also buys shares on the open market and holds them in trust for employees participating in the group’s executive long term incentive plans. At 31st March 2018, the ESOT held 1,560,224 shares (2017: 1,743,333 shares) which had not yet vested unconditionally to employees. Computershare Trustees (CI) Limited, as trustee for the ESOT, has waived its dividend entitlement. The total number of treasury shares held was 5,407,176 (2017: 5,407,176) at a total cost of £92 million (2017: £92 million). 35 Tax effects relating to other comprehensive income Before tax £ million 2018 Tax £ million Net of tax £ million Before tax £ million 2017 Tax £ million Net of tax £ million Currency translation differences Cash flow hedges Fair value gains / (losses) on net investment hedges taken to equity Fair value gains on available-for-sale investments Remeasurements of post-employment benefit assets and liabilities Tax rate adjustments Total other comprehensive income (95) 5 6 – 103 – 19 1 (1) – – (18) (13) (31) (94) 4 6 – 85 (13) (12) 165 (2) (21) 7 (18) – 131 – – – – 4 (2) 2 165 (2) (21) 7 (14) (2) 133 The US federal tax rate was reduced from 35% to 21% with effect from 1st January 2018. In line with this change, the rate applying to US deferred tax assets and liabilities at 31st March 2018 has been reduced from 37% to 23% (including state taxes), creating a US tax rate adjustment which is partly reflected in the Consolidated Income Statement and partly in the Consolidated Statement of Total Comprehensive Income. 184 Notes on the accounts for the year ended 31st March 2018 36 Other reserves 36a Group Capital redemption reserve £ million Foreign currency translation £ million Available- for-sale reserve £ million Hedging reserve £ million Total other reserves £ million At 1st April 2016 Cash flow hedges – losses taken to equity Cash flow hedges – transferred to income statement Fair value losses on net investment hedges taken to equity Fair value gains on available-for-sale investments Fair value losses on available-for-sale investments transferred to income statement Currency translation differences on foreign currency net investments and related loans taken to equity At 31st March 2017 Cash flow hedges – losses taken to equity Cash flow hedges – transferred to income statement Fair value gains on net investment hedges taken to equity Currency translation differences on foreign currency net investments and related loans taken to equity Tax on items taken directly to or transferred from equity At 31st March 2018 Cash flow hedges transferred to the income statement are included in: 7 – – – – – – 7 – – – – – 7 – – – (21) – – 165 144 – – 6 (95) 1 56 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O – – – – 5 2 – 7 – – – – – 7 (9) (8) 6 – – – – (11) (3) 8 – – (1) (7) (2) (8) 6 (21) 5 2 165 147 (3) 8 6 (95) – 63 2018 £ million 2017 £ million (7) 15 8 9 (3) 6 Revenue Cost of sales 36b Parent company At 1st April 2016 Cash flow hedges – losses taken to equity Cash flow hedges – transferred to income statement Currency translation differences on foreign operations taken to equity At 31st March 2017 Cash flow hedges – losses taken to equity Cash flow hedges – transferred to income statement Currency translation differences on foreign operations taken to equity At 31st March 2018 Capital redemption reserve £ million Foreign currency translation £ million Available- for-sale reserve £ million Hedging reserve £ million Total other reserves £ million 7 – – – 7 – – – 7 (3) – – 2 (1) – – (3) (4) 3 – – – 3 – – – 3 (8) (1) (3) (3) 1 1 – 2 (10) (1) (5) (5) 9 9 – (3) (6) – 185 Johnson Matthey / Annual Report and Accounts 2018 Accounts Notes on the accounts for the year ended 31st March 2018 37 Acquisitions In the year ended 31st March 2017, the group made two acquisitions relating to the New Markets Sector: on 1st April 2016, 100% of the share capital of MIOX Corporation, a developer and supplier of advanced water disinfectant technology and, on 31st May 2016, 100% of the share capital of Finex Oy, a supplier of advanced polymer resin technology. The fair value of the combined net assets acquired was £14 million, consideration paid £21 million and goodwill arising £7 million. The goodwill arising was attributable to opportunities to access expertise and anticipated future synergies and was not expected to be deductible for tax purposes. There were no acquisition fair value amendments to this goodwill in the year ended 31st March 2018. 38 Precious metal operating leases The group leases, rather than purchases, precious metals to fund temporary peaks in metal requirements provided market conditions allow. These leases are from banks for specified periods (typically a few months) and for which the group pays a fee. These arrangements are classified as operating leases. The group holds sufficient precious metal inventories to meet all the obligations under these lease arrangements as they fall due. At 31st March 2018, precious metal leases were £184 million (2017: £77 million). 39 Commitments Capital lease commitments – future capital expenditure contracted but not provided: Property, plant and equipment Other intangible assets Operating lease commitments: Future minimum amounts payable under non-cancellable operating leases Within one year From one to five years After five years Group Parent company 2018 £ million 2017 £ million 2018 £ million 2017 £ million 20 15 16 41 36 93 16 3 19 38 40 97 – 5 3 8 10 21 2 – 3 9 11 23 The group and parent company lease some of its property, plant and equipment which are used by the group and parent company in their operations. 40 Transactions with related parties Transactions between the parent company and its subsidiaries, which are related parties, have been eliminated on consolidation and so are only disclosed for the parent company’s accounts. The group’s joint venture and associate are related parties. Guarantees of subsidiaries’ liabilities are disclosed in note 31a. Trading transactions with joint venture: purchases of goods Trading transactions with associate: rendering of services Trading transactions with subsidiaries Sale of goods Purchases of goods Income from service charges Amounts receivable from subsidiaries Amounts payable to subsidiaries Loans to subsidiaries Loans from subsidiaries Group Parent company 2018 £ million 2017 £ million 2018 £ million 2017 £ million – – – – – – – – – 5 1 – – – – – – – – – 2,189 790 47 295 79 1,867 2,608 5 – 1,848 503 35 198 193 1,830 2,608 The group’s post-employment benefits plans are related parties and the group’s and parent company’s transactions with them are disclosed in note 17. 186 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Notes on the accounts for the year ended 31st March 2018 40 Transactions with related parties (continued) Key management personnel The key management of the group and parent company consist of the Board of Directors and the members of the Group Management Committee (GMC). During the year ended 31st March 2018, the GMC had an average of eight members (2017: ten members). The only transactions with any key management personnel was compensation charged in the year which was: Short term employee benefits Share-based payments Termination benefits Non-executive directors' fees and benefits Total compensation of key management personnel 2018 £ million 2017 £ million 6 3 – 1 10 6 3 1 1 11 Balances outstanding at the year end were nil (2017: termination benefits of £1 million). Information on the directors’ remuneration is given in the Remuneration Report. 41 Related undertakings A full list of related undertakings at 31st March 2018 (comprising subsidiaries, joint ventures and associates) is set out below. Those held directly by the parent company are marked with an asterisk (*) and those held jointly by the parent company and a subsidiary are marked with a cross (+). All the companies are wholly owned unless otherwise stated. All the related undertakings are involved in the principal activities of the group. Unless otherwise stated, the share class of each related undertaking comprises ordinary shares only. Entity Registered address +Johnson Matthey Argentina S.A. Tucumán 1 Piso 4, CP 1049, Buenos Aires, Argentina Johnson Matthey (Aust.) Ltd 64 Lillee Crescent, Tullamarine VIC 3043, Australia +Johnson Matthey Holdings Limited 64 Lillee Crescent, Tullamarine VIC 3043, Australia Johnson Matthey Belgium BVBA Pegasuslaan 5, 1831 Diegem, Belgium Tracerco Europe BVBA 1731 Zellik, Z3 Doornveld 115, Belgium The Argent Insurance Co. Limited Clarendon House, 2 Church Street, Hamilton, HM11, Bermuda Johnson Matthey Brasil Ltda Avenida Macuco, 726, 12th Floor, Edifício International Office, CEP04523-001, Brazil Stepac Brazil Ltda Rua Itapolis, n° 1921, Pacaembu, São Paulo, 01245-000, Brazil Tracerco do Brasil – Diagnosticos de Processos Industriais Ltda Rua Victor Civita, 66, bloco 2, salas 501/502, Condomínio Rio Office Park, Barra da Tijuca, Rio de Janeiro, CEP 22775-044, Brazil Johnson Matthey Battery Materials Ltd. 280 Liberté Ave, Candiac Québec J5R 6X1, Canada Tracerco Radioactive Diagnostic Services Canada Inc. 8908 60 Avenue NW, Edmonton AB, T6E 6A6, Canada Johnson Matthey Argillon (Shanghai) Emission Control Technologies Ltd. No. 298, East Rong Le Road, Songjiang District, Shanghai, China Johnson Matthey Battery Materials (Changzhou) Co., Ltd. 1 Xin Wei Liu Road, Changzhou Export Processing Zone, Changzhou, Jiangsu Province, China Johnson Matthey Chemical Process Technologies (Shanghai) Room 1066, Building 1, No 215 Lian He Bei Lu, Fengxian District, Company Limited Shanghai, China Johnson Matthey Clean Energy Technologies (Beijing) Co., Ltd 2007C, 20th Floor, No. 21 Building, No.5 Community, Shu Guang Xi Lane, Chaoyang District, Beijing, China Johnson Matthey Process Technologies (Beijing) Co., Ltd. Unit No. 2001-2007A, No. 21 Building, Shuguangxi Lane A5, Chaoyang District, Beijing, China Johnson Matthey Research & Development (Yantai) Co., Ltd. No. 9 Wuxi Road, Yantai Economic and Technology Development Zone, Yantai, Shandong Province, China Johnson Matthey (Shanghai) Catalyst Co., Ltd. 586 Dongxing Road, Songjiang Industry Zone, Shanghai, 201613, China Johnson Matthey (Shanghai) Chemicals Limited 588 Dongxing Road, Songjiang Industry Zone, Shanghai, 201613, China Johnson Matthey (Shanghai) Trading Limited Room 1615B, No. 118 Xinling Road, Waigaoqiao Free Trade Zone, Shanghai, China Johnson Matthey (Tianjin) Chemical Co., Ltd. Suite 1-1201, BoRun Commercial Plaza, Tianjin Development Zone, China Johnson Matthey (Zhangjiagang) Environmental Protection Technology Co., Ltd Room 807, Changjiang Building, ZJG FTZ, China Johnson Matthey (Zhangjiagang) Precious Metal Technology Co., Ltd. Rm. 1116-1117, The Petrochemical Trading Edifice, Zhangjiagang Free Trade Zone, Jiangsu Province, China Qingdao Johnson Matthey Hero Catalyst Company Limited (51.0%) New Material Industrial Park, Shiyuan Road, Qinda Industrial Park, Chengyang District, Qingdao, 200331, China 187 Johnson Matthey / Annual Report and Accounts 2018 Accounts Notes on the accounts for the year ended 31st March 2018 41 Related undertakings (continued) Entity Registered address Shanghai Bi Ke Clean Energy Technology Co Ltd (11.1%) Room 427 Building 2 No 351 Guo Shou Jing Road, China (Shanghai) Pilot Free Trade Zone, China Shanghai Johnson Matthey Applied Materials Technologies Co., Ltd Area A, 1st Floor, Building 7, 298 East Rong Le Road, Songjiang District, Shanghai, China Tracerco China Process Diagnostics & Instrumentation Section G Floor 2, Building 7, No 298 Rong Le East Road, Songjiang (Shanghai) Co., Ltd. Industry Zone, Shanghai, China Johnson Matthey A/S Frederikssundvej 274D, DK-2700 Brønshøj, Copenhagen, Denmark *AG Holding Ltd 5th Floor, 25 Farringdon Street, London, EC4A 4AB, England *Cascade Biochem Limited 1 5th Floor, 25 Farringdon Street, London, EC4A 4AB, England *Fuel Cell Today Limited 5th Floor, 25 Farringdon Street, London, EC4A 4AB, England Ilumink Limited 5th Floor, 25 Farringdon Street, London, EC4A 4AB, England *JMEPS Trustees Limited 5th Floor, 25 Farringdon Street, London, EC4A 4AB, England Johnson Matthey Battery Systems Engineering Limited 5th Floor, 25 Farringdon Street, London, EC4A 4AB, England *Johnson Matthey (CM) Limited 5th Floor, 25 Farringdon Street, London, EC4A 4AB, England Johnson Matthey Davy Technologies International Limited 5th Floor, 25 Farringdon Street, London, EC4A 4AB, England *Johnson Matthey Davy Technologies Limited 5th Floor, 25 Farringdon Street, London, EC4A 4AB, England *Johnson Matthey Fuel Cells Limited 5th Floor, 25 Farringdon Street, London, EC4A 4AB, England Johnson Matthey Investments Limited 5th Floor, 25 Farringdon Street, London, EC4A 4AB, England *Johnson Matthey (Nominees) Limited 5th Floor, 25 Farringdon Street, London, EC4A 4AB, England *Johnson Matthey Precious Metals Limited 5th Floor, 25 Farringdon Street, London, EC4A 4AB, England Johnson Matthey South Africa Holdings Limited 5th Floor, 25 Farringdon Street, London, EC4A 4AB, England Johnson Matthey Tianjin Holdings Limited 5th Floor, 25 Farringdon Street, London, EC4A 4AB, England *Katalco Limited 5th Floor, 25 Farringdon Street, London, EC4A 4AB, England Matthey Finance Limited 5th Floor, 25 Farringdon Street, London, EC4A 4AB, England *Matthey Holdings Limited 5th Floor, 25 Farringdon Street, London, EC4A 4AB, England *Synetix Limited 5th Floor, 25 Farringdon Street, London, EC4A 4AB, England *Tracerco Limited 5th Floor, 25 Farringdon Street, London, EC4A 4AB, England Finex Oy Seppolantie 1, Kotka, 48230, Finland Johnson Matthey Finland Oy Autokatu 6, 20380 Turku, Finland Kiinteistö Oy Kotkan Huumantie 5 (70.0%) c/o Finex Oy, Seppolantie 1, Kotka, 48230, Finland Johnson Matthey SAS Les Diamants – Immeuble B, 41 rue Delizy, 93500 Pantin, France Johnson Matthey Battery Materials GmbH Ostenriederstr. 15, 85368 Moosburg a.d. Isar, Germany Johnson Matthey Catalysts (Germany) GmbH Bahnhofstrasse 43, 96257 Redwitz an der Rodach, Germany Johnson Matthey Chemicals GmbH Wardstrasse 17, D-46446 Emmerich am Rhein, Germany Johnson Matthey GmbH & Co. KG 2 Otto-Volger-Strasse 9b, 65843 Sulzbach, Germany Johnson Matthey Holding GmbH Bahnhofstrasse 43, 96257 Redwitz an der Rodach, Germany Johnson Matthey Management GmbH Otto-Volger-Strasse 9b, 65843 Sulzbach, Germany Johnson Matthey Piezo Products GmbH Bahnhofstrasse 43, 96257 Redwitz an der Rodach, Germany Johnson Matthey Redwitz Real Estate (Germany) B.V. & Co. KG 2 Bahnhofstrasse 43, 96257 Redwitz an der Rodach, Germany Johnson Matthey Argillon Power Plant Catalysts Holdings Unit 2-6, 8/F, 909 Cheung Sha Wan Road, Cheung Sha Wan, (Hong Kong) Limited Kowloon, Hong Kong Johnson Matthey Hong Kong Limited Unit 2-6, 8/F, 909 Cheung Sha Wan Road, Cheung Sha Wan, Kowloon, Hong Kong Johnson Matthey Pacific Limited 3 Unit 2-6, 8/F, 909 Cheung Sha Wan Road, Cheung Sha Wan, Kowloon, Hong Kong Johnson Matthey Process Technologies Holdings Hong Kong Limited Unit 2-6, 8/F, 909 Cheung Sha Wan Road, Cheung Sha Wan, Kowloon, Hong Kong Johnson Matthey Tracerco Holdings Hong Kong Limited Unit 2-6, 8/F, 909 Cheung Sha Wan Road, Cheung Sha Wan, Kowloon, Hong Kong Johnson Matthey Yantai Holdings (Hong Kong) Limited Unit 2-6, 8/F, 909 Cheung Sha Wan Road, Cheung Sha Wan, Kowloon, Hong Kong Macfarlan Smith (Hong Kong) Limited Unit 2-6, 8/F, 909 Cheung Sha Wan Road, Cheung Sha Wan, Kowloon, Hong Kong Johnson Matthey Chemicals India Private Limited Plot No 6A, MIDC Industrial Estate, Taloja, District Raigad, Maharashtra 410208, India Johnson Matthey India Private Limited 103, Ashoka Estate, 24, Barakhamba Road, New Delhi – 110 001, India 188 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Notes on the accounts for the year ended 31st March 2018 41 Related undertakings (continued) Entity Registered address Johnson Matthey Limited 24/26 City Quay, Dublin 2, D02 NY19, Ireland Stepac L.A. Ltd. Tefen Industrial Park Bldg. #12, Post Box 73, Tefen, Western Galilee, 2495900, Israel Johnson Matthey Italia S.r.l. No 2, Via Talucchi, Turin, Italy Johnson Matthey Fuel Cells Japan Limited 5123-3 Kitsuregawa, Sakura-shi, Tochigi, 329-1412, Japan Johnson Matthey Japan Godo Kaisha 5123-3 Kitsuregawa, Sakura-shi, Tochigi, 329-1412, Japan Johnson Matthey DOOEL Skopje TIDZ Skopje 1, 1041 Ilinden, Macedonia *Johnson Matthey Sdn. Bhd. Suite 16-10, Level 16, Wisma UOA II, 21 Jalan Pinang, 50450 Kuala Lumpur, Malaysia Johnson Matthey Services Sdn. Bhd. Suite 16-10, Level 16, Wisma UOA II, 21 Jalan Pinang, 50450 Kuala Lumpur, Malaysia Tracerco Asia Sdn. Bhd. Suite 16-10, Level 16, Wisma UOA II, 21 Jalan Pinang, 50450 Kuala Lumpur, Malaysia Tracerco Asia Services Sdn. Bhd. Suite 16-10, Level 16, Wisma UOA II, 21 Jalan Pinang, 50450 Kuala Lumpur, Malaysia Johnson Matthey de Mexico, S. de R.L. de C.V. Av. de Margues y Av. de la Canada, 2a Etapa Parque Industrial Bernardo Quintana, El Marques, Querataro C.P., 76246, Mexico Johnson Matthey Servicios, S. de R.L. de C.V. Av Ramon Rivera Lara 6620, Parque Industrial Juarez, Chihuahua, Mexico Intercat Europe B.V. Stationsstraat 50, 3451 BZ, Vleuten, Netherlands Johnson Matthey Advanced Glass Technologies B.V. Fregatweg 38, 6222 NZ Maastricht, Netherlands Johnson Matthey B.V. Otto-Volger-Strasse 9b, 65843 Sulzbach/Ts. Germany Johnson Matthey Holdings B.V. Fregatweg 38, 6222 NZ Maastricht, Netherlands Johnson Matthey Netherlands B.V. Fregatweg 38, 6222 NZ Maastricht, Netherlands Johnson Matthey Netherlands 2 B.V. Fregatweg 38, 6222 NZ Maastricht, Netherlands Matthey Finance B.V.1 Fregatweg 38, 6222 NZ Maastricht, Netherlands Tracerco Norge AS Kokstadflaten 35, 5257 Kokstad, Norway Johnson Matthey Battery Systems Spólka z ograniczoną odpowiedzialnocścią PL 44-109 Gliwice, ul. Einsteina 36, Poland Johnson Matthey Poland Spólka z ograniczoną odpowiedzialnocścią Złota 59, 00-120 Warszawa, Warsaw, Poland Macfarlan Smith Portugal, Lda Largo de São Carlos 3, 1200-410 Lisboa, Portugal Johnson Matthey Catalysts LLC 1 Transportny Proezd, 660027 Krasnoyarsk, Russia International Diol Company (4.3%) 1st Basic Industrial Road 218, P.O. Box 12021, Jubail Industrial City, 31961, Saudi Arabia *Anipel Limited 10 Wheatfield Road, Edinburgh, Midlothian, EH11 2QA, Scotland *Bitrex Limited 10 Wheatfield Road, Edinburgh, Midlothian, EH11 2QA, Scotland *Johnson Matthey General Partner (Scotland) Limited 10 Wheatfield Road, Edinburgh, Midlothian, EH11 2QA, Scotland *Johnson Matthey (Scotland) Limited Partnership 2 10 Wheatfield Road, Edinburgh, Midlothian, EH11 2QA, Scotland Macfarlan Smith Limited Wheatfield Road, Edinburgh, Midlothian, EH11 2QA, Scotland *Meconic Limited 10 Wheatfield Road, Edinburgh, Midlothian, EH11 2QA, Scotland Johnson Matthey Singapore Private Limited 80 Robinson Road, #02-00 Singapore 068898 Johnson Matthey (Proprietary) Limited Corner Henderson and Premier Roads, Germiston South Ext 7, Gauteng, South Africa Johnson Matthey Research South Africa (Proprietary) Limited Corner Henderson and Premier Roads, Germiston South Ext 7, Gauteng, South Africa Johnson Matthey Salts (Proprietary) Limited Corner Henderson and Premier Roads, Germiston South Ext 7, Gauteng, South Africa Johnson Matthey Catalysts Korea Limited A-dong 2906-ho, 13 Heungdeok 1-ro, Giheung-gu, Yongin-si, Gyeonggi-do, South Korea Johnson Matthey Korea Limited 418, Ideok-ro, Iwol-myeon, Jincheon-gun, Chungcheongbuk-do, South Korea Johnson Matthey AB Viktor Hasselblads gata 8, 421 31 Västra Frölunda, Göteborg, Sweden Johnson Matthey Formox AB SE-284 80, Perstorp, Sweden Johnson Matthey & Brandenberger AG Glatttalstrasse 18, 8052 Zurich, Switzerland Johnson Matthey Finance GmbH Hertensteinstrasse 51, 6004 Lucerne, Switzerland Johnson Matthey Finance Zurich GmbH Glatttalstrasse 18, 8052 Zurich, Switzerland LiFePO4+C Licensing AG Hertensteinstrasse 51, 6004 Lucerne, Switzerland 189 Johnson Matthey / Annual Report and Accounts 2018 Accounts Notes on the accounts for the year ended 31st March 2018 41 Related undertakings (continued) Entity Registered address Johnson Matthey (Thailand) Limited 1858/12 Interlink Tower, 5th Floor, Bangna-Trad Road, Bangna Sub-District, Bangna District, Bangkok, Thailand Johnson Matthey Holdings (Thailand) Limited 1858/12 Interlink Tower, 5th Floor, Bangna-Trad Road, Bangna Sub-District, Bangna District, Bangkok, Thailand Johnson Matthey Services (Trinidad and Tobago) Limited Queen's Park Place, 17-20 Queens Park West, Port of Spain, Trinidad and Tobago Stepac Ambalaj Malzemeleri Sanayi Ve Ticaret Anonim Sirketi Güzeloba Mah. Rauf Denktaş Cad., No.56/101, Muratpaşa/Antalya, Turkey JM Holdings UK LLC Corporation Service Company, 2711 Centerville Road, Suite 400, Wilmington DE 19808, USA JM Holdings US LLC Corporation Service Company, 2711 Centerville Road, Suite 400, Wilmington DE 19808, USA Johnson Matthey Fuel Cells, Inc. Corporation Service Company, 2711 Centerville Road, Suite 400, Wilmington DE 19808, USA Johnson Matthey Holdings, Inc. Corporation Service Company, 2711 Centerville Road, Suite 400, Wilmington DE 19808, USA Johnson Matthey Inc.4 Corporation Service Company, 2595 Interstate Drive, Suite 103 PA 17110, USA Johnson Matthey Japan, Inc. Corporation Service Company, 2711 Centerville Road, Suite 400, Wilmington DE 19808, USA Johnson Matthey Materials, Inc. CSC Lawyers Incorporating Service, 2730 Gateway Oaks Drive, Suite 100, Sacramento CA 95833, USA Johnson Matthey North America, Inc. Corporation Trust Center, 1209 Orange Street, Wilmington DE 19801, USA Johnson Matthey Overseas Holdings Inc. Corporation Service Company, 2711 Centerville Road, Suite 400, Wilmington DE 19808, USA Johnson Matthey Pharmaceutical Materials, Inc. Corporation Service Company, 2711 Centerville Road, Suite 400, Wilmington DE 19808, USA Johnson Matthey Process Technologies, Inc. Corporation Service Company, 2711 Centerville Road, Suite 400, Wilmington DE 19808, USA Johnson Matthey Stationary Emissions Control LLC Corporation Service Company, 2711 Centerville Road, Suite 400, Wilmington DE 19808, USA Johnson Matthey US 2 LLC Corporation Service Company, 2711 Centerville Road, Suite 400, Wilmington DE 19808, USA Matthey Pharmaceutical Alkaloids, LLC (50.0%) Corporation Trust Center, 1209 Orange Street, Wilmington DE 19801, USA MIOX Corporation Corporation Service Company, 2711 Centerville Road, Suite 400, Wilmington DE 19808, USA Red Maple LLC (50.0%) Corporation Service Company, 2711 Centerville Road, Suite 400, Wilmington DE 19808, USA In some jurisdictions in which the group operates, share classes are not defined and in these instances, for the purpose of disclosure, these holdings have been classified as ordinary shares. 1 Ordinary and preference shares 2 Limited partnership, no share capital 3 Ordinary and non-cumulative redeemable preference shares 4 Ordinary and series A preferred stock 190 Reconciliation of non-GAAP measures to GAAP measures for the year ended 31st March 2018 The group uses various measures to manage its business which are not defined by generally accepted accounting principles (GAAP). The group’s management believes these measures provide valuable additional information to users of the accounts in understanding the group’s performance. Sales excluding precious metals (sales) The group believes that sales excluding precious metals is a better measure of the underlying performance of the group than revenue. Total revenue can be heavily distorted by year on year fluctuations in the market prices of precious metals. In addition, in many cases, the value of precious metals is passed directly on to our customers. Underlying profit and earnings These are the equivalent GAAP measures adjusted to exclude amortisation of acquired intangibles, major impairment and restructuring charges, profit or loss on disposal of businesses, gain or loss on significant legal proceedings together with associated legal costs, significant tax rate changes and, where relevant, related tax effects. The group believes that these measures provide a better guide to the underlying performance of the group. These are reconciled in note 4. Margin Underlying operating profit divided by sales excluding precious metals. Working capital days Non-precious metal related inventories, trade and other receivables and trade and other payables (including any classified as held for sale) divided by sales excluding precious metals for the last three months multiplied by 90 days. Free cash flow Net cash flow from operating activities, after net interest paid, net purchases of non-current assets and investments and dividends received from joint venture. Capex Additions of property, plant and equipment plus additions of other intangible assets. Capex to depreciation ratio Capex divided by depreciation. Depreciation is the depreciation charge of property, plant and equipment plus the amortisation charge of other intangible assets excluding amortisation of acquired intangibles (note 7). t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Working capital (excluding precious metals) Inventories Trade and other receivables Trade and other payables Total working capital Less precious metal working capital Working capital (excluding precious metals) Free cash flow Net cash flow from operating activities Dividends received from joint venture Interest received Interest paid Purchases of non-current assets and investments Proceeds from sale of non-current assets and investments Free cash flow Other Other non-GAAP measures are reconciled in the relevant note. 2018 £ million 783 1,228 (1,012) 999 (404) 595 2017 £ million 772 1,139 (968) 943 (335) 608 2018 £ million 2017 £ million 386 1 3 (45) (216) 7 136 523 – 5 (42) (260) 4 230 191 Johnson Matthey / Annual Report and Accounts 2018 Accounts Independent auditor’s report to the members of Johnson Matthey Plc 1. Our opinion is unmodified Basis for opinion We have audited the accounts of Johnson Matthey Plc (“the company”) for the year ended 31st March 2018 which comprise the Consolidated Income Statement, Consolidated Statement of Comprehensive Income, Consolidated and Parent Company Balance Sheets, Consolidated and Parent Company Cash Flow Statements, Consolidated and Parent Company Statement of Changes in Equity, and the related notes, including the Accounting Policies. In our opinion: – – – – the accounts give a true and fair view of the state of the group’s and of the parent company’s affairs as at 31st March 2018 and of the group’s profit for the year then ended; the group accounts have been properly prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU); the parent company accounts have been properly prepared in accordance with IFRS as adopted by the EU and as applied in accordance with the provisions of the Companies Act 2006; and the accounts have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the group accounts, Article 4 of the IAS Regulation. We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities are described below. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion. Our audit opinion is consistent with our report to the Audit Committee. We were appointed as auditor by the shareholders in 1985. The period of total uninterrupted engagement is for the 33 financial years ended 31st March 2018. We have fulfilled our ethical responsibilities under, and we remain independent of the group in accordance with, UK ethical requirements including the FRC Ethical Standard as applied to listed public interest entities. No non-audit services prohibited by that standard were provided. Overview Materiality: group accounts as a whole £23 million (2017: £22 million) 5% (2017: 5%) of adjusted profit before tax Coverage 83% (2017: 84%) of group profit before tax Risks of material misstatement vs 2017 Recurring risks Refinery process and stock takes (cid:1) (cid:2) Taxation accounting (cid:1) (cid:2) New: Product claims and uncertainties (cid:3) Carrying value of goodwill and other intangibles (cid:4) 192 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Independent auditor’s report to the members of Johnson Matthey Plc 2. Key audit matters: our assessment of risks of material misstatement Key audit matters are those matters that, in our professional judgement, were of most significance in the audit of the accounts and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. We summarise below the key audit matters (changed from 2017 to include product claims and uncertainties and to remove post-employment benefits), in decreasing order of significance, in arriving at our audit opinion above, together with our key audit procedures to address those matters and, as required for public interest entities, our results from those procedures. These matters were addressed, and our results are based on procedures undertaken, in the context of, and solely for the purpose of, our audit of the accounts as a whole, and in forming our opinion thereon, and consequently are incidental to that opinion, and we do not provide a separate opinion on these matters. Group and company Physical quantities: Our procedures included: The risk Our response Refinery process and stock takes The group refines over four million ounces of platinum group metals per annum with a market value of £3.4 billion. Refer to page 105 (Audit Committee Report) and page 148 (accounting policy). The group refines a significant amount of metal as set out in note 1. The year end metal inventory quantity is determined from: (i) assay estimates of the metal contained in the carrier material entering and refined metal leaving the refining process, and (ii) estimates of process losses, rolled forward from (iii) assay estimates of the metal content in the plants at the time of stock takes which take place at different times earlier than the financial year end. Furthermore, the plants process material on behalf of third parties, whereby the group must return pre-agreed recoverable quantities of refined metal to those parties; under or over recovery or other loss directly impacts the group’s own metal inventory. – Control observations: Assessing through observation, interview and reperformance on a sample basis the adequacy of group controls over the assay system, metal processing and inventory including physical security, metal receipt and dispatch, metal recording, reconciling the production and accounting systems, assaying and stock takes; – Count attendance and design: Attending certain physical stock takes to verify the design and implementation of stock take processes and physical quantities counted; – Count vs system reconciliation: Seeking to understand and corroborate the reasons for significant or unusual movements in inventory quantities between the accounting records and the physical stock takes; Evaluating the roll forward of inventory from the point of stock take to the year end to assess the potential for misstatement; A full stock take was not performed at the UK refineries during the year which led to an increased period between the previous stock take and the financial year end. – Benchmarking assumptions: Challenging the assay estimates taken by management by comparing these to assay estimates undertaken by customers and third party umpires; The year end metal inventory is dependent upon the physical quantities measured in the assay samples in (i) and (iii). The risks are such that a small variation in estimates could have a material effect on the valuation of inventory in the accounts. – Historical comparisons: Assessing provisions for inventory loss compared to historical trends and stock take results to assess the likelihood and quantum of processing loss (if any) of metal between the date of the stock take and the year end date; and – Assessing transparency: Considering the adequacy of the group’s disclosures about the degree of estimation involved in arriving at the measured inventory. Our results: As a result we found the valuation of inventory to be acceptable (2017: acceptable). Group and company Subjective estimate: Our procedures included: Taxation accounting Tax provisions of £86 million (2017: £89 million). Refer to page 106 (Audit Committee Report), page 147 (accounting policy) and pages 155-156 (financial disclosures). The group operates in multiple jurisdictions governed by national tax laws and regulations and is required to estimate the tax effect of cross border transactions including transfer pricing arrangements. Where the precise impact of these laws and regulations on indirect taxes and the tax payable on profits arising in those jurisdictions is unclear, the group seeks to make reasonable estimates to determine the tax charge arising. – Our taxation expertise: With the assistance of our own local and international tax specialists who have knowledge of the relevant indirect and direct tax regimes and experience in their application, analysing and challenging the assumptions used to determine the tax charge and provisioning; and benchmarking assumptions; and assessing correspondence with the relevant tax authorities including the status of tax authority audits and inquiries; and – Assessing transparency: Considering the adequacy of the group’s disclosures in respect of tax and uncertain tax positions. Our results: From the evidence obtained, we found the level of tax provisioning to be acceptable (2017: acceptable). 193 Johnson Matthey / Annual Report and Accounts 2018 Accounts Independent auditor’s report to the members of Johnson Matthey Plc 2. Key audit matters: our assessment of risks of material misstatement (continued) Group Subjective estimate: Our procedures included: The risk Our response Product claims and uncertainties Provision of £18 million included within other provisions of £27 million. In addition the group has a contingent liability for potential further product claims for which the outcome of any discussions is uncertain, and where the group is unable to make a reliable estimate of any possible financial consequence at this stage. Refer to page 106 (Audit Committee Report), page 148 (accounting policy) and pages 181-182 (financial disclosures). The group’s products are complex and produced to exacting standards. Product quality issues may be identified subsequent to delivery to and installation by customers. Accordingly at any point in time the group may be exposed to product liability issues including claims for damages or compensation. The group holds provisions for the potential costs associated with these risks. The assumptions underpinning these provisions are inherently uncertain. Dispute outcome: Where the group is unable to make a reliable estimate of potential exposures it discloses these risks as a contingent liability. Should the group be unable to successfully defend its position, these risks could give rise to a future liability. – Enquiry of lawyers: Inspection of correspondence with internal and external counsel and formal confirmations from counsel of open cases; – Test of detail: In relation to quantified issues, considering the status of discussions with customers, then testing and challenging the basis of the group’s calculations including the rectification or remediation cost estimates; and – Assessing transparency: Considering the adequacy of the group’s disclosures in respect of the loss on significant legal proceedings and contingent liabilities. Our results: From the evidence obtained, we found the level of provisioning and disclosure in respect of product claims to be acceptable. Group Forecast-based valuation: Our procedures included: The group has significant intangible assets and goodwill arising from the acquisition of businesses and investments in new products and technologies. Some investments and recent acquisitions are still at an early stage of commercial development and as such, carry a greater risk that they will not be commercially viable. Recoverability of these assets is based on forecasting and discounting future cash flows, which are inherently judgemental. Carrying value of goodwill and other intangible assets Goodwill of £574 million (2017: £607 million) and other intangible assets of £295 million (2017: £288 million). In the current year there was a pre-tax impairment charge of £11 million against the carrying value of the Water Technologies CGU reflecting lower growth rate assumptions for these businesses. Refer to page 106 (Audit Committee Report), page 147 (accounting policy) and page 169-170 (financial disclosures). – Assessing methodology: Obtaining the discounted cash flow models and assessing the principles and integrity of each model; – Benchmarking assumptions: Challenging the group’s valuation assumptions for its cash flow projections such as discount rates and cost inflation, with reference to internally and externally derived sources; – Our valuations expertise: Assessing the inputs based on our own insights and experience and challenging the appropriateness of the discount rate with the assistance of our own valuation specialists; – Sensitivity analysis: Performing breakeven analysis on the assumptions noted above; – Historical comparisons: Assessing the group’s historical forecasting accuracy by comparing the group’s prior year forecasts with actuals; and – Assessing transparency: Considering the adequacy of the group’s disclosures in respect of impairment testing and whether disclosures about the sensitivity of the outcome of the impairment assessment to changes in key assumptions properly reflected the risks inherent in the valuations. Our results: As a result of our testing we found the resulting estimate of the recoverable amount of goodwill and other intangible assets to be acceptable (2017: acceptable). We continue to perform procedures over post-employment benefits. However, following our review of our previous year’s audit findings, we have not assessed this as one of the most significant risks in our current year audit and, therefore, it is not separately identified in our report for 2018. 194 Independent auditor’s report to the members of Johnson Matthey Plc 3. Our application of materiality and an overview of the scope of our audit Materiality for the group accounts as a whole was set at £23.0 million (2017: £22.0 million), determined with reference to a benchmark of group profit before tax, excluding the loss on disposal of businesses, the loss on significant legal proceedings and major impairment and restructuring charges as disclosed on the face of the Consolidated Income Statement, of which it represents 5% (2017: 5%). We agreed to report to the Audit Committee any corrected or uncorrected identified profit misstatements exceeding £0.5 million (2017: £0.5 million), in addition to other identified misstatements warranting reporting on qualitative grounds. Materiality for the parent company financial statements as a whole was set at £20 million (2017: £20 million) determined with reference to a benchmark of company total assets, of which it represents 0.4% (2017: 0.4%). In establishing the overall approach to our audit, we considered the decentralised nature of the group’s operations, the risk profile of countries where the group operates, our historical audit findings and changes taking place within the business. We also considered the financial significance and risks associated with each business together with any local statutory audit requirements. Of the group’s 55 (2017: 57) reporting components, we subjected 44 (2017: 44) to audits for group reporting purposes, 8 (2017: 10) to specified risk focused audit procedures over revenue, inventory and receivables and 3 (2017: 3) to specified risk focused audit procedures over inventory, including in China, Germany, India, Macedonia, South Africa, the UK and the US. The components for which we performed specified risk-focused procedures were not individually financially significant enough to require an audit for group reporting purposes, but did present specific individual risks that needed to be addressed. The components within the scope of our work accounted for 89% of group revenue, 83% of group profit before tax and 82% of group total assets. For the remaining components, we performed analysis at an aggregated group level to re-examine our assessment that there were no significant risks of material misstatement within these, including through examining reports from local auditors on the results of their statutory audit work. In total these statutory audits comprise 6% of group revenue, 7% of group profit before tax and 10% of group total assets. The group audit team instructed component auditors as to the significant areas to be covered, including the relevant risks detailed above and the information to be reported back. The group team approved component materiality, which ranged from £0.1 million to £10.5 million (2017: £0.1 million to £10.5 million), having regard to the mix of size and risk profile of the group across the components. The work on 43 of the 55 components was performed by the component auditors and the rest by the group team. The group audit team visited six component locations (2017: six) in China, Macedonia, South Africa, the Netherlands, the UK and the US to assess the audit risk and strategy. Telephone conference meetings were also held with these component auditors and all others that were not physically visited. At these visits and meetings, the findings reported to the group audit team were discussed in more detail, and any further work required by the group audit team was then performed by the component auditor. Adjusted profit before tax Group Materiality £467 million £23 million (2017: £462 million) (2017: £22 million) £23.0 million Whole financial statements materiality (2017: £22 million) £10.5 million Range of materiality at 55 components (£0.1 million to £10.5 million) (2017: £0.1 million to £10.5 million) Adjusted profit before tax Group materiality £0.5 million Misstatements reported to the Audit Committee (2017: £0.5 million) Group revenue Group profit before tax 13 14 11 10 89% (2017: 90%) 17 16 10 8 83% (2017: 84%) 76 76 76 73 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Group total assets 18 16 3 8 82% (2017: 84%) 76 79 Full scope for group audit purposes 2018 Specified risk-focused audit procedures 2018 Full scope for group audit purposes 2017 Specified risk-focused audit procedures 2017 Residual components 195 Johnson Matthey / Annual Report and Accounts 2018 Accounts Independent auditor’s report to the members of Johnson Matthey Plc 4. We have nothing to report on going concern We are required to report to you if: – we have anything material to add or draw attention to in relation to the directors’ statement on page 135 on the use of the going concern basis of accounting with no material uncertainties that may cast significant doubt over the group’s and company’s use of that basis for a period of at least 12 months from the date of approval of the financial statements; or – the related statement under the Listing Rules set out on page 74 is materially inconsistent with our audit knowledge. We have nothing to report in these respects. 5. We have nothing to report on the other information in the annual report The directors are responsible for the other information presented in the Annual Report together with the financial statements. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except as explicitly stated below, any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing so, consider whether, based on our financial statements audit work, the information therein is materially misstated or inconsistent with the financial statements or our audit knowledge. Based solely on that work we have not identified material misstatements in the other information. Strategic Report and Directors’ Report Based solely on our work on the other information: – – – we have not identified material misstatements in the Strategic Report and the Directors’ Report; in our opinion the information given in those reports for the financial year is consistent with the financial statements; and in our opinion those reports have been prepared in accordance with the Companies Act 2006. Directors’ Remuneration Report The part of the Directors’ Remuneration Report to be audited extends from the Single Figure Table of Remuneration on page 123 to, and including, the Statement of directors’ shareholding on page 126; and in addition comprises the Explanation of figures on page 124, the Variable pay – additional disclosures, including bases of calculation and outcomes on pages 124 to 125, LTIP outcomes on page 126 and the Pension entitlements on page 126. In our opinion the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006. 196 Disclosures of principal risks and longer term viability Based on the knowledge we acquired during our financial statements audit, we have nothing material to add or draw attention to in relation to: – – – the directors’ confirmation within the viability statement that they have carried out a robust assessment of the principal risks facing the group, including those that would threaten its business model, future performance, solvency and liquidity; the principal risks disclosures describing these risks and explaining how they are being managed and mitigated; and the directors’ explanation in the viability statement of how they have assessed the prospects of the group, over what period they have done so and why they considered that period to be appropriate, and their statement as to whether they have a reasonable expectation that the group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. Under the Listing Rules we are required to review the viability statement. We have nothing to report in this respect. Corporate governance disclosures We are required to report to you if: – – – we have identified material inconsistencies between the knowledge we acquired during our financial statements audit and the directors’ statement that they consider that the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the group’s position and performance, business model and strategy; or the section of the annual report describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee; or a corporate governance statement has not been prepared by the company. We are required to report to you if the Corporate Governance Statement does not properly disclose a departure from the 11 provisions of the UK Corporate Governance Code specified by the Listing Rules for our review. We have nothing to report in these respects. Based solely on our work on the other information described above: – – with respect to the Corporate Governance Statement disclosures about internal control and risk management systems in relation to financial reporting processes and about share capital structures: – – we have not identified material misstatements therein; and the information therein is consistent with the financial statements; and in our opinion, the Corporate Governance Statement has been prepared in accordance with relevant rules of the Disclosure Guidance and Transparency Rules of the Financial Conduct Authority. Independent auditor’s report to the members of Johnson Matthey Plc In addition we considered the impact of laws and regulations in the specific areas of health and safety and anti-bribery recognising the nature of the group’s activities that may inadvertently affect the financial statements. With the exception of any known or possible non-compliance, and as required by auditing standards, our work in respect of these was limited to enquiry of the directors and other management and inspection of regulatory and legal correspondence. We considered the effect of any known or possible non-compliance in these areas as part of our procedures on the related financial statement items. We communicated identified laws and regulations throughout our team and remained alert to any indications of non-compliance throughout the audit. This included communication from the group to component audit teams of relevant laws and regulations identified at group level, with a request to report on any indications of potential existence of non-compliance with relevant laws and regulations (irregularities) in these areas, or other areas directly identified by the component team. As with any audit, there remained a higher risk of non-detection of irregularities, as these may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal controls. 8. The purpose of our audit work and to whom we owe our responsibilities This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members, as a body, for our audit work, for this report, or for the opinions we have formed. t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Stephen Oxley (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants 15 Canada Square London, E14 5GL 30th May 2018 6. We have nothing to report on the other matters on which we are required to report by exception Under the Companies Act 2006, we are required to report to you if, in our opinion: – – – – parent company, or returns adequate for our audit have not been received from branches not visited by us; or the parent company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or certain disclosures of directors’ remuneration specified by law are not made; or we have not received all the information and explanations we require for our audit. We have nothing to report in these respects. 7. Respective responsibilities Directors’ responsibilities the directors are responsible for: the preparation of the financial statements including being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; assessing the group and parent company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and using the going concern basis of accounting unless they either intend to liquidate the group or the parent company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or other irregularities (see below), or error, and to issue our opinion in an auditor’s report. Reasonable assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud, other irregularities or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/auditorsresponsibilities. Irregularities – ability to detect We identified areas of law and regulation that could reasonably be expected to have a material effect on the financial statements from our experience, through discussion with the directors and other management (as required by auditing standards), and from inspection of the group’s regulatory and legal correspondence. We had regard to laws and regulations in areas that directly affect the financial statements including financial reporting (including related company legislation) and taxation legislation. We considered the extent of compliance with those laws and regulations as part of our procedures on the related financial statement items. 197 Contents 200 Basis of reporting – non-financial data 203 Verification of non-financial data 204 GRI Standard Content Index 206 Shareholder information 208 Glossary of terms 209 Index 210 Financial calendar 2018/19 IBC Company details Other Information 198 Johnson Matthey / Annual Report and Accounts 2018 Our basis of non-financial reporting and information for shareholders. Also includes a summary of our Global Reporting Initiative disclosures, a glossary and an index. t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O 199 Johnson Matthey / Annual Report and Accounts 2018 Other Information Basis of reporting – non-financial data This report has been prepared in accordance with the GRI Standards: Core option. It covers the period from 1st April 2017 to 31st March 2018. Our last annual report was published in June 2017. Johnson Matthey compiles, assesses and discloses non-financial information for a number of reasons: • • • • • • where there is a legal obligation (UK Companies Act, mandatory carbon reporting, UK Modern Slavery Act); to help drive improved business performance; to demonstrate to institutional investors that Johnson Matthey’s business approach is responsible, ethical, sustainable and offers a sound value proposition; to demonstrate to our customers that Johnson Matthey’s business conduct meets or exceeds all of the required standards and expectations; to demonstrate to other stakeholders that Johnson Matthey conducts its business in an ethical, responsible and sustainable manner; and to benchmark our corporate performance against peer group companies. This report has been developed to incorporate the group’s significant economic, environmental and social impacts and is set within the context of the United Nations Brundtland definition of sustainability (1987) and our own sustainable business goals to 2025. The principles of inclusivity, materiality and responsiveness help to shape the structure of the report and in setting priorities for reporting. The report also explains how we are continuing to build sustainability into our business planning and decision making processes and how, through our governance processes, we manage social, environmental and ethical matters across the group. Performance data covers all sites which are under the financial control of the group, including all manufacturing, research and warehousing operations of the parent company and its subsidiaries. For the purposes of reporting, separate business units resident at the same location are counted as separate sites. Data from 70 sites was included in this report, 57 of which are manufacturing sites. Data from new facilities is included from the point at which the facility becomes owned by the company and operational. All non-financial performance data is reported on a financial year basis unless otherwise stated. Baseline year data has been restated, where necessary, to account for changes in best practice methodologies for reporting. The processes in place to internally and externally verify the reported non-financial data are described on page 203. Certain employee data is included in the financial accounts and is also subject to separate external audit. Calculation methodologies for KPIs relating to six sustainable business goals to 2025 Definition of employees and contractors A standard definition of employees and contractors has been implemented in 2017/18 across the group for all reporting of people-related goals: Employees Agency workers Outsourced function Specialist service Projects Continuously site based. Continuously site based. Continuously or regularly site based. One-off project or regularly based on site. One-off project. Contractors Contract signed directly between JM and individual and paid regular salary and other benefits by JM. Person employed by an agency performing tasks that would be expected to be undertaken by a JM employee. Facility management – catering, cleaning or grounds maintenance; IT and occupational health if outsourced. Work is directly supervised by JM. Work is directly supervised by JM. Work is supervised by contractor and monitored by JM. Reported as: employees Reported as: temporary worker Reported as: contractor Smallscale building or ground works; repairing specialist plant or equipment; low level maintenance; small scale repairs to offices or other buildings; stack monitoring. Work is supervised by contractor and monitored by JM. Reported as: contractor Construction work, capital project work, major maintenance activities. Work is supervised by contractor and monitored by JM. Reported as: contractor 200 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Health and safety 1 Goal 1: Health and safety: Aspire to zero harm Lost time injury and illness rate (LTIIR) is defined as the number of lost workday cases per 200,000 hours worked in a rolling year. A lost workday case is defined as an incident where an employee or contractor is unable to work for more than one scheduled working day as a result of a work-related injury or illness. Total recordable injury and illness rate (TRIIR) is defined as the number of recordable cases per 200,000 hours worked in a rolling year. A recordable case (as defined under the US Occupational Safety and Health Administration (OSHA) Regulations) is defined as a work related accident or illness that results in one or more of the following: absence of more than one day; medical treatment beyond first aid; death; loss of consciousness and restricted work or transfer to another job. The OSHA severity rate is a calculation that gives a company an average of the number of lost days per recordable incident. OSHA severity rate = ([total lost days in the year x 200,000] ÷ total hours worked during the year). Occupational illness incidence rate in the year = (number of new occupational illnesses diagnosed in the year) x 1,000 ÷ (average number of employees in the year). 200,000 hours represents 100 full time equivalent workers working 40 hours per week for 50 weeks per year. LTIIR by event type definitions Slip, trip or fall: • • • • A slip injury occurs where there is too little friction or traction between an individual’s footwear and the walking surface. A trip injury occurs when the foot hits an object causing a person to lose balance. A fall injury is recorded when someone falls from an elevated surface (e.g. roof), object or temporary work platform (e.g. ladder) or into an opening in a floor or a hole in the ground. Struck against is an injury occurring as a result of coming into contact with a surface or object in which the action was initiated by the person (e.g. when a screwdriver slips). Process safety rate definition Johnson Matthey has adopted International Council of Chemical Association’s (ICCA) process safety metric. The metric first requires a determination that the event is to be included in the process safety event severity rate (PSESR) calculation and then determining the severity using the severity table. In determining this rate, 1 point is assigned for each Level 4 incident attribute, 3 points for each Level 3 attribute, 9 points for each Level 2 attribute, and 27 points for each Level 1 attribute. The PSESR is recorded as a 12 month rolling number. Total worker hours include employees, temporary employees and contractors. Process safety performance indicator (PSPI) 2 = Process safety event severity rate (PSESR) Level 1 to 4 (Total severity score for all events x 200,000) = (Total worker hours) Theoretically, a process safety event could be assigned a minimum of 1 point (i.e. the incident meets the attributes of a Level 4 incident in only one category) or a maximum of 135 points (i.e. the incident meets the attributes of a Level 1 incident in each of the five categories). Our people 2 Goal 2: Our people: Employee engagement and enablement Johnson Matthey invites all its permanent and fixed term contract employees to voluntarily complete its employee survey once every two years to determine the wellbeing of its staff using a standard methodology defined and audited by the Korn Ferry Hay Group. All responses are submitted confidentially to a third party and results are independently analysed and reported back to JM management. Through the survey we measure attributes on a scale of 0 to 100%: • • employee engagement = how committed and motivated employees are to give their best to Johnson Matthey; employee enablement = how well employees’ jobs and work environment support peak performance in Johnson Matthey. Diversity and Inclusion (D&I) plan progress A detailed roadmap of activities to be completed on JM’s journey to D&I excellence out to 2025 has been approved. A measurement tracker has been deployed at both the site and group level to ensure a consistent methodology to record progress on this journey. Progress is tracked against the D&I plan using Johnson Matthey’s in-house methodology. Low carbon operations 3 Goal 3: Low carbon operations: Operational carbon footprint reduction Our operational carbon footprint, reported in tonnes of carbon dioxide (CO2) equivalent, includes Scope 1 and Scope 2 emissions. We report Scope 1 greenhouse gas (GHG) emissions from processes and energy use and convert the total group energy use to tonnes CO2 equivalent using conversion factors for each emissions source as published by Defra in July 2017. For the first time in 2017/18 we have included nitrous oxide (N2O), refrigerant and methane process emissions to air in our Scope 1 calculations. In this report we have restated our 2016/17 emissions using this new methodology. Our Scope 2 emissions are calculated using the ‘dual reporting’ methodology outlined in the GHG Protocol corporate standard 2015 revision, www.ghgprotocol.org. For the location based method of Scope 2 accounting, for all facilities outside of the US, we use national carbon intensity factors related to the consumption of grid electricity in 2015 made available in the 2017 edition of the world CO2 emissions database of the International Energy Agency. They were purchased under licence in February 2018 for sole use in company reporting. For US facilities we use regional carbon factors published by the Environmental Protection Agency in January 2017, eGRID data 2016. For the market based method of Scope 2 accounting, we have applied the hierarchy of sources for determination of appropriate carbon intensity factors, as outlined in Table 6.3 on page 48 of the GHG Protocol 2015 edition guidance. We have successfully obtained carbon intensity factors directly from our grid electricity suppliers in the EU, USA and Australia. However, it has not been possible to obtain this from suppliers in China, India, South Africa and non-OECD Europe. Under the UK mandatory GHG reporting requirements, we are required to ensure that the quantification of GHG emissions and data reliability are sufficient to meet our obligation under the UK Companies Act 2006 (Strategic and Directors’ Reports) Regulations 2013. The data we have presented for our carbon footprint in this report contains all Johnson Matthey’s material GHG emissions and therefore meets the requirements of this legislation. We have included a mandatory GHG report in the table on page 45. 201 Community engagement 6 Goal 6: Community engagement: Employee volunteering This KPI is an annual record of the total number of employee volunteering days undertaken by permanent employees within their local communities, in accordance with JM’s global Employee Volunteering Policy. The volunteering is recorded in periods of half days. Shorter periods of volunteering are not included in the data. The recorded volunteering days may have been completed either on company time or on paid company leave. Volunteering done on unpaid leave, or outside normal working hours, is not included in the reported numbers. The length of a standard day varies slightly from location to location, between seven and eight hours. In determining the in-kind contribution of employees’ volunteering we take the number of volunteering days reported in the year and multiply it by the group average cost of one day of employee time. Average cost of one day of total employee benefits employee time expense in year = Number of working days in year Number of working days in a year is five days per week for 50 weeks per year. Johnson Matthey / Annual Report and Accounts 2018 Other Information In 2018 we introduced a new methodology for normalising our carbon emissions based on production output. The denominator is defined as ‘tonnes of manufactured product sold externally’. Only sold products manufactured on JM premises are included. For sales of precious metal containing solutions from our Pgm Services only the weight of the precious metal is included in the calculation. For all other products, the total shipped weight of product is included. Carbon intensity of JM operations = total JM group Scope 1 + Scope 2 GHG emissions Tonnes of manufactured products sold externally by JM Responsible sourcing 4 Goal 4: Responsible sourcing: Sustainable supplier assessment and compliance We will ensure supplier awareness, understanding and acceptance of the JM Supplier Code of Conduct. We will seek evidence of adherence to the mandatory requirements of the JM Supplier Code of Conduct – demonstrated by assessment and, where necessary, audit of suppliers. These will be quantified on an annual basis. A strategic supplier is defined using JM in-house criteria. Sustainable products 5 Goal 5: Sustainable products: Sustainability impacts of our products (a) We will measure the correlation and classification of annualised sales of Johnson Matthey’s products, services and technologies against the 169 specific targets of the 17 United Nations Sustainable Development Goals (UN SDGs). (b) We have set quantitive targets that focus on the UN SDGs that are most material to our stakeholders or most relevant to our business impact. We will measure our progress towards these targets annually. Both (a) and (b) are calculated using Johnson Matthey’s in-house methodology. 202 Verification of non-financial data The board reviews corporate social responsibility (CSR) and broader sustainability issues as part of its risk management process. All data is reviewed by internal sustainability experts and at appropriate levels of management up to and including the Group Management Committee. Health and safety data is reviewed by group health and safety experts and as part of a formal group environment, health and safety (EHS) internal audit programme. Certain human resources data forms part of Johnson Matthey’s accounts which are subject to limited audit. “Johnson Matthey appointed Carbon Smart to provide third party assurance of the company’s global reported Scope 1, 2 and 3 greenhouse gas (GHG) emissions, total energy, total waste (solid and hazardous), water consumption and specified health and safety indicators for the reporting period 2017/18. Carbon Smart carried out a limited assurance engagement in accordance with the requirements of the ISAE 3000 (revised) standard including the specificities of ISAE 3410 for assuring GHG emissions data, and key health and safety definitions from the OHSA Regulations. Johnson Matthey also uses external specialists to review specific Johnson Matthey’s GHG inventory and quantification of sustainability issues. Over the past year this has included external audits or reviews of people management systems, health and safety (OHSAS 18001) and environmental management systems (such as ISO 14001, ISO 50001 and RC 4001). In 2018 we commissioned Carbon Smart Ltd to provide external assurance and commentary on the company’s sustainability reporting of our key performance indicators and data pertaining to our 2017/18 environment, health and safety performance. Carbon Smart have subsequently provided the following summary assurance report: environmental performance indicators has been completed in accordance with the WRI / WBCSD GHG Corporate Accounting and Reporting Standard (revised) best practice reporting principles of relevance, completeness, consistency, transparency, accuracy and the subject matter adheres to the ISAE 3410 principles related to both the quantification of emissions and presentation of disclosures. The objective of the engagement was to ensure that the assured Johnson Matthey values in scope were free of material misstatements to an acceptable, agreed materiality threshold and provide the relevant, material information required by stakeholders for the purpose of decision making. Based on the assurance procedures followed by Carbon Smart on the described scope of Johnson Matthey’s data across the 2017/18 reporting period, we have found no material evidence to suggest that the data is not: • • prepared in accordance with the WRI / WBCSD GHG Corporate Accounting and Reporting Standard (revised) and OHSA Regulations as relevant; prepared in accordance with Johnson Matthey’s relevant internal health and safety and environmental data collection guidelines; • materially correct and a fair representation of the company’s GHG emissions, specified environmental impacts and health and safety incident rates; • worthy of the award of limited assurance. Carbon Smart are independent of Johnson Matthey and have no business reason for bias in the preparation of this statement; we have complied with the ethical requirements relevant for the performance of the ISAE 3000 engagement. This conclusion should be read with Carbon Smart’s full assurance statement available at matthey.com/non-fin-assurance. t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O 203 Johnson Matthey / Annual Report and Accounts 2018 Other Information GRI Standard Content Index General disclosures in accordance with GR1 102 Disclosure GRI code Organisational profile Name of the organisation 102-1 Activities, brands, products and services 102-2 Location of headquarters 102-3 Location of operations 102-4 Ownership and legal form 102-5 Markets served 102-6 Scale of the organisation 102-7 Information on employees and other workers 102-8 Supply chain 102-9 Significant changes to the organisation and its supply chain 102-10 Precautionary principle or approach 102-11 External initiatives 102-12 Membership of associations 102-13 Strategy Statement from senior decision maker 102-14 Key impacts, risks and opportunities 102-15 Page Front cover 4-5; 15-19; 62-63 Inner back cover 4 131-134 5; 15; 33-35 4-5 48-59 40-42 40-42 43; 47 20-21 20; 55 9-12 14-15; 76-81 Ethics and integrity Values, principles, standards and norms of behaviour 102-16 Mechanisms for advice and concerns about ethics 102-17 14-15; 16-17; 20-21; 50-53; 53-55; 58 54 Governance Governance structure 102-18 Delegating authority 102-19 Executive level responsibility for economic, environmental and social topics 102-20 Consulting stakeholders on economic, environmental and social topics 102-21 Composition of the highest governance body and its committees 102-22 Chair of the highest governance body 102-23 Nominating and selecting the highest governance body 102-24 Conflicts of interest 102-25 Role of highest governance body in setting purpose, values and strategy 102-26 Collective knowledge of highest governance body 102-27 Evaluating the highest governance body’s performance 102-28 Identifying and managing economic, environmental and social impacts 102-29 Effectiveness of risk management processes 102-30 Review of economic, environmental and social topics 102-31 Highest governance body’s role in sustainability reporting 102-32 Communicating critical concerns 102-33 Nature and total number of critical concerns 102-34 Remuneration policies 102-35 Process for determining remuneration 102-36 Stakeholders’ involvement in remuneration 102-37 Annual total compensation ratio 102-38 Percentage increase in annual total compensation ratio 102-39 Stakeholder engagement List of stakeholder groups 102-40 Collective bargaining agreements 102-41 Identifying and selecting stakeholders 102-42 Approach to stakeholder engagement 102-43 Key topics and concerns raised 102-44 Reporting practice Entities included in the consolidated financial statements 102-45 Defining report content and topic boundaries 102-46 List of material topics 102-47 Restatements of information 102-48 Changes in reporting 102-49 Reporting period 102-50 Date of most recent report 102-51 Reporting cycle 102-52 Contact point for questions regarding the report 102-53 Claims of reporting in accordance with the GRI Standards 102-54 GRI content index 102-55 External assurance 102-56 Go online for our full GRI Index: matthey.com/gri-2017-18 204 76; 88-89 88-89 90-91 20-21 88-89 86; 88 92-94; 99-102 94 90-91; 95 84-85; 92 94-96 16-17; 90-91 95-97 90-91 96 88-89 59 113-118 52; 111-112 111 Information unavailable Information unavailable 20-21 59 20-21 20-21; 55 21 187-190 200-202 16-17; 21 ‘Performance highlights’ 22-24 1 200 200 Inner back cover 200 204-205 203 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Specific GRI disclosures for Johnson Matthey’s material topics GRI code Page Sustainability leadership GRI-103 Management approach 2016 103 7; 10 GRI-102 General disclosures 2016 102-14; 102-10 8; 11; 16-17; 78-81 Financial sustainability GRI-103 Management approach 2016 103 70-75 GRI-201 Economic performance 2016 201-3 17; 22; 60-63 Health and safety GRI-103 Management approach 2016 103 49 GRI-403 Occupational health and safety 2016 403-1; 403-2; 403-4 17; 50-51 Greenhouse gas emissions GRI-103 Management approach 2016 103 39-40 GRI-302 Energy 2016 302-1; 302-3; 302-4 44-45 GRI-305 Emissions 2016 305-1; 305-2; 305-3; 305-4 17; 23; 44-45 Air quality GRI-103 Management approach 2016 103 46 Climate change risk GRI-103 Management approach 2016 103 40 GRI-201 Economic performance 2016 201-2 44-45 Modern slavery and child labour GRI-408 Child labour 2016 408-1 40-42 GRI-409 Forced or compulsory labour 2016 409-1 40-42 Products lifecycle management GRI-103 Management approach 2016 103 42-43 GRI-416 Customer health and safety 2016 416-1; 416-2 43 GRI-417 Marketing and labeling 2016 417-1; 417-2 43 GRI-301 Materials 2016 301-3 43 GRI-306 Effluents and waste 2016 306-2; 306-3; 306-4 46 Water use GRI-103 Management approach 2016 103 47 GRI-303 Water 2016 303-1; 303-3 47 GRI-306 Effluents and waste 2016 306-1 47 Ethical business practices and compliance GRI-103 Management approach 2016 103 16-17; 39-43; 54 GRI-205 Anti-corruption 2016 205-1; 205-2; 205-3 90-91 GRI-206 Anti-competitive behaviour 2016 206-1 59 GRI-415 Public policy 2016 415-1 133 GRI-419 Socioeconomic compliance 2016 419-1 59 Resource scarcity GRI-103 Management approach 2016 103 21; 79 GRI-301 Materials 2016 301-2 46 Employee recruitment and retention GRI-103 Management approach 2016 103 52 GRI-102 General disclosures 2016 102-8 17; 58-59 GRI-401 Employment 2016 401-1 58 GRI-404 Training and education 2016 404-2; 404-3 59 Responsible sourcing GRI-103 Management approach 2016 103 40-41 GRI-308 Supplier environmental assessment 2016 308-1; 308-2 17; 41 GRI-414 Supplier social assessment 2016 414-1; 414-2 17; 41 GRI-407 Freedom of association and collective bargaining 2016 407-1 17; 41 Diversity and inclusion GRI-103 Management approach 2016 103 53-54 GRI-405 Diversity and equal opportunity 2016 405-1; 405-2 17; 53-54 GRI-406 Non-discrimination 2016 406-1 59 Community engagement GRI-103 Management approach 2016 103 54-55 GRI-413 Local communities 2016 413-1 17; 54-55 205 Johnson Matthey / Annual Report and Accounts 2018 Other Information Shareholder information Johnson Matthey share price as at 31st March 2013 2014 2015 2016 2017 2018 2,300p 3,271p 3,386p 2,744p 3,080p 3,042p Analysis of ordinary shareholders as at 28th April 2018 By location UK and Eire USA and Canada Continental Europe Asia Pacific Rest of World Unidentified Total By category Investment and unit trusts Pension funds Individuals Custodians Insurance companies Treasury shares and employee share schemes Sovereign wealth funds Charities Other Total By size of holding 1 – 1,000 1,001 – 10,000 10,001 – 100,000 100,001 – 1,000,000 1,000,001 – 5,000,000 5,000,001 and over Total Number of shares Percentage 105,265,610 42,158,113 33,911,797 4,232,847 899,111 12,473,128 52.9 21.2 17.0 2.1 0.5 6.3 198,940,606 100.0 Number of shares Percentage 88,727,792 26,871,302 12,162,271 7,401,420 6,487,180 7,489,328 8,953,388 1,128,507 39,719,418 44.6 13.5 6.1 3.7 3.3 3.7 4.5 0.6 20.0 198,940,606 100.0 Number of holdings Percentage Number of shares Percentage 5,337 73.5 1,316 18.1 388 5.4 184 2.5 28 0.4 8 0.1 1,620,211 3,642,360 13,362,352 54,257,942 55,994,152 70,063,589 0.8 1.8 6.7 27.3 28.2 35.2 7,261 100.0 198,940,606 100.0 Johnson Matthey share price five year performance versus FTSE 100 Rebased to 100 at 1st April 2013 By location 200 150 100 50 March 2013 March 2014 March 2015 March 2016 March 2017 March 2018 Johnson Matthey FTSE 100 206 Rest of World 0.5% Unidentified 6.3% Asia Pacific 2.1% Continental Europe 17.0% USA and Canada 21.2% UK and Eire 52.9% Share dealing services A telephone and internet dealing service for UK shareholders is provided by the company’s registrars, Equiniti. For further information, including Equiniti’s terms and conditions and details of their fees, log on to www.shareview.co.uk/dealing or call 03456 037 037* (in the UK); +44 121 415 7560 (outside the UK). Dividend – pence per share 2014 2015 2016 2017 2018 Interim 17.0 18.5 19.5 20.5 21.75 Final 45.5 49.5 52.0 54.5 58.25 Total ordinary 62.5 68.0 71.5 75.0 80.0 Special – – 150.0 – – Johnson Matthey has a progressive dividend. The board is proposing a final dividend for 2017/18 of 58.25 pence to take the total for the year to 80.0 pence, which is 7% up reflecting continued confidence in Johnson Matthey’s prospects. Dividend payments and DRIP Dividends can be paid directly into shareholders’ bank or building society accounts. Shareholders wishing to take advantage of this facility should contact the company’s registrars, Equiniti, or complete the dividend mandate form attached to their dividend cheque. A Dividend Reinvestment Plan (DRIP) is also available which allows shareholders to purchase additional shares in the company. Further information can be obtained from Equiniti, Aspect House, Spencer Road, Lancing, West Sussex BN99 6DA. Telephone 0371 384 2268* (in the UK); +44 121 415 7047 (outside the UK). They can also be contacted via their website at www.shareview.co.uk. American Depositary Receipts Johnson Matthey has a sponsored Level 1 American Depositary Receipt (ADR) programme which BNY Mellon administers and for which it acts as Depositary. Each ADR represents two Johnson Matthey ordinary shares. The ADRs trade on the US over-the-counter (OTC) market under the symbol JMPLY. When dividends are paid to shareholders, the Depositary converts such dividends into US dollars, net of fees and expenses, and distributes the net amount to ADR holders. For enquiries, BNY Mellon can be contacted on 1-888-BNY-ADRS (1-888-269-2377) toll free if you are calling from within the US. Alternatively, they can be contacted by e-mail at shrrelations@cpushareownerservices.com or via their website at www.adrbnymellon.com. Share price and group information Information on the company’s current share price together with copies of the group’s annual and half-yearly reports and major presentations to analysts and institutional shareholders are available on the Johnson Matthey website: www.matthey.com. The website’s Investors section contains extensive information and a number of tools which will be of assistance to investors including historic share price information downloads and a share price charting facility. For capital gains tax purposes the mid-market price of the company’s ordinary shares on 31st March 1982 was 253 pence. Enquiries Shareholders who wish to contact Johnson Matthey Plc on any matter relating to their shareholding are invited to contact the company’s registrars, Equiniti, Aspect House, Spencer Road, Lancing, West Sussex BN99 6DA. Telephone 0371 384 2344* (in the UK); +44 121 415 7047 (outside the UK) or via their website: www.shareview.co.uk. Shareholders may also telephone the company on +44 20 7269 8400 or write to: The Company Secretary Johnson Matthey Plc 5th Floor 25 Farringdon Street London, UK EC4A 4AB For other enquiries shareholders may contact the Investor Relations team at the above address and telephone number, by emailing jmpr@matthey.com, or via www.matthey.com * Lines are open 8.30am to 5.30pm Monday to Friday excluding public holidays in England and Wales. t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O By category By size of holding Other 20.0% Investment and unit trusts 44.6% 1 – 1,000 0.8% 1,001 – 10,000 1.8% 10,001 – 100,000 6.7% 5,000,001 and over 35.2% 100,001 – 1,000,000 27.3% Charities 0.6% Sovereign wealth funds 4.5% Treasury shares and employee share schemes 3.7% Insurance companies 3.3% Custodians 3.7% Individuals 6.1% Pension funds 13.5% 1,000,001 – 5,000,000 28.2% 207 Johnson Matthey / Annual Report and Accounts 2018 Other Information Glossary of terms 2006 Act The Companies Act 2006 ADHD Attention Deficit Hyperactivity Disorder ADR American Depositary Receipt AGM Annual general meeting APB Auditing Practices Board API Active pharmaceutical ingredient CAGR Compound annual growth rate Capital expenditure Capital expenditure divided by depreciation to depreciation Depreciation is the depreciation charge of ratio property, plant and equipment plus the amortisation charge of other intangible assets excluding amortisation of acquired intangibles CDP Carbon Disclosure Project CEFIC The Council of European Chemical Industry CGU Cash-generating unit ISO 14000 Internationally recognised series of standards which specify the requirements for an environmental management system ISO 50001 International standard giving guidelines on an energy management system JM Johnson Matthey JMEPS Johnson Matthey Employees Pension Scheme KfW KfW IPEX – Bank GmbH KPI Key performance indicator LDV Light duty vehicle LFP Lithium iron phosphate, a cathode material LTIIR Lost time injury and illness rate LTIP Long term incentive plan Margin Underlying operating profit divided by sales excluding precious metals CHP Combined heat and power NPI New product introduction CO Carbon monoxide CO2 Carbon dioxide COD Chemical oxygen demand CPI Consumer price index CSR Corporate social responsibility D&I Diversity and inclusion DRIP Dividend Reinvestment Plan EBITDA Earnings before interest, tax, depreciation and amortisation OHSAS 18001 Internationally recognised standard on occupational health and safety management OSHA Occupational Safety and Health Administration OTC Over-the-counter PARS Prior Approval Required Substances PBT Profit before tax Pgm Platinum group metal PILON Payments in lieu of notice PSP Performance share plan EHS Environment, health and safety PSRM Process safety risk management EIB European Investment Bank R&D Research and development eLNO™ JM’s next generation high energy density battery material RC 14001 An internationally recognised standard, an expansion of ISO 14001 EPS Earnings per share RDE Real world driving emissions standards ESG Environment, social and governance ESOT Employee Share Ownership Trust EU European Union FCA Financial Conduct Authority FRC Financial Reporting Council Free cash flow Net cash flow from operating activities, after net interest paid, net purchases of non-current assets and investments and dividends received from joint venture Fuel cell Technology which converts hydrogen or other fuels (methanol, natural gas) into clean electricity GAAP Generally accepted accounting principles GHG Greenhouse gas GMC Group Management Committee GRI Global Reporting Initiative GWP Global warming potential HDD Heavy duty diesel HR Human resources REACH Registration, Evaluation, Authorisation and Restriction of Chemicals Regulation EU chemical control legislation which came into force in June 2007 ROIC Return on invested capital RPI Retail price index RSP Restricted share plan SAICM Strategic Approach to International Chemicals Management Sales Sales excluding the value of precious metals SIC Standing Interpretations Committee SIP Share incentive plan SOx Oxides of sulphur SPV Special purpose vehicle SVHC Substance of very high concern The Code The UK Corporate Governance Code, issued by the FRC TRIIR Total recordable injury and illness rate HSRG Health Science Research Group TSCA Toxic Substances Control Act IAS International Accounting Standards UN United Nations IASB International Accounting Standards Board UN SDGs United Nations Sustainable Development Goals IFRIC International Financial Reporting Interpretations Committee IFRS International Financial Reporting Standards Incoterms® The International Chamber of Commerce’s International Commercial Terms ISA International Standards on Auditing VOC Volatile organic compound Working Non-precious metal related inventories, trade capital days and other receivables and trade and other payables (including any classified as held for sale) divided by sales excluding precious metals for the last three months multiplied by 90 days 208 t r o p e R c i g e t a r t S e c n a n r e v o G s t n u o c c A n o i t a m r o f n I r e h t O Index Page Page Accounting Policies 143-149 Accounts 137-197 Acquisitions (note 37) 186 Amortisation of acquired intangibles (note 7) 154 Audit Committee Report 103-110 Audit fees (note 10) 154 Auditor’s report 192-197 Balance sheets 139 Basis of reporting – non-financial data 200-202 Board of Directors 84-85 Borrowings (note 28) 174 Capital expenditure (and note 1) 73, 150-151 Capital structure and management (and note 31g) 73, 181 Cash and cash equivalents (note 28) 174 Cash flow hedges transferred to income statement (note 36) 185 Cash flow statements 140 Chairman’s letter 86 Chairman’s statement 6-7 Changes in equity 141-142 Chief Executive’s statement 9-12 Clean Air – performance review 64-65 Commitments (note 39) 186 Community investment and charitable programmes 54-55 Company details IBC Comprehensive income (and note 35) 138, 184 Contingent liabilities (note 32b) 182 Corporate Governance Code 87 Corporate Governance Report 87-98 Customers 32-37 Deferred taxation (notes 12, 33) 155-156, 183 Depreciation and amortisation (note 9) 154 Directors’ Report 131-134 Dividends (and note 14) 73, 156 Earnings per ordinary share (note 13) 156 Effect of exchange rate changes (note 3) 152-153 Efficient Natural Resources – performance review 66-67 Employee numbers and costs (note 15) 157 Employee share ownership trust (ESOT) (note 34) 184 Environmental performance 44-47 Finance costs / income (note 11) 155 Financial assets and liabilities (note 30) 175-176 Financial calendar 210 Financial review 70-73 Financial risk management (and note 31) 74-75, 176-181 Foreign exchange gains and losses (note 9) 154 Free cash flow 73, 191 Global Reporting Initiative (GRI) 204-205 Glossary of terms 208 Going concern 74 Goodwill (note 19) 169-170 Governance 82-135 Grants (note 9) 154 Group Management Committee 13 Group performance review 60-61 Guarantees (note 31a) 177 Health – performance review 67-68 Health and safety 49-51 How we create value 18-19 Human resources policies 52-54 Human rights policies 41-42 Income statement 138 Intangible assets (note 20) 170-171 Inventories (notes 9, 24) 154, 173 Investments in joint venture and associate (note 22) 172 Investments in available-for-sale assets (note 23) 172 JM in profile 4-5 Key management personnel (note 40) 187 Key performance indicators 22-24 Long-term contracts (note 27) 173 Loss on disposal of businesses (note 5) 153 Loss on significant legal proceedings (note 6) 153 Major impairment and restructuring charges (note 8) 154 Materiality assessment 21 Modern slavery and child labour 41-42 Movements in assets and liabilities arising from financing activities (note 29) 175 Net debt (note 28) 174 New Markets – performance review 68-69 Nomination Committee Report 99-102 Non-controlling interests 141 Operating leases (notes 9, 38, 39) 154, 186 Operating profit (note 9) 154 Operations 38-47 Other reserves (note 36) 185 Outlook 12 Payables (note 26) 173 People 48-59 Performance highlights Intro pages Post-employment benefits (and note 17) 72-73, 160-167 Precious metal operating leases (note 38) 186 Product lifecycle performance 43 Property, plant and equipment (note 18) 167-168 Provisions (note 32) 181-182 Receivables (note 25) 173 Reconciliation of non-GAAP measures to GAAP measures 191 Related parties (note 40) 186-187 Related undertakings (note 41) 187-190 Remuneration Report 111-130 Research and development (and note 9) 26-31, 154 Responsibility of directors 135 Responsible sourcing 40-41 Return on invested capital (and note 31g) 61, 73, 181 Revenue (note 2) 152 Risks and uncertainties 76-81 Sales excluding precious metals 191 Science 25-31 Sector performance review 62-69 Sector performance summary 62-63 Clean Air 64-65 Efficient Natural Resources 66-67 Health 67-68 New Markets 68-69 Segmental information (note 1) 150-152 Share-based payments (note 16) 158-160 Share capital (note 34) 184 Shareholder information 206-207 Sources of estimation uncertainty 148 Stakeholder communications 55 Stakeholders 20-21 Standards adopted in year 148 Standards not yet applied 149 Strategic progress and priorities 8 Strategic Report 2-81 Strategy 14-15 Structure 4-5 Subsidiaries (notes 21, 41) 171, 187-190 Sustainable business framework 16-17 Taxation (and notes 12, 33) 72, 155-156, 183 Treasury policies 74-75 Underlying profit reconciliations (note 4) 153 Values Intro pages, 53 Verification of non-financial data 203 Viability 74-75 Working capital 191 209 Johnson Matthey / Annual Report and Accounts 2018 Other Information Financial calendar 2018/19 2018 7th June Ex dividend date 8th June Final dividend record date 2019 (provisional) 5th February Payment of interim dividend 30th May Announcement of results for year ending 31st March 2019 26th July 127th Annual General Meeting (AGM) 7th August 6th June Ex dividend date 7th June Payment of final dividend subject to declaration at the AGM Final dividend record date 21st November Announcement of results for the six months ending 30th September 2018 17th July 128th AGM 6th August 29th November Ex dividend date 30th November Interim dividend record date Payment of final dividend subject to declaration at the AGM Photography credits During our 200th anniversary year, JM held a competition, inviting employees to take photographs that represented the JM brand identity – inspiring science, enhancing life. Photographs from two of our finalists feature in this report: Page 48 – photograph by Jasmin Brunner, Moosburg, Germany. Pages 198-199 (bottom image) – photograph by Nathan Barrow, Sonning, UK. Congratulations to Jasmin, Nathan and all of our other finalists. eLNO is a trademark of the Johnson Matthey group of companies. 210 Company details Registered office Johnson Matthey Plc 5th Floor 25 Farringdon Street London EC4A 4AB Telephone: +44 (0)20 7269 8400 Fax: +44 (0)20 7269 8433 www.matthey.com E-mail: jmpr@matthey.com Johnson Matthey Plc is a Public Limited Company registered in England – Number 33774 Professional advisers Auditor KPMG LLP 15 Canada Square London E14 5GL Brokers Bank of America Merrill Lynch J. P. Morgan Cazenove 2 King Edward Street 25 Bank Street London EC1A 1HQ Canary Wharf London E14 5JP Lawyers Herbert Smith Freehills LLP Exchange House Primrose Street London EC2A 2EG Registrar Equiniti Aspect House Spencer Road Lancing West Sussex BN99 6DA Telephone: 0371 384 2344 (in the UK)* +44 (0)121 415 7047 (outside the UK) www.shareview.co.uk * Lines are open 8.30am to 5.30pm Monday to Friday excluding public holidays in England and Wales. This report is printed on paper sourced from responsibly managed forests, certified in accordance with the FSC® (Forest Stewardship Council) and is recyclable and acid-free. Pureprint Ltd is a Carbon Neutral Printing Company. Designed and produced by MAGEE www.magee.co.uk J o h n s o n M a t t h e y A n n u a l R e p o r t a n d A c c o u n t s 2 0 1 8 2018 Annual Report and Accounts www.matthey.com/AR18 Johnson Matthey Plc 5th Floor 25 Farringdon Street London EC4A 4AB UK Tel: +44 20 7269 8400 

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