Annual Financial Report

RNS Number : 3886B

Johnson Matthey PLC

16 June 2016

 

JOHNSON MATTHEY PLC

ANNUAL REPORT & NOTICE OF ANNUAL GENERAL MEETING

Johnson Matthey Plc (the "Company") has today published its 2016 Annual Report and Accounts and Notice of 2016 Annual General Meeting. Both documents are available on the Company's website at www.matthey.com

In accordance with Listing Rule 9.6.1, copies of both documents, together with the Form of Proxy for the 2016 Annual General Meeting, have been submitted to the National Storage Mechanism and will shortly be available for viewing at www.morningstar.co.uk/uk/NSM

The Annual General Meeting of the Company will be held at 11.00 am on Wednesday 20th July 2016 at The Royal Society, 6-9 Carlton House Terrace, London SW1Y 5AG.

Information required to be made available by the Company under Rule 6.3.5R of the Disclosure and Transparency Rules, to the extent not already included in the Company's announcement of preliminary results for the year ended 31st March 2016, issued on 2nd June 2016, is set out in the Appendix below.

Simon Farrant

Company Secretary

16th June 2016

APPENDIX

Risks and Uncertainties

Our 2015/16 risk management assessment has resulted in several changes to our principal risks and uncertainties, including:

•              'Technological change' has been reclassified as 'Innovation' and reflects the expanded strategic direction provided by the appointment of our Chief Technology Officer.

•              'Supply chain' has been expanded to include the optimisation of efficiencies and opportunities from our production facilities as well as the sourcing and supply of goods.

•              'Intellectual property (IP) and know-how' has been refocused and it now covers the end to end management of all intellectual capital. Cybercrime is now being considered separately as part of our information security risk processes. Whilst cybercrime is not a separate principal risk and uncertainty, we will continue to closely monitor and assess its level of threat to our business.

•              We considered whether product quality should be one of our principal risks and uncertainties. Our assessment of this risk against impact and likelihood varied greatly by division according to the product produced, customer and contractual risk. We concluded that whilst important, it was not significant enough to be managed as a principal risk across the group.

•              We also looked at the impact of the UK potentially leaving the EU and concluded that due to the global nature of our business and location of our customers it was not a principal risk and uncertainty. However, we continue to monitor the situation closely.

The following table sets out the 2015/16 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. The net risk rating (after mitigating controls) is also shown.

STRATEGIC
Growth within our existing business Understanding and responding to the needs of customers, capitalising on appropriate growth opportunities within our existing business.
Risk and impact Our aim is to become truly customer centric. To ensure continued growth in our business, we continue to invest in our people, products and technology to differentiate ourselves from our competitors and to develop innovative, sustainable products. A failure to understand and respond to customer requirements or competitor activity could result in missed opportunities for growth with existing and new customers and loss of significant customer / market share.	Mitigation ·      Customer focus, collaboration with customers to produce good value, innovative, quality products. ·      Understanding of market dynamics and value proposition. ·      Diversification of business activities, continuous assessment of technologies and products. ·      Research and development to bring new products into our portfolio.			Changes since 2015 annual report No change. Our ambition is to be a preferred supplier and have significant customer / market share results in a high risk and opportunity rating. Risk rating High
New business Responding to, identifying or capitalising on appropriate new growth opportunities.
Risk and impact We have identified and continue to identify a number of opportunities to complement and diversify our business portfolio. Failure to identify new opportunities and capitalise on acquisitions could result in an inability to meet our strategic objectives and maintain / grow our market share.	Mitigation ·      New business development activities. ·      Research and development to diversify our product portfolio. ·      Marketing and customer focus activities. ·      Portfolio management. ·      Post investment reviews.			Changes since 2015 annual report Increased appetite and activity to identify and capitalise on new opportunities is driving an increase to the risk rating. Risk rating High
Innovation Constant innovation is essential to maintain our competitive advantage
Risk and impact We operate in highly competitive markets in which innovative, competitively priced, fit for market products are essential in maintaining our competitive advantage. An inability to align and prioritise our investments with corporate strategy may result in us missing our group growth targets, reduced margins and higher costs.	Mitigation ·      Portfolio management of innovation activities and key performance indicators. ·      Organisation structure and governance to define groupwide innovation strategy and prioritisation across the divisions. ·      R&D is part of a defined global network of strategic external partners to leverage open innovation and corporate venturing.			Changes since 2015 annual report We recently expanded our innovation portfolio management metrics to include productivity based metrics. This refined approach will enable us to drive efficiency from R&D, understand the potential return on our investment and capture higher value. The refinement in our approach required a reassessment of this risk and opportunity, which we now consider to be medium rather than low. We invested £188.0 million in R&D in the year, up 11% from £169.9 million in 2014/15. Risk rating Medium
MARKET
Global economic, political and regulatory uncertainty Failure to adequately respond to changes in the macroeconomic, regulatory or political environment in one or more of our key markets or countries.
Risk and impact The global nature of the group's businesses exposes it to risk arising from economic, political and legislative changes in the countries in which it operates. Aspects of this risk include: ·      Sudden short term changes in one of our markets due to oil or platinum group metal (pgm) price volatility, foreign exchange rate movements, the imposition or lifting of sanctions or trade controls / barriers or similar activity. ·      Sustained periods of economic weakness in our markets. ·      Changes to the regulatory environment, for example emissions legislation. Impacts associated with this risk are wide ranging and could include reduced customer / market demand and / or customer defaults, cost escalation and price / market erosion, foreign exchange losses and a reduced ability to import / export raw materials and products.			Mitigation ·      Maintenance of a balanced portfolio of products and market services, with a variety of long term strategic drivers. ·      Ongoing long term strategic reviews with assessment of market and country concentration. ·      Detailed budgeting and planning process. ·      Interaction with trade bodies to ensure that we are aware of upcoming changes to legislation and regulations. ·      Regular broker and shareholder interaction. ·      Treasury policies to manage currency volatility.			Changes since 2015 annual report No change. Risk rating High
OPERATIONAL
Environment, health and safety Operating safely in line with changes to environmental, health and safety legislation and standards.
Risk and impact In common with 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 and respond to changes made to applicable laws, regulations or standards we could adversely impact our employees, we may lose production time and we may attract negative media and regulator interest.	Mitigation ·      Documentation and adherence to safety principles. ·      Training and awareness activities. ·      Risk, audit activities and safety checks. ·      Safety culture programme and behavioural standards. ·      Investigations to determine the cause of incidents and accidents and the development of remediation plans. ·      Speak up and independent hotline for employees to report concerns			Changes since 2015 annual report Our risk has been assessed using a revised and enhanced framework covering a broad range of dimensions across health, safety and environmental risks. Health and safety continues to be our priority. Although we tragically suffered a fatality during the year, the medium assessment comes from applying impact and likelihood criteria across this broad range of risk scenarios. Risk rating Medium
Supply chain Understanding customer requirements for our production facilities, warehousing and freight of inbound and outbound goods. Sourcing materials, leveraging our scale and scope to procure products and services cost efficiently and ethically.
Risk and impact The group operates in many locations across the world and is therefore exposed to a number of risks associated with a complex supply chain. It is fundamental that we understand customer requirements and exploit our production capabilities, warehousing and freight of goods. It is also important to us that our supplies are sourced efficiently and ethically. A number of strategic materials, notably pgms, rare earth materials and narcotic raw materials, are available from a limited number of countries and suppliers, so ensuring the availability of these products is essential. The impact of this risk could affect our ability to carry out manufacturing and satisfy customer requirements leading to reputational damage and loss of potential future business.		Mitigation ·      Supplier key performance indicators, audits and quality management. ·      Sourcing from multiple suppliers. ·      Research and development alternatives to consider use of non-strategic materials. ·      Expertise in supply chain, logistics, procurement and trade export controls. ·      Business continuity management, identification of critical failure risks and plans in place to manage these.			Changes since 2015 annual report The scope of this risk and opportunity has materially changed and is therefore not comparable with the prior year's assessment. Risk rating High
People Effective recruitment and retention.
Risk and impact The group relies on its ability to recruit, retain and develop employees around the world with the necessary range of skills and experience. An inability to recruit and retain talent may result in a loss of critical knowledge in the business, delays in achieving targets and suboptimal innovation. This could lead to negative impacts on business performance.		Mitigation ·      Employer brand and coordinated graduate recruitment. ·      Remuneration strategy with clarity around market best practice and Johnson Matthey's position on base pay, annual and long term incentives, pensions and regional benefits. ·      Talent management process. ·      Transparency of policies.			Changes since 2015 annual report A number of groupwide initiatives are underway to attract and retain talent, thus reducing the impact of this risk. Risk rating Low
Security of assets
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, the security of which is critical. A material loss due to a breach, failure in security management systems, security controls or a loss during processing could lead to a number of impacts including loss / restriction of licence to operate, loss of goods and an inability to supply customers, increased security costs and an impact on the group's reputation		Mitigation ·      Security management systems and site security systems. ·      Assay and other process controls. ·      Security awareness campaigns and training. ·      Audits of site security systems. ·      Stock takes to check inventories. ·      Use of approved carriers for transit. ·      Insurance coverage for losses from theft or fraud. ·      Liaison with local law enforcement for high risk sites.			Changes since 2015 annual report No change. Risk rating Low
Intellectual capital
Risk and impact We operate in highly competitive markets in which innovative, competitively priced, fit for market products are essential. The generation and application of technology know-how and IP, together with the monitoring of third party IP, is essential in maintaining our competitive advantage. Failure to identify and protect the group's IP or failure to identify and mitigate against third party IP rights could lead to a loss in business advantage, loss of freedom to operate and reputational damage associated with litigation.		Mitigation ·      Management of IP portfolio. ·      Non-disclosure activities. ·      Use of IP lawyers to provide specialist guidance. ·      Training and awareness. ·      Monitoring of third party IP. ·      Ensuring that employee behaviours associated with intellectual capital are effective.			Changes since 2015 annual report Increased due to advances in technology and our competitor landscape. Risk rating High
Failure of significant sites
Risk and impact While the group operates in a variety of locations, certain sites are critical to the group due to their scale or the specific nature of their production activities. 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 demands, potential loss of market confidence and impact on the overall performance of the group.		Mitigation ·      Assessment of critical sites. ·      Business continuity plans in place. ·      Inventory management to provide critical spares and inventories. ·      Use of external suppliers for key activities and services including generators and utilities. ·      IT disaster recovery capabilities. ·      Insurance of sites.			Changes since 2015 annual report No change. Risk rating Medium
Ethics and compliance Doing the right thing
Risk and impact Due to the markets in which we operate and the complexity of our supply chain, the group is exposed to a changing and increasingly stringent regulatory environment. Ethical misconduct by our employees inadvertently, knowingly or negligently or a legal non-compliance through a lack of knowledge and awareness or through a deliberate breach could lead to reputational damage, removal of licence to operate, legal action, impacts on staff morale and loss of business.		Mitigation ·      Code of ethics in place which has been rolled out to all employees with face to face training. ·      Use of subject matter experts, internal and external, on legal compliance and risk mitigation matters. ·      Group and local policies and procedures in place including full integration with business processes. ·      Group control requirements such as supplier on-boarding, counterparty due diligence and payments approval. ·      Independent confidential speak up hotline for employees, contractors and third parties. ·      Oversight on contractual provisions and commercial arrangements by legal teams. ·      Global network of ethics ambassadors. ·      Emergency response procedures for events such as dawn raids. ·      Investigation of incidents and allegations of misconduct.			Changes since 2015 annual report Code of ethics and training for all employees rolled out this year. A speak up policy has been launched and enhanced reporting tools have improved oversight and management of concerns being raised. Rating has increased as a result of better visibility of reporting. Risk rating High
Business transition Failure to manage major programmes and transition from a big small company to a small big company.
Risk and impact Failure to manage major programmes to upgrade our business systems and successfully transition from a big small company to a small big company through appropriate standardisation and sharing of resources / activities. Potential impacts associated with this risk include the organisation failing to adapt to new ways of working and ineffective change management could lead to anticipated efficiencies and cost savings not being realised. Further to this, the group's culture could be adversely affected.		Mitigation ·      Communication and employee engagement plans are in place for all programmes with support from the GMC as appropriate. ·      'Get fit' process adopted across the business ahead of planned roll out of new business systems to ensure that sites are prepared for necessary change. ·      Clear business impact assessments prepared ahead of going live with clear business targets. ·      Programme management and governance activities with key performance indicators (KPIs) and red, amber, green (RAG) review reports.			Changes since 2015 annual report No change. Risk rating Medium

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

•              Den Jones, Group Finance Director

•              John Walker, Executive Director

•              Odile Desforges, Non-Executive Director

•              Alan Ferguson, Non-Executive Director

•              Colin Matthews, Non-Executive Director

•              Chris Mottershead, Non-Executive Director

•              Dorothy Thompson, Non-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 1st June 2016 and is signed on its behalf by Tim Stevenson, Chairman.

 

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