Annual Financial Report

RNS Number : 6065I

Johnson Matthey PLC

20 June 2017

 

JOHNSON MATTHEY PLC

ANNUAL REPORT & NOTICE OF ANNUAL GENERAL MEETING

Johnson Matthey Plc (the "Company") has today published its 2017 Annual Report and Accounts and Notice of 2017 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 2017 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 Friday 28th July 2017 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 Guidance and Transparency Rules, to the extent not already included in the Company's announcement of preliminary results for the year ended 31st March 2017, issued on 1st June 2017, is set out in the Appendix below.

Simon Farrant

Company Secretary

20th June 2017

APPENDIX

Risks and Uncertainties

The ongoing review of our principal risks ensures that we reflect on the challenges facing our business and the changes we have made to our business in response to those challenges. In April 2017, we announced  a change in our group structure. As a consequence of a strategic review, the group moved to managing and reporting the business as four sectors: Clean Air, Efficient Natural Resources, Health and New Markets. These are aligned to the global priorities of cleaner air, the efficient use of natural resources and improved health. This focus provided us with a refreshed framework to consider the identification of new risks, evolution of existing risks and evaluation of control effectiveness. During this exercise we concluded that while many of our risks remain largely unchanged we could describe them more precisely, to ensure focus is on the most important mitigating activities. As a result of this process we have made the following changes to our principal risks and uncertainties:

·      Existing market outlook (previously described as 'growth within our existing business' and 'global economic, political and regulatory uncertainty'). This risk was broadly defined across both external influences on our business as well as internal factors. We have refocused this risk on external influences and will use refined key risk indicators to monitor any movement in the most important underlying assumptions associated with our business plans. The internal factors are picked up in a new risk (risk 3).

·      Future revenue growth (previously described as 'innovation' and 'new business'). Our risk associated with growing our business, both through the identification of opportunities and acting on new opportunities, was predominately focused on potential merger and acquisition activities. We have now amended this to consider the risks associated with investment decisions, including significant capital investment, mergers and acquisitions and research and development activities.

·      Maintaining our competitive advantage in existing markets. This risk was previously captured under the very wide ranging 'growth within our existing business'. The internal aspect of this risk in meeting our customers' evolving technology needs coupled with ongoing process efficiencies to maintain our competitive advantage is reflected in this new risk (risk 3).

·      Product quality. This new risk was previously managed at business and divisional level. With our continuing emphasis on quality and brand we have elevated this risk to ensure greater board visibility.

·      Sourcing of strategic materials. This risk previously covered a wide range of supply chain aspects. We have refocused this risk to consider sourcing of our strategic raw materials, the supply of which is vital to our manufacturing processes.

·      People. This risk has been reassessed in the context of our recent strategic review, which has identified some areas where we need to build additional capability.

·      Business transition. We are evolving the way we run our business. Historically, we have operated as a decentralised organisation and, to drive efficiency, we are in the process of standardising some activities across the group. Directed by strong functional leaders, our business transition will position the group for future growth. The risk has been amended to reflect our current business transition plans.

We also considered the risk landscape for cyber and information systems resilience and determined that this was included within our 'failure of significant sites' risk and as such did not need to be included as a separate principal risk and uncertainty.

Managing Through Brexit

Brexit, whilst not a separate risk, is included within the scope of our existing market outlook risk. As a major manufacturing and exporting business, we have been monitoring developments through a dedicated working group, giving careful consideration as to how best to navigate the situation. There is still a great deal of uncertainty as to what Brexit will mean for Johnson Matthey. The Brexit working group is focused on ensuring that Johnson Matthey is prepared to navigate through and deliver the best outcome for our people, our business and our customers. In addition, we plan to work closely with the UK Government to make the most of the opportunities that Brexit offers, and ensure that our industry can continue to succeed.

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. The net risk rating (after mitigating controls) is also shown.

Existing Market Outlook
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.	Mitigation ·      Understanding the key drivers and the range of possible scenarios. ·      Building plans against those scenarios. ·      Monitoring changes to those drivers and adjusting business plans accordingly.	Changes since 2016 annual report This risk partially replaces 'growth within our existing business'. This risk is specifically focused on understanding the external influences which may impact our business. It is rated as high as a result of the uncertainty of Brexit and the evolving pace of change in the BEV/European diesel market, making scenario planning essential. Risk 3 focuses on the related internal factors. Risk rating High (unchanged from risk 1 last year)
Future Revenue Growth
Risk and impact Failure to grow through new opportunities either as a result of failing to identify the opportunity, fund or execute successfully.	Mitigation ·      Monitoring and understanding market evolution as part of our strategic planning process resulting in opportunity identification. ·      Growth opportunities are executed through targeted acquisitions, capital investment and research and development. Progress is monitored and tracked against specific key performance indicators (KPIs).	Changes since 2016 annual report New growth opportunities may be realised through different combinations of investment including acquisition, capital investment and R&D. As the approach may change based on the circumstances, we believe the risk is better expressed by focusing on the missed opportunity irrespective of the investment type. Risk rating Medium (unchanged from the innovation risk rating last year)
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 ·     Investment in understanding our customers. ·     R&D and capital investment processes ensure resource is prioritised against the areas of greatest opportunity. ·     Benchmarking business processes' efficiency.	Changes since 2016 annual report This risk was previously captured under the very wide ranging 'growth within our existing business'. The external aspect of this risk is captured in risk 1 and the internal risk of failing to run our business to sustain our competitive advantage is captured here. We have a strong track record of meeting our customers' evolving technology needs, our capability coupled with ongoing process efficiency activity means we have rated this risk as medium. New risk Risk rating Medium
Environment, Health and Safety
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 could attract negative media and regulator interest.	Mitigation ·     Understanding of our business risk profile. ·     Systems and processes to facilitate adherence to corporate policies, procedures and standards. ·     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. ·     An independent hotline for employees to report concerns.	Changes since 2016 annual report Health and safety is our priority and we take our responsibility for environmental impact very seriously. Over the past 12 months we have worked to refine our mitigating activities. Risk rating Medium
Sourcing of Strategic Materials
Risk and impact As Johnson Matthey has limited suppliers from which to source certain strategic raw materials, any breakdown in the supply of these materials would lead to an inability to manufacture and satisfy customer demand.	Mitigating activities ·     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 2016 annual report The prior year risk rating was principally driven by the risks associated with sourcing of strategic materials. During the year, we have focused on building expertise in supply chain and procurement and as such have assessed the risk as reducing. Risk rating Medium
People
Risk and impact To achieve our strategic objectives, we continually assess the skills and capabilities that will enable us to deliver our strategy. An inability to recruit and retain key skills may result in a slower growth trajectory.	Mitigation ·     Assessment of skills and capability requirements. ·     Robust talent management processes. ·     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. ·     Transparency of policies.	Changes since 2016 annual report This risk has been reassessed in the context of our recent strategic review, which has identified some areas where we need to build additional capability. We have therefore increased the risk rating. Risk rating Medium
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 ·     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 2016 annual report Unchanged from 2016 although we have amended the title to reflect the specific risks. Risk rating Low
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 strategy and new product introduction process. ·     Portfolio management of intellectual capital. ·     Monitoring of third party intellectual capital. ·     Use of intellectual capital lawyers to provide specialist guidance. ·     Training and awareness.	Changes since 2016 annual report Decreased to reflect our increasingly effective mitigations. Risk rating Medium
Failure of Significant Sites
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, IT systems failure, cyber attack 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.	Mitigation ·     Assessment of critical sites. ·     Business continuity plans in place and annual programme of testing in place. ·     Cyber awareness and monitoring. ·     IT disaster recovery. ·     Inventory management to provide critical spares and inventories. ·     Use of external suppliers for key activities and services including generators and utilities. ·     Insurance of sites.	Changes since 2016 annual report No change Risk rating Medium
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 in place supported by training and formal acknowledgement. ·     Understanding of key ethics and compliance risks. ·     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 2016 annual report This risk is reassessed on an ongoing basis in the light of the evolving regulatory and business background. There is significant mitigation in place but the risk rating remains unchanged this year as we embed upgraded third party intermediary processes. Risk rating High
Business Transition
Risk and impact To position the group for future growth and maximise available efficiencies, we are evolving the way we run our business. Historically we have operated as a decentralised organisation but to drive efficiency we are in the process of 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.	Mitigation ·     Communication and employee engagement plans are in place for all programmes with support from the GMC as appropriate. ·     Change management processes. ·     Programme management and governance activities with KPIs and red, amber, green (RAG) review reports. ·     Capital allocation decision making process.	Changes since 2016 annual report Risk reflects our business transition that will position the group for future growth. The risk rating remains unchanged from the business transition risk rating last year. Risk rating Medium
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 that they operate as intended. We may be exposed to liability claims should a product fail to perform as expected. This could lead to loss of future business and reputational damage.	Mitigation ·     Quality management systems in place supported by accreditation and audit. ·     Robust manufacturing processes. ·     Monitoring and reporting of quality performance, taking corrective action where required. ·     Robust contract terms and conditions.	Changes since 2016 annual report We considered whether quality management should be a principal risk in 2016. At that time we concluded that while important, it was not significant enough to be considered as a principal risk as the impact and likelihood varied by sector according to the product produced, customer and contractual risk. With our continued emphasis on quality and brand we have elevated this risk to ensure greater board visibility. New risk 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

•          Anna Manz, Chief Financial Officer

•          John Walker, Executive Director

•          Odile Desforges, Non-Executive Director

•          Alan Ferguson, Non-Executive Director

•          Jane Griffiths, Non-Executive Director

•          Colin Matthews, Non-Executive Director

•          Chris Mottershead, 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 31st May 2017 and is signed on its behalf by Tim Stevenson, Chairman.

 

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