Johnson Matthey plc

06/14/2019 | Press release | Distributed by Public on 06/14/2019 00:15

Annual Financial Report

JOHNSON MATTHEY PLC

ANNUAL REPORT & NOTICE OF ANNUAL GENERAL MEETING

Johnson Matthey Plc (the 'Company') has today published its 2019 Annual Report and Accounts and Notice of 2019 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 2019 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 17th July 2019 at The Institution of Civil Engineers, One Great George Street, Westminster, London, SW1P 3AA.

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 2019, issued on 30th May 2019, is set out in the Appendix below.

Simon Farrant

Company Secretary

14th June 2019

APPENDIX

Risks and Uncertainties

We critically assess our principal risks to ensure that we continually reflect on the challenges facing our business and the changes that we need to make in response.

We consider our principal risks and uncertainties alongside our strategic and business plans to ensure our risk coverage and analysis supports decision making, and to inform our audit efforts. This year we sought external advice to ensure we were managing our cyber risk effectively. We also gave specific and detailed consideration as to whether metal liquidity and supply should be considered a principal risk.

Ensuring a reliable supply of platinum group metals remains an area of importance for JM. This includes anticipating our customers' demands at the same time as having a detailed understanding of metal mining and supply. While the gross risk associated with metal supply, price and liquidity is significant, we concluded that the risk is being adequately mitigated through a number of activities including persistent monitoring of triggers that may cause deviation from our forecasts.

We sought external assurance on our plans to modernise and improve our IT infrastructure, specifically to gain assurance that the modernised estate would have the resilience to respond to the scale, sophistication and impact of future cyber threats.

We have concluded that for the most part, our key areas of risk remain unchanged. In all cases, we continue to review and refine the documented mitigations for each risk. We continue to report whether the risk profile is increasing, decreasing or remaining constant. This provides our board and our shareholders with greater transparency and useful insight into our risks and what we are doing about them.

Changes, additions and remarks on our principal risks and uncertainties in 2018/19:

• As a result of our root cause analyses, we have broadened the scope of our former principal risk, 'failure of significant, sites', specifically to recognise the vital nature of our day to day manufacturing activity, associated risks, and extensive associated controls. We have created a new 'failure to maintain operations' principal risk in which 'failure of critical sites' has been included.

• Metal liquidity and supply - acknowledging the critical nature of metal raw materials to our manufacturing operations, we decided to assess whether 'metal liquidity and supply' should be a principal risk in its own right. While it was agreed that it should not, additional controls have been agreed to provide further assurance and will be managed under our 'sourcing of strategic materials' principal risk.

• Brexit - although JM relies extensively on an agile, flexible supply chain, we have paid significant attention to the potential impact a 'no-deal' Brexit may bring. Our well established Brexit working group, which is composed of a number of functional and sector experts, has assessed the implications of a 'no-deal'. A number of mitigating activities were put in place ahead of 29th March 2019 in preparation for this eventuality, for example through building inventory.

As part of the preparations, the project team conducted scenario analysis to assess the impact of individual risks and combinations of risks, and as the probability of a hard Brexit (without a transition agreement recognising the existing trading rules) increased, the working group approved the acceleration of the project team's contingency plans, with the primary objective of ensuring the continuity of the European business across the whole business model. To that end, we remain comfortable that our current contingency planning will be effective should the UK exit the EU without a deal. We remain vigilant and alert to changes in the UK and EU's stance on Brexit and the potential implications these may have on our operations.

• Battery Materials - recognising the significant strategic potential of our Battery Materials business, we are creating a leading practice risk and governance capability to focus on managing programme and business risks. Our priority is to ensure that business and programme risks receive appropriate management attention and are addressed quickly and effectively in this complex environment.

• Emerging risks - understanding future risks and our ability to respond is supported by all our principal risks, but with specific analysis of our three forward-looking risks; 'future growth', 'existing market outlook' and 'maintaining competitive advantage'. As well as providing us with assurance that our strategy is effective and achievable, these risks have played a central role and source of insight for our viability modelling. The viability statement is shown on page 97 of the 2019 Annual Report and Accounts.

The following table sets out the principal risks and uncertainties facing the group, the mitigating actions we have in place. It also details any profile changes for each principal risk during the course of the year.

Our risks are not listed from greatest to lowest risk. We list our strategic risks first followed by operational risks. To help understand the potential impact of our risks on our strategy, each risk has a GMC owner who is responsible for the risk and to ensure controls are adequate and prioritised effectively. Additionally, each risk is linked to one or more of our strategy pillars - Science (S), Customers (C), Operations (O), People (P), which are annotated below.

1 Existing market outlook S, C, P

Risk and impact

The impact of change in the key business assumptions is either unplanned or unforeseen and we are not agile enough to respond.

This risk would include legislative changes caused by Brexit, other market movements outside of our predictions, and other trends such as the imposition of tariffs, US protectionism or Chinese and global slowdown.

GMC owner

Anna Manz

Mitigation

Understanding the key drivers and 'severe yet plausible' scenarios.

Integrate strategic risk within the strategic planning process to enable improved consideration of different market outcomes.

Define triggers and having formed plans in response to them.

Monitoring changes to those drivers and adjusting business plans accordingly.

Technology road mapping to understand our response to evolution in our markets and associated scientific and technological requirements.

Changes since 2018

annual report

Market conditions have become more uncertain since last year with the possibility of a global slowdown. We monitor global economic factors closely so that we can understand the potential effects of slower global or regional economies on our businesses and implement plans to respond. Although a global slowdown appears more likely by consensus, JM's portfolio infers a degree of protection, given the variety of our investments.

2 Future growth S, C, O, P

Risk and impact

Failure to deliver planned growth and value creation as outlined at Capital Markets Day in September 2017 through ineffective execution.

GMC owner

Robert MacLeod

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 projects and talent identified to support realisation of the strategy.

Project management office (PMO) to ensure appropriate governance is in place and plans are delivering to expected timelines.

Changes since 2018 annual report

In executing our organic growth strategy, we are making major capital investments and so we are significantly enhancing our capital project delivery programme to manage this risk.

3 Maintaining our competitive advantage S, C, O

Risk and impact

Failure to maintain our competitive advantage in existing markets, and as a result, not meeting customers' evolving needs as efficiently or effectively as our competitors.

GMC owner

Jane Toogood

Mitigation

Investment in our customer understanding capability.

Continual engagement and feedback with our customers at multiple levels within our business and theirs.

Research and development and capital investment processes to ensure resource is prioritised against the areas of greatest opportunity.

Benchmark efficiency of business processes.

Changes since 2018

annual report

We are delivering major capability building programmes including Commercial, Procurement and Manufacturing Excellence. This enables more effective capital allocation decisions. These programmes and processes are now largely established and our focus is on ensuring these are embedded and their benefits realised.

4 Environment, health and safety (EHS) O, P

Risk and impact

Our business operations are subject to a wide range of challenging health, safety and environmental laws, standards and regulations from government and non - governmental bodies around the world.

If we fail to operate safely we could injure our people, and breach applicable laws which could adversely impact our employees, result in lost production time and potentially attract negative interest from the media and regulators.

GMC owner

Robert MacLeod

Mitigation

· Carry out robust process safety audits on high risk sites to enhance and assure the work we do to make our manufacturing processes as safe as possible.

· Implement safety culture programme and behavioural standards.

· Implement process safety programme.

· Determine the cause of incidents and accidents and develop remediation plans.

· Ensure, through ongoing investment, that equipment continues to be appropriate.

· Continued training and awareness activities.

Changes since 2018

annual report

Health and safety continue to be our absolute priority across the business. Execution and embedding of all EHS plans continue to be tracked and monitored on a regular basis.

As part of our commitment to make the world cleaner and healthier, we are extending our understanding of the impact of our operations with further focus through our environmental and sustainability programmes.

5 Sourcing of strategic materials S, C, O

Risk and impact

Due to the nature of our operations, JM has limited suppliers from which to source certain strategic raw materials including precious metals. Any significant breakdown in the supply of these materials would lead to an inability to manufacture and satisfy customer demand.

GMC owner

John Walker

Mitigation

· Model alternative supply strategies with expected demand.

· Continually investigate alternative materials as part of research and development.

· Review critical suppliers annually, and apply appropriate mitigating actions.

· Include long term demand for precious metal in JM's ten year strategic plan.

· Invest in pgm refining business.

· Further strengthen supplier relationship management and review regularly to discuss supplier capacity constraints.

Changes since 2018

annual report

This risk now includes additional mitigations to enhance assurance over metal liquidity and supply. This includes additional modelling and stress testing of the market and our metal demands of our current and future operations.

6 People P

Risk and impact

To successfully execute our strategy and deliver growth, we need to ensure that we have the breadth and depth of leadership and the appropriate skills and capabilities to drive a healthy, motivated and engaged workforce.

GMC owner

Anne Kelleher

Mitigation

· Leadership development programmes.

· Embed JM values and behaviours in all internal processes including hiring and performance reviews.

· Develop high level capability plans to support strategic plans.

· Conduct global employee opinion survey every two years followed by development and delivery of targeted action plans.

· Wellbeing programme.

Changes since 2018

annual report

We are continuing to invest in our leadership through development programmes to ensure we have the skills and capabilities to deliver our strategy and are growing talent through robust succession planning to build our future leaders.

We carried out a global employee survey, identified improvement areas and developed action plans which are now are in progress. These plans include a programme focused on supporting our people's health and wellbeing.

7 Security of metal and highly regulated substances O

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.

GMC owner

Jane Toogood

Mitigation

· Continue execution of the security improvement roadmap.

· Implement group security policies across all sites.

· Carry out inventory stock takes.

· Ongoing security awareness campaigns and training.

· Security audits.

Changes since 2018

annual report

Level of risk remains consistent as we continue to execute our security improvement roadmap.

8 Intellectual capital management S, O

Risk and impact

Failure to adequately manage our own, and third party, intellectual capital, knowledge and information could lead to a loss in business advantage, loss of freedom to operate and reputational damage associated with litigation.

GMC owner

Simon Farrant

Mitigation

· Implement business intellectual capital management strategy.

· Use intellectual capital lawyers to provide specialist guidance.

· Portfolio management of intellectual capital through new technology solution.

· Invest in cyber security (see risk 13).

Changes since 2018

annual report

We have continued to develop market leading products using our world class science capabilities. We protect our inventions and knowhow, although our markets remain challenging, crowded and litigious.

9 Failure to maintain operations C, O

Risk and impact

We may experience interruptions and / or delays in the manufacturing and supply of our products resulting in lost sales affecting our reputation and revenue growth.

GMC owner

John Walker

Mitigation

· Ensure regular maintenance of critical machinery.

· Continue to invest in infrastructure.

· Adhere to high technical standards.

· Implement Procurement Excellence programme.

· Insurance coverage in place.

· Implement Group Business Continuity Policy and manual across all sites.

· Continue to develop comprehensive response plans and test annually.

Changes since 2018

annual report

We have broadened the scope of our original risk, 'Failure of significant sites', to recognise the vital nature of our day to day manufacturing activities, associated risks and extensive associated controls. We are investing in our pgm refineries and our preventative maintenance planning work.

10 Ethics and compliance C, O, P

Risk and impact

Failure to comply with ethical and regulatory compliance standards leading to reputational damage, possible criminal / legal exposure for the company or for individuals.

GMC owner

Simon Farrant

Mitigation

· Implement refreshed code of ethics supported by training, and tone from the top set by senior leadership.

· Suite of legal compliance policies and procedures in place.

· Use internal and external subject matter experts, to identify risks, set standards and provide advice and training.

· Implement ethical working practices certification.

Changes since 2018

annual report

This risk is continually assessed given the evolving regulatory and business background.

11 Business transition O, P

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 group wide standardisation of some activities, directed by strong functional leaders, to ensure best practice is used and maintained across the group.

The risk is that we fail to deliver transformational change, fail to achieve efficiencies and have a disengaged workforce.

GMC owner

Robert MacLeod

Mitigation

· Strategic PMO to drive appropriate governance across all workstreams.

· Implement project management framework across all key initiatives.

· Expert third party assurance on key change programmes, including ERP (SAP) go-live at key sites, assured by expert third parties

· Communicate with and engage employees to drive functional engagement.

Changes since 2018

annual report

This risk has been updated as we continue to evolve the way in which we run our business. We are managing this risk through our upgraded PMO which ensures we have targeted action plans, employee communications and wellbeing programmes to support our workforce.

12 Product quality S, C, O

Risk and impact

Our products are used in a wide range of applications, processes and systems. The safety and quality of these products are crucial to ensuring they operate as intended.

Should a product fail to perform as expected, we could be responsible for harming consumers or exposed to liability claims. This could lead to loss of future business, reputational damage and loss of licence to operate.

GMC owner

Jason Apter

Mitigation

· Monitor and report quality performance, taking corrective action where required.

· Implement quality management system.

· Continue to develop robust manufacturing systems supported by standardised processes.

· Robust supplier contract terms and conditions.

Changes since 2018

annual report

Risk remains consistent as the regulatory environment continues to tighten and our customers are experiencing greater scrutiny. JM has continued to make significant progress in embedding a global quality management system supported with training and regular communications.

13 Applications, systems and cyber O, P

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.

GMC owner

Anna Manz

Mitigation

· Deliver of our cyber security and infrastructure improvement investment to increase resilience.

· Implement key policies and standards across JM.

· Continue to invest in information systems, monitoring and assurance to support our data security strategy.

· Input and assurance from third party specialists.

Changes since 2018

annual report

We are continuing to invest heavily in our IT infrastructure to provide better visibility and controls to support a more efficient business.

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:

· Patrick Thomas, 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

· Xiaozhi Liu, 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 2019 and is signed on its behalf by Patrick Thomas, Chairman.