COVID-19 has brought unprecedented challenges to the world and Johnson Matthey. During this pandemic, we have tried to balance the needs of all of our stakeholders but our first priority remains the health and safety of our people, customers, suppliers and communities where we operate. I would like to say a heartfelt thank you to all of our employees for their dedication and efforts over the past few months.
Our business is resilient and diverse, serving a range of end markets and geographies. We made good progress in 2019/20 and delivered operating performance slightly ahead of market expectations, excluding the effects of COVID-19 which adversely impacted underlying operating profit by around £60 million. We took immediate and decisive action to protect our business, and to maintain good liquidity and a strong balance sheet. Looking forward, we are accelerating our strategy to drive greater efficiency across the business, building upon the investments we have made in new manufacturing facilities and in our systems and processes. We have delivered nearly £120 million of our previously announced cost savings. However, we recognise the need to be even more efficient in order to maintain our competitiveness and in addition some of our end markets have been affected by COVID-19. Therefore, we are targeting additional annualised cost savings of at least £80 million by the end of 2022/23. We regret that this will lead to some job losses, which we estimate to be around 2,500 globally over the three year period.
Given the ongoing uncertainty, we are unable to provide financial guidance for 2020/21. In Clean Air, our customers are gradually ramping up their plants but visibility on the path of recovery remains low. Efficient Natural Resources is later cycle and we anticipate an impact as lower demand begins to affect the industries it serves. Health is relatively unaffected by the macroeconomic environment and should benefit from new customer contracts. In Battery Materials, the commercialisation of eLNO remains on track. Notwithstanding the strong financial position of the group, in light of the current uncertainty and to balance the needs of all stakeholders, the board is proposing a final dividend for the year of 31.125 pence, representing half the level of the 2018/19 final dividend.
These developments do not change the global trends that will drive our longer term growth. Addressing climate change remains a priority and commitments to net zero are gathering pace across the world. Our continued investment in strategic growth projects and leading sustainable technologies uniquely positions us to address this and other key global trends, delivering significant value for our shareholders and society.
Reported revenue increased 36% driven by higher average precious metal prices
Reported operating profit declined 27% driven by a restructuring and impairment charge of £140 million and a c.£60 million impact related to COVID-19
Reported EPS declined 39%, reflecting lower operating profit and higher net finance charges
Cash inflow from operating activities was £598 million
Sales declined 2% driven by Clean Air and Health, partly offset by higher sales in Efficient Natural Resources and New Markets
Underlying operating profit declined 6% primarily driven by a c.£60 million impact related to COVID-19. Excluding COVID-19, underlying operating profit grew 5%
Of the c.£60 million, c.£30 million reflected lower demand in Clean Air, and the remainder was due to higher trade debtor provisions across the group and delayed sales due to logistical challenges in our other businesses
Underlying EPS declined 13% reflecting lower underlying operating profit and higher net finance charges. Net finance charges grew primarily driven by increased average precious metal borrowings due to higher precious metal prices, on which we pay higher interest on average than the rest of our borrowings
Strong balance sheet with net debt of £1.1 billion; net debt to EBITDA of 1.6 times
Return on invested capital (ROIC) decreased from 16.4% to 13.3% mainly due to increased capital expenditure, higher average precious metal working capital through the year and lower underlying operating profit
The group has a strong balance sheet, good cash generation and liquidity headroom. However, given the heightened degree of current uncertainty and to balance the needs of all stakeholders, the board will propose a final ordinary dividend for the year of 31.125 pence at the Annual General Meeting on 23rd July 2020, representing half the level of the 2018/19 final dividend. This is not intended to be a rebasing; the board remains committed to a progressive dividend and anticipates restoring future dividend payments to levels seen prior to the COVID-19 pandemic when circumstances permit.
Subject to approval by shareholders, the final dividend will be paid to shareholders on 4th August 2020, with an ex dividend date of 18th June 2020.
Outlook for the year ending 31st March 2021
Given the ongoing uncertainty, we are unable to provide financial guidance for the year ending 31st March 2021. Looking at each of our sectors:
Clean Air has a direct link to consumer demand. Following automotive OEM shutdowns earlier in the year, we are now seeing our customers gradually reopen their plants. Production in China is recovering towards prior year levels, and Europe and the US are now also gradually ramping up. However, visibility on the path of recovery remains low. This significant uncertainty has led to a wide range of forecasts for automotive and truck production for the coming year. External data currently suggests a decline of c.25% in light duty for Europe and the US, but better in Asia, while for heavy duty the declines are slightly more. Although the actual outcomes could be materially different. We have a flexible cost base in Clean Air, enabling us to manage different levels of activity, with c.75% of costs before mitigation being variable
Efficient Natural Resources serves a diverse range of end markets and is subject to a broader range of variables. It is later cycle than Clean Air, so while we have seen little impact so far on the business from macroeconomic weakness, we expect this will come through as lower demand begins to affect the industries it serves and because of volatile feedstock dynamics. Pgm prices will also influence operating performance. Operating leverage is greater here as the sector operates with a larger number of sites and higher fixed costs
Health is relatively unaffected by changes in the macroeconomic environment. We expect to benefit from new supply agreements for APIs used in generic opioid addiction therapies as well as our continued work with innovator customers
In Battery Materials, commercialisation of eLNO remains on track
Our newly announced efficiency initiatives will deliver additional annualised savings of at least £80 million by 2022/23 for a cash cost of c.£80 million, with initial savings of at least £30 million supporting operating performance in 2020/21. We have a strong balance sheet and liquidity position and expect to generate further cash through precious metal working capital improvements as we continue to reduce refinery backlogs. We remain committed to our investment in our strategic growth projects which will support our medium term growth.
Martin Dunwoodie, Director of Investor Relations020 7269 8241
Louise Curran, Senior Investor Relations Manager020 7269 8235
Jane Crosby, Investor Relations Manager020 7269 8242
Sally Jones, Director of Corporate Relations020 7269 8407
David Allchurch, Tulchan Communications020 7353 4200
Notes: In our pre-close trading update (30th March 2020) we guided to an impact of around £50 million on our trading performance from COVID-19. Vara consensus for full year underlying operating profit in 2019/20 was £581 million (range: £562 million to £593 million) as at 29th March 2020.
1. Underlying is before profit or loss on disposal of businesses, gain or loss on significant legal proceedings together with associated legal costs, amortisation of acquired intangibles, major impairment and restructuring charges and, where relevant, related tax effects. For definitions and reconciliations of other non-GAAP measures, see pages 43 to 47.
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 2018/19 results converted at 2019/20 average exchange rates
3. Revenue excluding sales of precious metals to customers and the precious metal content of products sold to customers
eLNO is a trademark of Johnson Matthey Public Limited Company