After the goldrush

Chris Clark, the chief executive of Johnson Matthey, is in confident mood and with good reason. Profits at the speciality chemicals and precious metals company are on the increase and a reshaping of the business towards the environmentally friendly fields of fuel cell technology and catalytic converters has propelled the share price. "Johnson Matthey is clearly at an exciting stage of development and we are lucky to be in markets that are showing great growth prospects," says Mr Clark. "This is a great position to be in and this year should be no exception."

The chief executive, who took the helm three years ago, has worked hard to realign Johnson Matthey after a unsuccessful foray into the world of semi-conductors hurt the business's credibility with investors for much of the late Nineties.

"The main focus of growth is our core catalysts and chemicals division," he says. "We will grow the business by investing to support the organic growth potential and by targeted acquisition. We are investing heavily to support this in the UK and overseas."

Indeed, Johnson Matthey plans another year of record investment. "Last year our capex rose to more than £100m; this year we plan to increase this to around £140m. The opportunities in our businesses are exciting.

Mr Clark was instrumental in the decision to sell the troubled electronics materials division in 1999 for £420m. The unit specialised in the supply of microchips and was badly affected when the semiconductor market fell out of bed in the late Nineties as a glut of chips led to a slump in prices. "We wanted to create greater focus on catalysts and chemicals where we saw better opportunities and greater growth potential," he says. "Since 1998 the share price has moved ahead strongly as we have seen the benefits of this strategy coming through." The shares have quadrupled in the past three years and stood at 1,048p yesterday.

The recent strong performance means Johnson Matthey can put the microchips failure firmly behind it, and banish the ghosts of the notorious 1984 banking collapse, when the Bank of England was forced to rescue the banking arm of Johnson Matthey, then a leading player in the gold bullion market, after it collapsed with bad debts of £250m.

Now the company and the investment community are increasingly excited about the prospects for fuel cell technology. Fuel cells are environmentally friendly and could one day replace the internal combustion engines. The cells act as batteries to generate power through a chemical reaction. They are relatively clean, producing only water and carbon dioxide as by-products compared to the various noxious gases from petrol-powered engines.

"Fuel cells have certainly captured the imagination,' says Mr Clark. "JM is extremely well placed to benefit as this market moves from concept stage to reality. We are investing to support this exciting opportunity." The technology could be used in cars as early as 2003.

Johnson Matthey has forged strong links with Ballard Power Systems, the Canadian group that is one of the world's two key developers of fuel cell engines. It has shrunk the size of a fuel cell-powered engine to one in a conventional car bonnet. Mr Clark hopes to start making significant revenues from fuel cells in the next few years and analysts believe it will produce good profits within a decade. But the chief executive is keen to stress that Johnson Matthey is not relying exclusively on the potential of its fuel cell business to power the company's growth. The market for Johnson Matthey's catalytic converters is also doing well.

"Johnson Matthey is not just about fuel cells, though that is one opportunity for us. We have just officially opened our new autocats plant in Shanghai, a market where increasing importance is being placed on improving air quality – this is Johnson Matthey's ninth autocatalyst manufacturing facility worldwide," Mr Clark says.

"The emerging markets offer great opportunities for us. However, our autocats business continues to benefit in its core markets from ever tightening global emissions standards legislation," he adds. "We have just announced the [£147m] acquisition of Meconic to accelerate growth of our pharmaceutical materials business which is relatively small. There are good growth prospects here too." Johnson Matthey believes the deal will enhance earnings in the year beginning April 2002, the first full year of ownership.

Johnson Matthey already operates a pharmaceutical materials business at West Deptford in New Jersey, America. John Sheldrick, the finance director, says the division is similar to Meconic with complementary product ranges and a focus on high-value, low-volume products including opiates and other controlled substances. Johnson Matthey has around £500m to spend and Meconic looks like the first of a handful of bolt-on acquisitions.

Investors are keen to find out which companies Mr Clark and his team are looking at, but he remains guarded. "We will pursue acquisitions that complement and add value to our core business. But we don't need to make acquisitions to drive growth. The acquisition of Meconic is an example of this. We had been keen to grow our pharmaceutical materials business, which at present is small but profitable. Meconic is a great fit in terms of products and also provides us with the opportunity to use a base in the UK for European expansion."

Indeed, Johnson Matthey was willing to offer a very healthy 42 per cent premium for Meconic, Britain's only licensed producer of narcotics such as cocaine and heroin sold to the big drug companies. To prevent potential rival bidders from stepping in, Johnson Matthey spent £56m to buy 38 per cent of Meconic's shares in the market the day it announced the takeover.

But elsewhere within Johnson Matthey, there have been concerns that the slowdown in the global car market could dent the profitability of Johnson Matthey's catalytic converter business in the near term. But Mr Clark remains upbeat. "We expect to deliver double-digit profit growth in a flat global vehicle sales market," he says. "The drive to combat pollution round the world and the legislation that accompanies it continues to benefit Johnson Matthey both in existing and new markets. In the US, cars and trucks are now being fitted with not one but several autocats. Last year, global vehicle sales advanced by 1 per cent but the autocatalyst market grew by 6 per cent. We are market leaders in this field."

Johnson Matthey's expertise in platinum and similar metals such as palladium remains a key to its success. Fuel cells and catalytic converters use platinum group metals as their key ingredient. The company is the world's largest distributor of platinum-group metals and the business still provides the bulk of Johnson Matthey's revenues. But the move into developing fuel cells and catalysts is helping the company distance its fortunes from the sharp fluctuations in the price of precious metals. The biggest bonus from this is that it generates large amounts of cash that Johnson Matthey can reinvest in its more exciting areas.

One of the few divisions that looks less enticing, and an area the company rarely talks about in much detail, is the colours and coatings business that provides materials used by china and glass manufacturers such as Royal Doulton and Waterford. It is increasingly looking out of place within the group.

Mr Clark has worked hard to get Johnson Matthey into the robust shape it is in today, but he won't rest on his laurels. "We see a lot of development potential across the business in the UK and round the world," he says. Investors are eagerly awaiting news of the chief executive's next acquisition to take Johnson Matthey forward. It could be weeks.

Investors will be hoping that Johnson Matthey's decision to throw money at developing fuel cells and catalytic converters does not prove the latest fad for the company. It has taken several years for the group to regain the City's respect following the heavy investment in semi-conductors that went badly wrong. At least Mr Clark appears to accept that he must not put all Johnson Matthey's eggs in one basket. Another about-turn in strategy could prove disastrous.

FACT FILE

Market capitalisation: £2.36bn

Turnover: £5.90bn in the year to 31 March 2001 (£3.87bn in 2000)

Pre-tax profit: £181m in the year to 31 March 2001 (£157m in 2000)

Main business: Johnson Matthey is a world leader in speciality chemicals focused on precious metals, catalysts and other fine chemicals. Principal activities are manufacture of catalysts and pollution control systems, pharmaceutical compounds, process catalysts and speciality chemicals; refining, fabrication and marketing of precious metals; and the manufacture of colours and coatings for the ceramic, glass, paint and plastics industries

Key executives: Michael Miles, non-executive chairman; Chris Clark, chief executive; John Sheldrick, group finance director; Graham Titcombe, group managing director. David Morgan, executive director, group corporate development

Employees: 6,600