The COVID-19 pandemic has created great uncertainty for businesses and society globally.
Our priority has been the safety of our people, customers, suppliers and the communities in which we operate. It has been a challenging period but the steps we have taken in recent years to create a more simple, agile and efficient business, coupled with the dedication of all my colleagues across the whole of Johnson Matthey, have enabled us to navigate it well. I am pleased that we delivered operating performance ahead of market expectations, as well as good cash generation, and made further progress on transforming the group.
In Clean Air, following the temporary disruption earlier in the year, we are currently seeing a strong recovery in demand across all regions, especially in China. Efficient Natural Resources saw an impact from weaker demand in some end markets, although we are seeing positive momentum in licensing with new wins and are strongly positioned for the energy transition. Health is benefiting from new customer contracts which will also drive future growth. We are making good progress with the commercialisation of eLNO and, given our increasing confidence from customer testing, are now proceeding with the front end engineering design for our second commercial plant.
Across the group we have made structural improvements to our operating model to drive efficiency and increase capability, and are already starting to see the benefits. Our actions include executing on our targeted annualised cost savings of c.GBP225 million by the end of 2022/23; optimising our global manufacturing footprint in Clean Air and delivering significant working capital benefits by fundamentally changing our metal operating model. Consistent with our ongoing strategy to create a simpler and more efficient portfolio, we completed the disposal of two of our smaller non-core activities.
Activity in autos and other key markets has improved since the beginning of the COVID-19 pandemic and we expect a materially stronger second half in comparison to the first half of this year. However, the path of recovery remains uncertain and we are not providing quantitative guidance for the group overall for the year ending 31st March 2021. In light of the market backdrop, but also reflecting the group's performance and the importance of dividends to shareholders, the board has approved an interim dividend of 20.0 pence per share.
I am excited by our medium term growth prospects driven by accelerating global trends and we are purpose led to reduce the impact of climate change. We are investing for our future and remain focused on executing our growth opportunities including battery materials, fuel cells and our hydrogen production technologies.
Reported revenue increased 2% driven by higher average precious metal prices
Reported operating profit declined 74% driven by lower demand in Clean Air and major impairment and restructuring charges of GBP78 million
Reported EPS declined 87%, reflecting lower reported operating profit and higher net finance charges
Cash inflow from operating activities was GBP482 million
Sales declined 20%, primarily driven by weaker demand in Clean Air. Sales in Efficient Natural Resources and New Markets also declined whilst Health grew
Underlying operating profit declined 42% primarily driven by Clean Air. In aggregate, operating profit from our other operating sectors was broadly flat
Underlying EPS declined 50% reflecting lower operating profit and higher net finance charges
Capital expenditure of GBP148 million as we continue to invest in our strategic growth projects
Free cash flow improved to GBP256 million benefiting from lower precious metal working capital, despite higher average precious metal prices
Strong balance sheet maintained with net debt of GBP0.9 billion; net debt to EBITDA of 1.6 times
Return on invested capital (ROIC) decreased to 10.4% primarily due to lower operating profit
The group maintains a strong balance sheet, good access to liquidity and is cash generative. In a challenging period, operating performance improved progressively through the first half, although remains below the prior year with heightened levels of uncertainty persisting. In considering all these factors and recognising the importance of dividends to shareholders, the board has approved an interim dividend of 20.0 pence per share (1H 2019/20: 24.5 pence per share).
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. The interim dividend will be paid to shareholders on 4th February 2021, with an ex dividend date of 26th November 2020.
Outlook for the year ending 31st March 2021
Activity in autos and other key markets has improved since the COVID-19 pandemic began earlier this year and we expect a materially stronger second half in comparison to the first half of this year. However, the path of recovery remains uncertain and we are not providing quantitative guidance for the group overall for the year ending 31st March 2021. Looking at each of our sectors:
Clean Air performance recovered strongly through the first half. The global outlook for autos has improved, with external data now suggesting European and US automotive production could be down c.20% in our fiscal year, compared with the previous estimate of down c.25%, with China above the prior year. In heavy duty, external data suggests European and US production could be down c.30% with the Chinese market above the prior year. Order patterns remain volatile and visibility is low, meaning the actual outcome for the full year could still be materially different. Our flexible cost base, with c.75% of costs being variable before mitigation, enables us to manage different levels of activity
Efficient Natural Resources full year operating performance is expected to be below the prior year, although we currently expect our usual seasonality and a stronger second half. Catalyst Technologies is likely to be below the prior year due to weaker demand whilst PGM Services is expected to be above the prior year, benefiting from higher average precious metal prices
In Health we continue to make progress with our new customer contracts for active pharmaceutical ingredients used in generic opioid addiction therapies and our work with innovator customers which will drive future growth. Consequently, we expect full year operating performance to be above the level of the prior year
In New Markets we expect operating performance to be above the level of the prior year
We continue to drive efficiency and are making good progress against our targeted annualised cost savings of c.GBP225 million. From these initiatives, we are on track to deliver expected benefits of GBP59 million4 in the year ending 31st March 2021, with costs in the year of c.GBP90 million. To support our medium term growth, we are continuing to invest in our strategic growth projects.
Appointment of interim Chief Financial Officer
As previously announced, Anna Manz will be stepping down as Chief Financial Officer and Executive Director of Johnson Matthey on 20th November 2020. We are pleased to announce the appointment of Karen Hayzen-Smith, currently Group Financial Controller, as interim Chief Financial Officer with immediate effect. Karen will not be appointed to the board.
Tel: 020 7269 8241
Vara consensus for underlying operating profit in the first half 2020/21 was GBP142 million (range: GBP122 million to GBP158 million) as at 18th November 2020.
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.
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 2019/20 results converted at 2020/21 average exchange rates.
Revenue excluding sales of precious metals to customers and the precious metal content of products sold to customers.
GBP59 million includes GBP30 million relating to Clean Air footprint and driving group organisational efficiency, and GBP29 million of procurement savings.
eLNO is a trademark of Johnson Matthey Public Limited Company.
Tel: +32 2 709 2098
Fax: +32 2 709 2301