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* Profit drops 9 percent after "challenging year"
* Sees "steady progress" in year ahead
* Shares climb hit all-time high
By Clara Ferreira-Marques
LONDON, June 6 (Reuters) - A recovering U.S. auto marketcushioned catalyst maker Johnson Matthey's drop inannual profit, sending its shares to an all-time high as itforecast steady progress due to tougher rules on vehicleemissions.
Johnson Matthey, the world's largest maker of catalysts thatcontrol vehicle emissions, was badly hit by the impact of weakermetals prices on its division that refines, markets anddistributes platinum - used in catalytic converters - and otherprecious metals.
But that was offset by better-than-expected progress in thedivision that makes catalysts for cars, trucks and the chemicalsindustry.
U.S. auto sales have seen a recovery as consumer confidenceimproves, and sales in May were boosted by construction workersand oil drillers snapping up pickup trucks to meet demand fortheir services.
Johnson Matthey posted a 9 percent drop in underlying pretaxprofit to just over 389 million pounds ($599 million) for theyear to the end of March. The fall was smaller than analysts hadforecast.
The company had warned of a tough year for its preciousmetals unit - normally the largest contributor to its bottomline - and investors had fretted over the impact of changes to adistribution deal with Anglo American Platinum, theworld's largest platinum producer.
On Thursday, Johnson Matthey forecast profit growth, helpedby chemicals processing, the impact of bolt-on acquisitions andrecovering prices.
"We'll be growing. We should do better in both the first andthe second half than last year. It is going to be modest growth,but growth nonetheless," Finance Director Robert MacLeod said.
Johnson Matthey stock was up 6.6 percent at 2,756 pence by1220 GMT, off an earlier high of 2,817p but outperforming avirtually flat FTSE 100 index.
"The outlook statement has helped sentiment considerably.Steady progress in the current year is probably better than most people had expected," said analyst Charles Pick at brokerageNumis.
EMISSIONS RULES
Underlying operating profit at the group's environmentaltechnologies division, which makes catalysts for cars andtrucks, climbed 7 percent - despite weaker sales of catalystsfor cars in Europe where the outlook remains uncertain.
Even with lacklustre consumer demand there, Johnson Mattheyexpects to benefit from tighter emissions legislation in Europefrom January. New rules are coming into force that will requireimproved catalysts for trucks and buses, resulting in a three tofour times increase in catalyst sales value per vehicle.
"We feel good that we will get growth in Europe - for ourbusiness - because of the structural drivers," MacLeod said.
China and India are also expected to adopt similar emissionsrules.
As expected, the precious metals products division was hitby low platinum and palladium prices and smaller volumes feedingthrough to its distribution business due to strikes across theSouth African mining industry last year.
That unit reported a 27 percent drop in underlying operatingprofit, although the group said it was seeing improvement.
Johnson Matthey paid a full-year dividend of 57 pence.
