China plc China plc Annual Report 2006 Contents Financial Highlights Directors, Secretary and Advisers Chairman’s Statement Financial Overview Business Review Prospects Directors’ Report Report of the Remuneration Committee Corporate Governance Report of the Auditors Consolidated Profit and Loss Account Page 1 3 5 6 9 10 12 20 27 30 31 Statement of Total Recognised Gains and Losses 32 Note of Historical Cost Profits and Losses Balance Sheets Consolidated Cash Flow Statement 32 33 35 Notes to the Consolidated Financial Statements 37 Five Year Record Notice of Annual General Meeting 64 65 front cover: Orbit inside cover: top right: Buffet Miniatures top left: CK Buttercup Financial Highlights Before exceptional items Exceptional items 2006 £’000 2006 £’000 Before exceptional items as restated (note 28) 2005 £’000 Exceptional items 2005 £’000 Total 2006 £’000 Results Turnover - continuing operations 47,757 – 47,757 46,399 Operating profit - continuing operations 2,777 784 3,561 2,696 Share of operating profit/(loss) of associate net of impairment Net interest receivable Other financing income/(costs) 5 241 64 – – – 5 241 64 (21) 75 (189) Profit on ordinary activities before profit on disposal of fixed assets 3,087 784 3,871 2,561 Profit on disposal of fixed assets – 1,876 1,876 – Profit on ordinary activities before taxation 3,087 2,660 5,747 2,561 – – – – – – 269 269 Dividends paid Key Ratios Operating margin before exceptional items Operating margin after exceptional items Basic earnings per share Adjusted earnings per share Diluted basic earnings per share Diluted adjusted earnings per share Dividends paid per share 1,217 5.8% 7.5% 37.6p 20.4p 37.5p 20.3p 11.2p China plc China plc Total as restated (note 28) 2005 £’000 46,399 2,696 (21) 75 (189) 2,561 269 2,830 1,194 5.8% 5.8% 24.7p 17.6p 24.6p 17.5p 11.0p page 1 China plc China plc5 Year Performance turnover £000 profit 60000 50000 40000 30000 20000 10000 4 0 9 , 0 5 4 7 4 , 9 4 2 7 9 , 8 4 9 9 3 , 6 4 7 5 7 , 7 4 turnover £000 profit 60000 0 '02 '03 '04 '05 '06 42,398 50000 40000 4 0 9 , 0 5 4 7 4 , 9 4 2 7 9 , 8 4 7 5 7 , 7 4 1 6 5 , 2 5 . 1 2 9 9 3 , 6 4 6 7 2 , 3 2 . 8 1 7 8 0 , 3 6 . 7 1 0 . 5 1 '04 '05 '06 30000 4000 20000 3000 10000 2000 1000 0 25 20 15 3 4 0 , 2 '02 '03 10 0 3 8 7 , 2 42,398 42,398 turnover £000 4 0 9 , 0 5 4 7 4 , 9 4 2 7 9 , 8 4 9 9 3 , 6 4 7 5 7 , 7 4 60000 50000 40000 30000 20000 10000 0 4000 Turnover (£000) 3000 2000 1000 0 6 7 2 , 3 7 8 0 , 3 1 6 5 , 2 3 8 7 , 2 profit 3 4 0 , 2 '02 '03 '04 '05 '06 4000 3000 2000 1000 6 7 2 , 3 7 8 0 , 3 1 6 5 , 2 3 8 7 , 2 3 4 0 , 2 4 . 0 2 Profit before profit on disposal of fixed assets, exceptional items and recognition of deferred tax asset (£000) 0 '02 '03 '04 '05 '06 '02 '03 '04 '05 '06 5 0 '02 '03 '04 '05 '06 '02 '03 '04 '05 '06 25 20 15 10 5 0 25 20 15 10 5 0 5 . 1 2 2 . 8 1 . 4 0 2 6 . 7 1 0 . 5 1 '02 '03 '04 '05 '06 Adj earning per share . 5 1 2 . 4 0 2 . 2 8 1 . 0 5 1 . 6 7 1 '02 '03 '04 '05 '06 Adj earning per share page 2 Adj earning per share Adjusted earnings per share (p) Company Profile Churchill China plc Directors, secretary and advisers China plc China plc EXECUTIVE DIRECTORS SOLICITORS A D Roper D J S Taylor D M O’Connor R N Grundy I T Hicks Addleshaw Goddard 100 Barbirolli Square Manchester M2 3AB NON-EXECUTIVE DIRECTORS STOCKBROKERS AND ADVISERS E S Roper (Chairman)* • Brewin Dolphin Securities R S Kettel* • J N E Sparey* • SECRETARY AND REGISTERED OFFICE D J S Taylor ACA Marlborough Pottery High Street Tunstall Stoke-on-Trent Staffordshire ST6 5NZ Edmund House 12-22 Newhall Street Birmingham B3 3DB BANKERS Lloyds TSB plc 41 Market Street Longton Stoke-on-Trent Staffordshire ST3 1BN AUDITORS REGISTRARS PricewaterhouseCoopers LLP Lloyds TSB Registrars Cornwall Court Cornwall Street Birmingham B3 2DT The Causeway Worthing West Sussex BN99 6DA * Member of audit committee • Member of remuneration committee Registered no: 2709505 page 3 “ We consolidated our market leadership position, making good progress in a range of new market sectors.” page 4 left: Orbit below left: Alchemy White below right: X Squared Chairman’s Statement China plc China plc “ Our strong financial position and confidence in our core profitability will enable us to implement a number of development initiatives. We are reviewing a number of options for growth” Group turnover for the year was £47.8m (2005: £46.4m) and profit Our strategy emphasising design, procurement and efficient order before taxation and exceptional items £3.1m (2005: £2.6m). Group fulfilment has been well received by major retailers in the UK, US profit before taxation was £5.7m (2005: £2.8m). Operating cash and other export markets. generation before additional pension contributions was also strong at £5.7m (2005: £5.4m). Our cost base continued to be impacted by increases in energy prices, particularly in the fourth quarter. The completion of a number Sales to Hospitality customers, recovered strongly from a restrained of projects has however enabled us to become more efficient within first half to finish the year at figure of £27.4m (2005: £26.6m). Good our operations, allowing us to offset some of the additional costs. progress was made within UK national accounts, the US market and in the Middle East. The Alchemy range continues to prosper with In the early part of the year we made significant progress in significant year on year growth. Vitrified sales were more restrained strengthening our balance sheet. The sale of the Alexander site at a although new product launches have been well received. premium to carrying value enabled us to make a further substantial contribution to our main defined benefit pension scheme. Alongside It is pleasing to report a growth in Retail sales to £20.4m (2005: this a targeted reduction in inventory levels played a significant part £19.8m) where we had expected to record lower sales following in strong cash generation. the move to direct shipment to customers. Whilst the increase has been achieved largely from lower margin promotional contracts it is especially gratifying given current retail market uncertainties. page 5 China plc China plc Financial Overview In the year to 31 December 2006 Group sales were £47.8m (2005: the consolidation of activities from our Whieldon Road site has £46.4m) and profit before exceptional items and taxation was necessitated a reduction in the carrying value of certain plant and £3.1m (2005: £2.6m). This increase continues the progress made in machinery at that location, a charge of £0.3m has been made the second half of 2005. Profit after exceptional items but before against profits taxation was £5.7m (2005: £2.8m). The additional contributions made into the Group’s defined benefit Over the year the Group has generated strong operating cash flow scheme and the cessation of future accrual have significantly of £5.7m (2005: £5.4m) before one off pension payments. This reduced the Group’s liability in respect of its net pension deficit was achieved through a combination of improved profitability and to £2.8m (2005: £6.5m). The Board now believes that the pension disciplined working capital management, which led to a reduction deficit is at a manageable level which for the foreseeable future may in stock of £1.8m and consequent improvement in cash flow. There be addressed without significant additional funding. was little effect on overall cash balances from exceptional items as receipts from property disposals were matched by a one-off payment Adjusted earnings per share were 20.4p (2005: 17.6p). Basic into the Group’s defined benefit pension scheme. Nevertheless cash earnings per share were 37.6p (2005: 24.7p). balances improved from £2.6m at the end of 2005 to a figure of £6.4m at 31 December 2006. Dividend The results for the period include a number of exceptional items The Board is pleased to announce that given the achievement of resulting in a net benefit to profit before taxation of £2.7m (2005: forecasts and the continued strong cash generation evident in the £0.3m). In January 2006 we disposed of the Alexander Pottery, second half of the year it proposes an increased final dividend of Cobridge realising gross proceeds of the sale of £3.0m and an 8.1p per ordinary share (2005: 7.3p). The total dividends declared in exceptional gain of £1.9m. Additionally, the cessation of future relation to the year will therefore increase to 12.0p per ordinary share accrual to the Group’s defined benefit pension scheme on 31 (2005: 11.0p). March 2006 led to a one off positive adjustment in relation to the curtailment of future benefits. This amount of £1.1m (2005: nil) has been treated as exceptional given its size. Conversely, page 6 right: Fruit de Saison above left: Energy above right: Sanderson “Our Retail operation begins the year in its strongest position for some time” right: Fruit de Saison above left: Energy above right: Sanderson page 7 “Alchemy sales grew substantially once again, demonstrating the inherent appeal of this product range to all markets and the continued success of our new product development programme” page 8 China plc China plc Operating Review Sales Sales of Hospitality products were £27.4m (2005: £26.6m), with good investment in this area increased during 2006. We intend to further growth in the second half of the year. Sales were up 3% on last year, extend our range of product in Vitrified, Alchemy and other areas in a good performance given a flat first half. In the UK we consolidated 2007. our market leadership position, making good progress in a range of new market sectors. Overseas we have also seen significant growth Sales of Retail products at £20.4m (2005: £19.8m), generated a in North American and Middle East markets, US sales improved performance somewhat in excess of our expectations; this was by 40%. These gains reflect our long term investment in market flattered by additional promotional volumes generally at lower development. margins. Alchemy sales grew substantially once again, demonstrating Our business model remains to offer a high quality design, the inherent appeal of this product range to all markets and the procurement and fulfillment service to UK and export customers continued success of our new product development programme. either through our UK operation or on a direct shipment basis. This Sales of vitrified products declined slightly overall, although within strategy continues to win new business and we have extended the this new product launches performed to expectations. Innovative range of major retailers we service during the year. product development remains the key to future growth and our Manufacturing and Operations The continued programme of consolidation of manufacturing and The year has benefited from cost and efficiency improvements warehousing operations to our Sandyford site has had a significant related to our development of new warehousing, although the less effect on mitigating the net cost of energy rises experienced in tangible investment in demand forecasting systems and people has the year. New investment has also allowed us to support the also realised substantial benefits. production of innovative new products which are the lifeblood of our forward strategy and to improve the flexibility of our manufacturing Our Shanghai operation has become well established in the year and operations. Increased energy prices have clearly had a negative has made a substantial contribution to the improvements we have effect on this years performance, but we expect that the rate of seen in procurement and customer service. increase experienced in recent years will now moderate. left: Mono above left: Buffet Minatures above right: Coast page 9 China plc China plc Board Changes As announced in January, I will be retiring from the Board at the Annual Jonathan Sparey, who joined Churchill in 2000 as a Non-Executive General Meeting in May this year, and as such this will be my last Director, will succeed me as Chairman. Jonathan is a senior partner in Chairman’s statement. Since joining the Group in 1960, it has been my L.E.K Consulting LLP, a leading international corporate strategy firm, pleasure to work alongside many talented and committed people, and and I look forward to him continuing to provide strategic advice and I would like to take this opportunity to thank everyone involved with direction for the Group in his new role as Chairman. Churchill in making my time at the Company an extremely rewarding and fulfilling experience. Prospects far left: Alchemy left: Disney right: Buffet far right: Ultimo We expect that the steady growth in revenue from our Hospitality Our strong financial position and confidence in Churchill’s core business will continue as the investment we have made in new profitability will enable us to implement key development initiatives. products and target market sectors worldwide generates a return. We are reviewing a number of options to accelerate growth across Our Retail operation begins the year in its strongest position for some the markets we serve and will be making further investments in our time and our customers increasingly value the services we provide. We operational base. have not anticipated a recurrence of the promotional business which supported 2006’s performance, but expect that our core business will I am pleased to report that trading in the early months of 2007 has continue to improve its contribution to Group profitability. New licenses been encouraging and in line with our expectations. from Disney and Sanderson will reinforce this progress. page 10 Stephen Roper Chairman Stephen Roper Chairman 21 March 2007 April 2006 Alchemy Miniatures page 11 far left: Alchemy left: Disney right: Buffet far right: Ultimo Stephen Roper Chairman 21 March 2007 71701 PRE 2 16/4/07 22:01 Page 12 Directors’ Report The Directors present their report and the audited financial statements for the year ended 31 December 2006. Principal activities, operating and financial review The consolidated profit and loss account for the year is set out on page 31. The principal activity of the Group is the manufacture and sale of ceramic and related products for hospitality and household markets around the world. A review of the operations of the Group during the year and its future prospects are given in the Chairman’s Statement on page 5 and Business Review on page 13. Dividends and transfers to reserves The Directors have paid the following dividends in respect of the years ended 31 December 2006 and 31 December 2005: Ordinary dividend: Final dividend 2005 7.3p (2004: 7.3p) per 10p ordinary share Interim dividend 2006 3.9p (2005: 3.7p) per 10p ordinary share 2006 £’000 793 424 –––––––– 1,217 –––––––– –––––––– After the payment of the above dividends, the profit for the financial year of £2,871,000 (2005: £1,484,000) will be transferred to the Group’s reserves. The Directors now recommend payment of the following dividend Ordinary dividend: Final dividend 2006 8.1p (2005: 7.3p) per 10p ordinary share 2006 £’000 883 –––––––– –––––––– Directors The Directors of the Company who have served during the year and since the year then ended are as follows: 2005 £’000 792 402 –––––––– 1,194 –––––––– –––––––– 2005 £’000 793 –––––––– –––––––– E S Roper* A D Roper D J S Taylor D M O’Connor R S Kettel * J N E Sparey * R N Grundy I T Hicks (appointed 28 September 2006) * Non executive The Directors retiring by rotation are D J S Taylor and D M O’Connor who being eligible, offer themselves for re-election. The unexpired terms of the service contracts of D J S Taylor and D M O’Connor are twelve months. I T Hicks was appointed as a Director of the Company on 28 September 2006 and in accordance with the Company’s articles, retires at the next Annual General Meeting. The unexpired term of I T Hicks’ service contract is six months. page 12 71701 PRE 2 16/4/07 22:01 Page 13 Directors (continued) The biographical details of the Directors are as follows: Stephen Roper, non executive Chairman, aged 64, has worked for Churchill in a number of sales and management roles since joining the company in 1960, latterly as Group Chief Executive from 1990 and as Executive Chairman in 1999. He was appointed non executive Chairman in 2003. He has extensive experience of sales and market development, particularly in relation to export markets. Andrew Roper, Group Managing Director, aged 58, has worked for the Company since 1973. He is a qualified Chartered Accountant and has responsibility for the development of Group strategy and for operational performance and development. He was appointed to his present role in 1998. David Taylor, Finance Director and Company Secretary, aged 47, has worked for the Group for 15 years. Following qualification as a Chartered Accountant with KPMG, he worked in a number of finance roles before joining Churchill in 1992. He was appointed to the Board in 1993. Rodney Kettel, non executive Director, aged 63, was formerly a partner in PricewaterhouseCoopers, Chartered Accountants, Birmingham, and has extensive experience in advising listed companies. He joined the Board in 1999. David O’Connor, Managing Director: Retail products, aged 50, has worked for Churchill for 16 years in a number of production, operations and marketing roles. He has extensive experience within the Ceramics industry and joined the Board in 1999. Jonathan Sparey, non executive Director, aged 49, is a partner in L.E.K. Consulting, a leading international corporate strategy firm. He was previously a Director of the merchant bank Samuel Montagu and Co. He joined the Board in 2000. Ralph Grundy, Managing Director: Hospitality products, aged 46, joined Churchill in 1998 and was appointed to the Board in 2000. He has worked in a number of senior sales and marketing roles, principally within the luxury and fast moving consumer goods sectors. Iain Hicks, Sourcing Director, aged 37, has worked for the Group in a variety of roles since joining Churchill in 1992. He has led the development of the Group’s sourcing operation since it was established in 1999 and was appointed to the Board in 2006. Business review Business environment We operate in many different geographic markets serving hospitality and retail customers with a range of tabletop products. Whilst our principal exposure is to the UK market, where we generate over 60% of our gross revenue, we also enjoy significant sales to Europe and North America which respectively account for 18% and 14% of our turnover. Almost without exception all of these markets are subject to a high level of competitive pressure and our costs of operation require constant review and control. It is a general characteristic of our markets that there has been increased consolidation amongst our customers. Customers for hospitality products, both in terms of our immediate customers within the distribution chain and end users, have tended to grow in size and in the proportion of the overall market they serve. Distribution channels for the household markets have moved towards bigger retailers as large chain operations expand their product ranges from food to include multiple product categories, including household goods. Whilst total market size information is not easily available for our markets, we believe that there have been no significant changes in the overall size of or markets during the year. Competitively, the abolition of EU quotas on ceramic tableware from Chinese suppliers in 2005 initially led to increased competition in the UK and Europe from import companies. This pressure has now stabilised somewhat although we anticipate that markets will continue to be competitive. Our UK manufacturing operations have also been subject to a number of cost pressures, principally driven by increased energy prices. We have responded to these cost rises through restructuring our operations and by reducing our usage of gas and electricity. We believe that to succeed as a business we must remain agile and to anticipate and respond to these changes. Our business model cannot remain static and we must constantly review our business and amend our operations where necessary. page 13 71701 PRE 2 16/4/07 22:01 Page 14 Directors’ Report (continued) Strategy The Group’s strategy remains to generate improved shareholder returns through the provision of value to customers through excellence in design, quality and service. We aim to increase Group profitability principally through steady increments to sales and margins, but also in active control of our cost base. It is no longer sufficient simply to provide a value based offering, we must meet our customers expectations in key areas in order to remain their preferred supplier. Design It is a key strategic aim to design products that meet our end users requirements both in terms of performance, shape and surface design. Our target markets require product that is ascetically appealing whilst also being functional and robust. We offer a broad range of product satisfying a range of design styles, product types and price points. Product lifecycles in certain parts of our business are shortening with the consequent requirement to reduce design and development lead times and increase flexibility. All our product, whether made in our own factories or sourced from third party manufacturers, is researched and designed within Churchill or in conjunction with experienced external designers. The ability to develop new products and ranges and to bring these to market is an important part of our success. We have invested significant resource in new staff and flexible technology to increase our capability in this area. We review our performance in relation to the new product development process and in the performance of new products and ranges after launch. We also try to ensure that we have a balanced design team and that are given sufficient freedom to anticipate market trends and requirements to allow them to innovate successful new products. Quality Historically, as a manufacturer, we measured our quality in relation to the effectiveness of our factories. However we understand that quality must exist throughout our business process. Quality is reflected not only in the appearance of our product but in its design, its performance in operation and in the systems which support the fulfilment of our contract with our customers. In addition to the introduction of quality systems within manufacturing and operations, we have had to develop new working methods with third party suppliers to ensure that the product that our customer receives is as they expect. This includes the identification and review of potential suppliers, the periodic audit of established partners and the clarification of exact product specifications. We measure quality through the review of customer feedback and active involvement with our customers after we have sold product to them. Customer service Customer service remains a key element of our strategy. The fulfilment of customer expectations is critical to the maintenance of good relationships. Most of our customers are repeat customers and as such we must ensure that they return to Churchill. We have steadily developed our IT systems to forecast likely demand for products and to manage our stock holding to ensure that we meet ambitious on time, in full, delivery targets. In addition we have organised our production facilities to balance efficient production with flexible manufacture to ensure that we can respond quickly to unexpected demand levels. We aim to invest regularly in new production technology in order to meet changing demand levels and to develop our IT systems in this area. In the last three years we have invested £3m in new warehousing and logistics in order to efficiently meet our customers needs. We assess our performance in this area principally by measurement of the degree to which we meet agreed order delivery schedules on time and in full. These targets are monitored on a regular basis. page 14 71701 PRE 2 16/4/07 22:01 Page 15 Research and development The introduction of new and innovative products and designs remains a cornerstone of our future strategy. The Group’s aim is to continue to identify future market trends and then to design and develop products that meet these needs. A significant effort is made to develop our process technology to allow the introduction of more complex product designs. New product development is controlled through regular meetings and the success of new launches is reviewed in the short term against individual targets and over the longer term as a function of our strategy. Future outlook The Board believes that demand for hospitality products in developed markets will continue to increase as leisure related spending continues to grow. There has been a significant expansion in eating out in the UK to the extent that there are now over 300,000 individual foodservice outlets covering a wide range of commercial and institutional activities. The Group intends to continue to expand its leading UK position whilst investing in the development of export markets. The opportunities overseas may be divided into markets where hospitality is well established, but the Group has not achieved a reasonable market share and developmental markets where demand for hospitality products is likely to grow as local or regional economies develop. It is therefore believed that there will be significant opportunities for further and sustained growth in the medium and long term. Demand for retail products has been subject to a number of pressures in recent years. Overall volume demand in the Group’s principal markets has remained steady, however the monetary value of the markets has reduced as price points have fallen, mainly due to overseas competition and changes in the structure of retail distribution channels. It is believed that these pressures are unlikely to abate in the short term although a degree of price stability does appear to be emerging and is expected to continue. Principal risks and uncertainties The Group’s operations are subject to a number of risks. The key business risks affecting the Group are set out below: Market change The Group operates in dynamic markets where there have been significant recent changes to economic conditions, the major distribution channels within each market and the relative competitive position of suppliers to these markets. It is therefore important that the Group continues to review the markets in which it currently operates and wishes to develop to ensure that it continues to meet customer needs in an efficient and profitable manner. The risk inherent in each market is offset by the relatively broad spread of our operations in geographic terms and by a widening portfolio of products to serve different segments of these markets. We are also actively developing new geographic markets. Currency exposure The Group’s position as a worldwide provider of ceramic and related products means that our profitability will be subject to currency fluctuations related to export sales. Our policy is generally to offer our customers the ability to be invoiced in their local currency. Our non sterling receipts are principally denominated in US dollars and Euros. Against US dollar receipts we have a natural offset due to our overseas sourcing operations where the cost of purchase from our third party suppliers is generally denominated in US dollars. We review and control our transactional foreign currency exposure regularly and take appropriate action to manage net exposures using simple option forward contracts. We do not as a matter of policy take longer term positions to cover economic foreign currency exposure in this area, but review currency rate changes as part of our pricing policy. Cost competitiveness Our markets have been subject to significant cost movements in recent years. We have responded by augmenting our UK production facilities with a wide range of third party suppliers who generally operate in lower cost environments. The spread of these suppliers gives us the ability to switch production to obtain the best balance of quality and price. As a major user of energy within our production process we have an exposure to changes in availability and price of gas and electricity. page 15 71701 PRE 2 16/4/07 22:01 Page 16 Directors’ Report (continued) Cost competitiveness (continued) We have sought to control this risk through management of our overall energy consumption and through contractual arrangements to ensure that we maintain adequate supplies of power at a cost which enables us to operate. Product compliance We are exposed to risk in relation to our products meeting accepted safety standards within the markets we serve. Each major geographic market applies different standards and legal penalties may be considerable for non compliance. We manage these risks principally through the monitoring of applicable standards, the testing of our product to ensure it meets these standards and sale in accordance with local regulations. We also, where practical, maintain appropriate external insurance. Key Performance Indicators Sales and sales growth The absolute level of sales and sales growth are reviewed regularly through the year against previous year and target levels. Sales 2006: £47.8m (2005: £46.4m) Sales growth 2006: 3.0% (2005: -5.0%) Overall sales levels have increased despite the anticipated impact of higher levels of direct sales to customers. Customer service and stock Customer service and stockholding levels are reviewed on a regular basis as part of the operational management of the Group’s business. The main aim of this measure is to ensure that the Group’s strong reputation for on time order fulfilment is maintained, consistent with the efficient operation of production and sourcing activities and the optimisation of working capital. Stock 2006: £6.8m (2005: £8.6m) The level of stock and work in progress has reduced during the year given management action to reduce certain levels of overstock, through the change in mix of business away from that supplied through UK warehouses and also as a result of further implementation of stock management systems. Operating profit and profit before taxation before exceptional items The level of operating profit and significant factors affecting its delivery are reviewed and controlled on a regular basis. Operating profit before exceptional items 2006: £2.8m (2005: £2.7m) Operating profit before tax and exceptional items increased as additional sales and contribution levels offset higher input prices principally in relation to energy. The level of profit before tax and exceptional items are reviewed on a monthly basis against previous performance and target levels. Profit before taxation and exceptional items 2006: £3.1m (2005: £2.6m) Profit before tax and exceptional items increased in 2006 due to the increase in operating profit but also due to an increase in interest receipts arising from higher average cash balances and other financing income. page 16 71701 PRE 2 16/4/07 22:01 Page 17 Operating cash generation The Group believes that over an extended time period it is important to generate cash at an operating level equivalent to declared operating profit, before adjustment for exceptional items. This measure identifies the effectiveness of our control over working capital demands and ensures that cash is available for further investment in the business, to ensure that our shareholders receive an appropriate return and to meet taxation payments. Operating profit before exceptional items 2006: £2.8m (2005: £2.7m) Operating cash generation before additional pension contributions 2006: £5.7m (2005: £5.4m) In both of the years under review operating cash generation was significantly in excess of operating profit, principally due to the reduction in stock holding levels achieved in those years. Insurance of directors The Group maintains insurance for the Directors in respect of their duties as Directors. Employees Our employees are critical to the current and future success of our business, we continually monitor and review our human resource policies to ensure that we exceed statutory requirements and to ensure that we have a committed well motivated team. We regularly communicate with our employees through team briefs and Works Committee meetings informing and involving them in the business’s objectives and strategy. We endeavour to maintain an open and constructive relationship with our employees’ trade union representation and meet regularly with them to discuss developments within the business. The Group remains actively committed to the training and development of all employees, working with local educational establishments, private providers and the Ceramic Industry Learning Network. The Group aims to deliver a programme of training to meet business and individual needs and goals. Churchill China maintains a programme using Process Improvement Teams and masterclass techniques engaging employees in the development of new methods to improve quality, processes and performance. We are committed to Total Quality Management and aim to continue to improve and extend the skill base of our workforce encouraging multi-skilling across all business functions. Employees are actively encouraged to seek promotion within the business and wherever possible we promote from within. The Group runs a successful commercial graduate training programme to complement the development of our existing workforce. The Group is fully committed to its equal opportunities employment policy offering equality in training, career development and promotion of all employees irrespective of gender, ethnic origin, age, nationality, marital status, religion, sexual orientation or disability. We work to identify and minimise all Health and Safety risks in the business, providing a safe and healthy working environment for all our employees and visitors. Regular training through our Health and Safety department aims to ensure that our management team is up to date with all changes in policies and legislation and that all employees are regularly briefed and trained in those standards. Environment The Group monitors the impact of its business on the environment. In addition to the process of management of omissions from its operations, the Group has instituted actions to pro-actively address the levels of waste produced by the business and its consumption of energy. Specific programmes are in place to recover and recycle waste created by our manufacturing process and we are actively working with our customers and suppliers to reduce the levels of packaging associated with our products. page 17 71701 PRE 2 16/4/07 22:01 Page 18 Directors’ Report (continued) Financing The Group currently uses short term variable rate financing arrangements to provide finance for working capital requirements. The Group also finances certain fixed assets using fixed rate finance leases (as set out at note 27). Financial instruments The Group uses forward exchange contracts and foreign currency bank accounts to manage its exposure to exchange rate risk caused by trading activities in currencies other than sterling. The risk management policy adopted is to regularly review forward foreign currency cash flows, identifying the currency effect of completed sale and purchase transactions, transactions which have been contracted for but not completed and an assessment of expected likely forward cash flows. The net currency exposure arising from this review is then managed using forward option contracts. Net currency exposures are generally covered between three and six months forward at any point in time. The Group does not trade in financial instruments. The Group has no material interest rate risk, the only interest rate exposure is in relation to short term cash deposits and borrowings. Substantial shareholdings The Directors have been advised of the following individual interests, or Group of interests, other than those dealt with in the summary of Directors interests, held by persons acting together, which at 14 March 2007 exceeded 3% of the Company’s issued share capital: Shareholder Landfinance Limited S Baker J A Roper M J & G Roper Discretionary Unit Trust Henderson Global Investors Number of ordinary shares Percentage 1,130,000 1,020,000 1,020,000 920,370 500,000 440,000 10.4% 9.4% 9.4% 8.4% 4.6% 4.1% Suppliers The Group agrees terms and conditions covering its business with its suppliers at the time of each transaction or in advance. In normal circumstances payment is generally made in accordance with these terms, subject to suppliers meeting the agreed terms and conditions. The Group’s average creditor payment period at 31 December 2006 was 23 days (2005: 26 days). The Company has no trade creditors. Political and charitable contributions Contributions made by the Group during the year for political and charitable purposes were £nil (2005: £nil) and £3,640 (2005: £1,450) respectively. In addition to the above the Group regularly donates quantities of product to charitable causes. The estimated value of these donations in 2006 was £9,000 (2005: £9,000). The Group’s policy in respect of charitable donations is to support local charities and institutions, particularly in relation to education and sport. page 18 71701 PRE 2 16/4/07 22:01 Page 19 International Financial Reporting Standards As a company listed on the Alternative Investment Market of the London Stock Exchange, International Financial Reporting Standards will apply to the Group’s financial statements with effect from 1 January 2007. The Group has commenced a review and conversion process to meet these requirements. At present the principal impact identified from this review has been in respect of pension costs which are expected to be similar to the effects arising from the implementation of FRS 17 which has been adopted in the current financial statements (see note 21). No other major effects have currently been identified from this review process. Directors’ responsibilities Company law requires the Directors to prepare financial statements for each financial year that give a true and fair view of the state of affairs of the Company and the Group as at the end of the financial year and of the profit or loss of the Group for that period. The Directors are required to prepare the financial statements on the going concern basis, unless it is inappropriate to assume that the Company will continue in business. The Directors confirm that suitable accounting policies have been used and applied consistently. They also confirm that reasonable and prudent judgments and estimates have been made in preparing the financial statements for the year ended 31 December 2006 and that applicable accounting standards have been followed. The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the financial statements comply with the Companies Act 1985. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The maintenance and integrity of the Churchill China plc website is the responsibility of the Directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Disclosure of information to auditors So far as each Director is aware, there is no relevant audit information of which the Company’s auditors are unaware. Relevant information is defined as “information needed by the Company’s auditors in connection with preparing their report”. Each Director has taken all the steps that he ought to have taken in his duty as a director in order to make himself aware of any relevant audit information and to establish that the Company’s auditors are aware of that information. Auditors The auditors PricewaterhouseCoopers LLP have indicated their willingness to continue in office and a resolution that they be re-appointed will be proposed at the Annual General Meeting. D J S Taylor Company Secretary 21 March 2007 page 19 71701 PRE 2 16/4/07 22:01 Page 20 Directors’ Report (continued) Report of the Remuneration Committee Remuneration policy This section of the Report of the Remuneration Committee is not audited. The terms of Reference for the Remuneration Committee are listed below: ● ● ● To determine on behalf of the Board and the Shareholders the Company’s broad policy for Executive reward and the entire individual remuneration including terms of service for each of the Executive Directors (and as appropriate other nominated Senior Executives). In doing so, to give the Executive Directors appropriate encouragement to enhance Company performance and ensure that they are fairly but reasonably rewarded for their individual responsibilities, abilities and contribution. To report and account directly to the Shareholders, on behalf of the Board, for their decisions. At the same time the Remuneration Committee issued a policy statement which is endorsed by the Board. In determining its policy the Committee has given full consideration to Section B of the best practices provisions annexed to the Listing Rules of the London Stock Exchange. The two elements of this statement are: ● Total rewards to Executive Directors are intended to provide a comprehensive benefit package which both attracts and motivates individuals of calibre and experience to achieve continuous improvement in shareholder benefits (whilst at all times maintaining the highest levels of integrity). Reflecting individual responsibilities, abilities, expertise and preferences, a balance is sought between guaranteed income through salary and pension with incentives aligned to measurable criteria to cover both short and longer term periods. Total rewards will be set with acknowledgement of comparable rewards in industry-related public companies and those of similar scale and also with sensitivity to subordinate staff within the Company with whom the packages will as far as possible be consistent and fair. The Remuneration Committee is composed of R S Kettel, who acts as Chairman, E S Roper and J N E Sparey, all of whom are non executive Directors. During the year the following provided advice which materially assisted the Remuneration Committee; A D Roper (Group Managing Director) and A M Basnett (HR Director, Churchill China (UK) Limited). Directors’ emoluments This section of the Report of the Remuneration Committee is audited. Emoluments of the Directors were as follows: 2006 Executive A D Roper D J S Taylor D M O’Connor R N Grundy I T Hicks* Non executive E S Roper R S Kettel J N E Sparey page 20 Salary £ 196,233 135,333 137,667 137,667 23,751 50,333 31,004 32,000 –––––––– 743,988 –––––––– –––––––– Aggregate emoluments including pensions Performance bonuses Benefits in kind Aggregate emoluments Pensions (see below) £ ££ £ £ 8,000 7,250 7,250 7,250 4,750 – – – –––––––– 34,500 –––––––– –––––––– 568 13,558 17,102 17,398 2,299 568 – – –––––––– 51,493 –––––––– –––––––– 204,801 156,141 162,019 162,315 30,800 50,901 31,004 32,000 –––––––– 829,981 –––––––– –––––––– 3,847 9,703 7,830 8,384 2,243 – – – –––––––– 32,007 –––––––– –––––––– 208,648 165,844 169,849 170,699 33,043 50,901 31,004 32,000 –––––––– 861,988 –––––––– –––––––– 71701 PRE 2 16/4/07 22:01 Page 21 Directors’ emoluments (continued) 2005 Executive A D Roper D J S Taylor D M O’Connor R N Grundy Non executive E S Roper R S Kettel J N E Sparey Performance bonuses Benefits in kind Aggregate emoluments Pensions (see below) Aggregate emoluments including pensions £ – – – – – – – –––––––– – –––––––– –––––––– ££ £ £ 577 13,855 15,397 15,504 577 – – –––––––– 45,910 –––––––– –––––––– 154,777 128,855 137,397 134,171 47,577 29,004 29,000 –––––––– 660,781 –––––––– –––––––– 110,662 12,896 8,067 7,694 – – – –––––––– 139,319 –––––––– –––––––– 265,439 141,751 145,464 141,865 47,577 29,004 29,000 –––––––– 800,100 –––––––– –––––––– Salary £ 154,200 115,000 122,000 118,667 47,000 29,004 29,000 –––––––– 614,871 –––––––– –––––––– *Disclosures made above in relation to I T Hicks relate to the period from the date of his appointment as a Director on 28 September 2006. There were no contracts of significance during or at the end of the financial year in which a Director of the Company was materially interested. Performance bonuses for executive Directors are earned on a basis combining increases in Group profitability, and the achievement of defined personal performance objectives. Performance bonuses are capped at 20% of base salary. Performance bonuses represent up to 17% of total pay for all executive Directors. Benefits in kind include the provision of car benefits, fuel benefits and medical insurance. No Director waived emoluments in respect of the years ended 31 December 2006 and 2005. Pension costs above represent the transfer value of the increase in pension benefits over the year less Directors contributions as required by the Listing Rules, together with contributions made by the Group to defined contribution schemes. For additional information in respect of Directors’ pensions refer to the section ‘Pensions’ below. page 21 71701 PRE 2 16/4/07 22:01 Page 22 Directors’ Report (continued) Share options This section of the Report of the Remuneration Committee is audited. Details of share options granted under the Executive and unapproved Executive schemes are as follows: D J S Taylor Unapproved Executive scheme Executive scheme Unapproved Executive scheme Unapproved Executive scheme Unapproved Executive scheme D M O’Connor Executive scheme Unapproved Executive scheme Executive Scheme Unapproved Executive Scheme R N Grundy Executive scheme Unapproved Executive scheme Unapproved Executive scheme Unapproved Executive scheme I T Hicks Approved Executive scheme Approved Executive scheme Unapproved Executive scheme Number of options Date of 31 December 2006 grant Number of options 31 December 2005 or at date of appointment 13.04.00 5.12.00 5.12.00 19.04.02 30.04.04 5.12.00 19.04.02 30.04.04 30.04.04 5.12.00 5.12.00 19.04.02 30.04.04 19.04.02 30.04.04 30.04.04 7,500 9,500 20,500 15,000 10,000 –––––––– 62,500 –––––––– –––––––– 2,250 15,000 4,000 6,000 –––––––– 27,250 –––––––– –––––––– – 20,500 15,000 10,000 –––––––– 45,500 –––––––– –––––––– – 6,000 4,000 –––––––– 10,000 –––––––– –––––––– 7,500 9,500 20,500 15,000 10,000 –––––––– 62,500 –––––––– –––––––– 9,750 15,000 4,000 6,000 –––––––– 34,750 –––––––– –––––––– 9,500 20,500 15,000 10,000 –––––––– 55,000 –––––––– –––––––– 7,500 6,000 4,000 –––––––– 17,500 –––––––– –––––––– Exercise price p Date from which exercisable 118.5 151 151 171 208 Apr 2003 Dec 2003 Dec 2003 Apr 2005 Apr 2007 Expiry date Apr 2010 Dec 2010 Dec 2010 Apr 2012 Apr 2014 151 171 208 208 151 151 171 208 171 208 208 Dec 2003 Apr 2005 Apr 2007 Apr 2007 Dec 2010 Apr 2012 Apr 2014 Apr 2014 Dec 2003 Dec 2003 Apr 2005 Apr 2007 Dec 2010 Dec 2010 Apr 2012 Apr 2014 April 2005 April 2007 April 2007 April 2012 April 2014 April 2014 On 15 November 2006 D M O’Connor exercised 7,500 share options granted under the Executive Share Option scheme at an exercise price of 151p, R N Grundy exercised 9,500 share options granted under the Executive Share Option scheme at an exercise price of 151p and I T Hicks exercised 7,500 share options granted under the Executive Share Option scheme at an exercise price of 171p. The market price at the date of exercise was 271p. Share options are granted to Directors in accordance with the terms of reference of the Remuneration Committee (see page 20) to provide encouragement to enhance Group performance in the long term and having regard to each employee’s responsibilities, ability and contribution. The grant of options is made at market value at the date of grant at no cost to the employee. The above options are only exercisable subject to the satisfaction of performance criteria in relation to sustained improvement in the financial performance of the Group. In the case of the above options the Remuneration Committee consider that a sustained improvement in the financial performance of the Group represents an increase in the adjusted earnings per ordinary share of the Group of at least 6% above the increase in the Retail Price Index over the three year period from the beginning of the financial year in which the option was granted. The market price of the Company’s shares at the end of the financial year was 255p (2005: 181p). The range of prices for the year to 31 December 2006 was 179p to 273p (2005: 170p to 240p) per ordinary share. page 22 71701 PRE 2 16/4/07 22:01 Page 23 Gains made by Directors on share options This section of the Report of the Remuneration Committee is audited. The gains made by Directors from the exercise of share options during the year, calculated at the market share price at the date of exercise of the options, were as follows: D J S Taylor D M O’Connor R N Grundy I T Hicks 2006 £ – 9,000 11,400 7,500 –––––––– 27,900 –––––––– –––––––– 2005 £ 8,200 25,398 8,200 – –––––––– 41,798 –––––––– –––––––– Pensions This section of the Report of the Remuneration Committee is audited. The method of provision of pension benefits to Directors changed during the year. Up to 31 March 2006 benefits were provided through a defined benefit scheme, the Churchill Group Retirement Benefit Scheme. On 31 March 2006 the accrual of future benefits under this scheme ceased and future pension provision was made under a Group Personal Pension arrangement. The disclosures below reflect this change. Pension benefits earned by Directors under the defined benefit scheme were as follows: A D Roper D J S Taylor D M O’Connor R N Grundy I T Hicks* The disclosure above is in accordance with the Listing Rules. Increase in benefit over the year (excl inflation) £ 401 441 283 354 192 –––––––– 1,671 –––––––– –––––––– Transfer value of increase in benefit less Directors’ contributions £ 3,847 2,260 346 900 3,443 –––––––– 10,796 –––––––– –––––––– Accrued benefit £ 90,731 24,653 24,057 11,720 14,557 –––––––– 165,718 –––––––– –––––––– page 23 71701 PRE 2 16/4/07 22:01 Page 24 Directors’ Report (continued) Pensions (continued) A D Roper D J S Taylor D M O’Connor R N Grundy I T Hicks* Increase in benefit over the year (incl inflation) £ Transfer value at 31 December 2006 £ Transfer value at 31 December 2005 £ Increase in transfer value less Directors’ contributions £ 2,827 1,090 920 653 576 –––––––– 6,066 –––––––– –––––––– 1,551,646 1,416,908 308,246 236,247 107,534 88,419 –––––––– 2,292,132 –––––––– –––––––– 275,437 209,630 93,959 78,833 –––––––– 2,074,767 –––––––– –––––––– 134,738 30,737 24,505 11,463 9,211 –––––––– 210,654 –––––––– –––––––– The disclosure above is in accordance with the Companies Act 1985 * Disclosures made above in relation to I T Hicks relate to his service from 1 January 2006 to 31 December 2006 although he was appointed to the Board on 28 September 2006. The accumulated total benefit is the amount of pension that would be paid each year on retirement based on service to 31 December 2006 or the date of retirement if earlier. All transfer values have been calculated on the basis of actuarial advice in accordance with Actuarial Guidance Note GN11. The transfer values of the accrued entitlement represent the value of assets that the pension scheme would need to transfer to another pension provider on transferring the scheme’s liability in respect of the Directors’ pension benefits that they earned in respect of qualifying services. They do not represent the sums payable to the individual Directors. The increase in the transfer value less Directors’ contributions is the increase in the transfer value of the accrued benefits during the year after deducting the Directors’ personal contributions to the scheme. The transfer value of the increase in accrued benefits, required by the Listing Rules, discloses the current value of the increase in accrued benefits that the Director has earned in the period, whereas the change in his transfer value, required by the Companies Act, discloses the absolute increase or decrease in his transfer value and includes the change in value of accrued benefits that results from market volatility affecting the transfer value at the beginning of the period, as well as the additional value earned in the year. All scheme members have the opportunity to pay Additional Voluntary Contributions. Neither the contributions nor the resulting benefits are included in the above table. All executive Directors are deferred members of the Churchill Retirement Benefit Scheme. The pension benefit of A D Roper is funded to allow retirement based on accrued service to 31 March 2006 on attaining the age of 60 years. A D Roper did not contribute to the Scheme. The pension benefit of D J S Taylor is funded to allow retirement between the ages of 60 and 65 with a pension based on accrued service to 31 March 2006. The pension benefits of D M O’Connor, R N Grundy and I T Hicks are funded to allow retirement at 65 with a pension based on accrued service to 31 March 2006. D J S Taylor, D M O’Connor, R N Grundy and I T Hicks contribute 8% of pensionable earnings towards Scheme benefits. Only basic salary is pensionable. page 24 71701 PRE 2 16/4/07 22:01 Page 25 Pensions (continued) Following the cessation of future accrual to the Churchill Group Retirement Benefit Scheme, D J S Taylor, D M O’Connor, R N Grundy and I T Hicks became members of the Churchill China 2006 Group Personal Pension Plan on 1 April 2006. Contributions paid by the Group in respect of this scheme were at a rate of 7% of pensionable salary. D J S Taylor D M O’Connor R N Grundy I T Hicks* 2006 £ 7,443 7,484 7,484 1,663 –––––––– 24,074 –––––––– –––––––– 2005 £ – – – – –––––––– – –––––––– –––––––– * Since appointment on 28 September 2006. Directors’ service contracts This section of the Report of the Remuneration Committee is not audited. Executive Directors are not appointed on contracts for a fixed duration. A D Roper and D J S Taylor have contracts of service which can be terminated by the Company or the Director with a notice period of twelve months. D M O’Connor and R N Grundy have service contracts that can be terminated with a notice period of twelve months from the Company or six months from the Director. I T Hicks has a service contract that can be terminated with a notice period of six months from the Company or three months from the Director. A D Roper’s and D J S Taylor’s service contracts were signed on 26 October 1994. The service contracts for D M O’Connor, R N Grundy and I T Hicks were signed on 21 March 2000, 11 July 2000 and 5 October 2001 respectively. Non executive Directors are appointed on fixed term contracts of two years duration. Fixed term contracts for non executive Directors were signed on the following dates; E S Roper 20 March 2006, R S Kettel 4 March 2005 and J N E Sparey 20 March 2006. There are no defined contractual payments in the event of termination of a Directors’ service contract. Directors’ interests This section of the Report of the Remuneration Committee is audited. The interests of the Directors and their immediate families and family trusts at 31 December 2006 in the 10p ordinary shares of the Company were as follows: E S Roper A D Roper D J S Taylor R S Kettel D M O’Connor J N E Sparey R N Grundy I T Hicks 2006 2005 1,133,045 862,430 1,163,045 862,430 10,000 20,000 4,599 19,000 6,500 1,500 ––––––––– 2,057,074 ––––––––– ––––––––– 10,000 20,000 4,599 19,000 4,500 – ––––––––– 2,083,574 ––––––––– ––––––––– page 25 71701 PRE 2 16/4/07 22:01 Page 26 Directors’ Report (continued) Directors’ interests (continued) A D Roper’s non-beneficial shareholdings included above at 31 December 2006 were 200,000 (2005: 200,000 10p ordinary shares), as trustee of various trusts established for the benefit of his children. E S Roper’s and A D Roper’s interests in the 10p ordinary shares of the Company at 31 December 2006 represented 10.4% and 7.9% (2005: 10.7% and 7.9%) respectively of the Company’s issued share capital. There has been no change in the interests set out above between 31 December 2006 and 21 March 2007. Performance Graph This section of the Report of the Remuneration Committee is not audited. Total Shareholder Return Fledgling AIM Churchill 250 200 150 100 50 2001 2002 2003 2004 2005 2006 (Source: Bloomberg) Over the five year period against which the total shareholder return from the Group is being assessed, performance has been substantially above that generated by the AIM index, but slightly below that shown by the FTSE fledgling index. The Group has generally achieved a steady rate of return averaging 15% on a compound basis, although in 2005 returns dropped in that year principally due to lower earnings. Over the five year period total shareholder return from the Company has been 101%, whilst that achieved by the AIM index as a whole was 11% and the FTSE Fledgling 132%. In the year to 31 December 2006 the overall return from the Company was 36%, the AIM index achieved a -2% return and the FTSE Fledgling index 13%. In the opinion of the Directors the above indices are the most appropriate indices against which to measure the total shareholder return of Churchill China plc as they are constituted of businesses of similar size to the Company. On behalf of the Board R S Kettel Chairman of the Remuneration Committee 21 March 2007 page 26 71701 PRE 2 16/4/07 22:01 Page 27 Corporate Governance As a Company quoted on the Alternative Investment Market of the London Stock Exchange, the Company is not required to comply with the Principles of Good Governance and Code of Best Practice (“the Combined Code”), however the Board supports the standards required by the Combined Code. During the year ended 31 December 2006 the Company was in full compliance with the Code provisions except in a limited number of areas as discussed in the following paragraphs. The Board of Directors The Board is currently composed of five executive and three non executive Directors and meets at least eleven times per year. It is felt that the current composition and operation of the Board is adequate to ensure a balance of power and authority. The non executive members of the Board take an active and influential part in Board procedures and a senior independent non executive Director, R S Kettel, has been formally appointed. The Combined Code recommends that the Boards of listed companies include at least three independent non executive Directors. R S Kettel and J N E Sparey are considered to be independent. Given his period of executive service prior to his current appointment, his significant shareholding and family relationships, E S Roper is not considered to be independent as defined by the terms of the Combined Code. The Board does not believe that given the size of the Group and the nature of non executive Directors’ involvement in the business, that this non compliance has been of detriment to the Group. In addition to a formal agenda covering financial control, management and business development, there is appropriate debate addressing areas outside the regular agenda to ensure that all Directors are able to take an informed view of the progress of the business. The nature of the organisational structure of the Group allows executive Directors to maintain a close involvement in all aspects of the Group’s operations. A schedule of matters reserved for Board decision is maintained and a procedure exists to allow Directors access to independent professional advice if required. The following table shows the attendance of Directors at Board meetings through the year. E S Roper A D Roper D J S Taylor R S Kettel D M O’Connor J N E Sparey R N Grundy I T Hicks (since appointment) There are two principal sub-committees of the Board. Meetings held Meetings attended 11 11 11 11 11 11 11 3 11 11 11 9 10 11 10 3 The Audit Committee, which is wholly composed of non executive Directors, meets at least twice per year to receive reports from executive management and external auditors and is normally attended by the Finance Director. The audit committee is chaired by R S Kettel. The Remuneration Committee is wholly composed of non executive Directors and is normally attended by the Group Managing Director who takes no part in discussions on his own remuneration. The remuneration committee is chaired by R S Kettel. Terms of reference for both Committees and a remuneration policy statement have been agreed by the Board. The Company does not have a nomination committee as new Board appointments are discussed by the Board as a whole rather than by delegation to a committee. page 27 71701 PRE 2 16/4/07 22:01 Page 28 Directors’ Report (continued) Internal control The Board of Directors has overall responsibility for the Group’s system of internal control and is responsible for reviewing its effectiveness. This system is designed to manage rather than eliminate the risk of failure to achieve business objectives and provides reasonable, but not absolute, assurance against material mis-statement or loss. The Board has established a system for ongoing review of risk assessment and management procedures to ensure that the controls on which it places reliance are operating satisfactorily and that new risks to which the business becomes exposed through its activities are recognised and appropriate controls implemented. These procedures have been in operation throughout the year and in the period to the date of this report. The risks to which the Group is exposed are formally reviewed by the Board twice a year. More regular reviews of individual risk areas are carried out and the results reported to the Board. Operational responsibility for each of the main risk areas has been clearly identified and are allocated to either Directors of the Company or of the Company’s principal operating subsidiary Churchill China (UK) Limited, under the supervision of the Board as a whole. Individual managers and employees are also aware, where appropriate, of their responsibilities in both identifying and controlling risk. The Company’s systems in relation to risk assessment and control seek to ensure that as part of the normal process of business management material risks are identified and brought to the attention of the Board. Directors review risk as part of a regular programme of meetings covering both general business processes and specific risk areas. A system of reporting is in place to provide control information on key risk areas within reports submitted to the Board and reviewed. In addition to this Directors and managers are aware of their responsibility to monitor both changes in business activity and changes to the economic legislative environment in which the Company operates. Potential new risk areas have been identified and control procedures documented. The Board and the Audit Committee have reviewed the effectiveness of the system of internal control during the year. Internal audit The Company does not employ an internal audit department and does not believe that, given the size and structure of the business, the geographic proximity of its major operations and the close control effected by the involvement of Executive Directors in the day to day running of the business, such a department would provide an effective means of gaining significant improvements in internal control. The requirement for an internal audit function is reviewed annually. Internal financial control The Board of Directors has overall responsibility for the Group’s systems of internal financial control which it exercises through an organisational structure with authorisation, monitoring and reporting procedures which are appropriate to the needs of the business. These systems have been designed to give the Board reasonable, but not absolute assurance against material mis-statement or loss. The principal features of the Group’s system of internal financial control are: the maintenance of a control environment in which the need for the highest standards of behaviour and integrity are communicated to employees; the use of a detailed reporting system covering performance against comprehensive financial and other key operating indicators. The Board and the Audit Committee have reviewed the operation and effectiveness of the system of internal financial control during the year. The Board have responded to this review with management and work to address the areas identified. page 28 71701 PRE 2 16/4/07 22:01 Page 29 Going concern The Board confirms that having made enquiries, the Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing financial statements. By order of the Board D J S Taylor Company Secretary 21 March 2007 page 29 71701 PRE 2 16/4/07 22:01 Page 30 Independent Auditors’ Report to the Members of Churchill China plc We have audited the Group and Parent Company financial statements (the ‘‘financial statements’’) of Churchill China plc for the year ended 31 December 2006 which comprise the consolidated profit and loss account, the Group and Company balance sheets, the Group cash flow statement, the Group statement of total recognised gains and losses, the note of historical cost profits and losses and the related notes. These financial statements have been prepared under the accounting policies set out therein. Respective responsibilities of directors and auditors The Directors’ responsibilities for preparing the Annual Report and the financial statements in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice) are set out in the Statement of Directors’ Responsibilities. Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). This report, including the opinion, has been prepared for and only for the Company’s members as a body in accordance with Section 235 of the Companies Act 1985 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with the Companies Act 1985. We also report to you whether in our opinion the information given in the Directors’ Report is consistent with the financial statements. In addition we report to you if, in our opinion, the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors’ remuneration and other transactions is not disclosed. We read other information contained in the Annual Report, and consider whether it is consistent with the audited financial statements. This other information comprises only the Directors’ report, the chairman’s statement, the corporate governance statement, and the remuneration report. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information. We also, at the request of the Directors (because the Company applies the Listing Rules of the Financial Services Authority as if it were a listed company), review whether the Corporate Governance Statement reflects the Company’s compliance with the nine provisions of the Combined Code (2003) specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the Board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control procedures. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgments made by the Directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Group’s and Company’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. Opinion In our opinion: ● the financial statements give a true and fair view, in accordance with United Kingdom Generally Accepted Accounting Practice, of the state of the Group’s and the Parent Company’s affairs as at 31 December 2006 and of the Group’s profit and cash flows for the year then ended; ● the financial statements have been properly prepared in accordance with the Companies Act 1985; and ● the information given in the Directors’ Report is consistent with the financial statements. PricewaterhouseCoopers LLP Chartered Accountants and Registered Auditors Birmingham 21 March 2007 page 30 71701 PRE 2 16/4/07 22:01 Page 31 Consolidated Profit and Loss Account for the year ended 31 December 2006 Notes Before exceptional items 2006 Exceptional items 2006 Total 2006 £’000 £’000 £’000 Before exceptional items 2005 (as restated – note 28) £’000 Exceptional items 2005 £’000 Total 2005 (as restated – note 28) £’000 Turnover – continuing operations Operating profit – continuing operations Share of operating profit/(loss) of associate net of impairment Profit on disposal of fixed assets Net interest receivable and similar items Other financing income/(cost) Profit on ordinary activities before taxation Tax on profit on ordinary activities Profit on ordinary activities after taxation Dividends Retained profit for the year Earnings per ordinary share Diluted earnings per share 2 3 5 6 7 21 8 9 10 11 11 47,757 –––––––– –––––––– – –––––––– –––––––– 47,757 –––––––– –––––––– 46,399 –––––––– –––––––– – –––––––– –––––––– 46,399 –––––––– –––––––– 2,777 784 3,561 2,696 5 – – 1,876 5 1,876 241 64 –––––––– – – –––––––– 241 64 –––––––– – – 269 – 2,696 (21) 269 75 (21) – 75 (189) –––––––– – –––––––– (189) –––––––– 3,087 (874) –––––––– 2,660 (785) –––––––– 5,747 (1,659) –––––––– 2,561 (645) –––––––– 269 493 –––––––– 2,830 (152) –––––––– 1,916 762 2,213 1,875 4,088 (1,217) –––––––– 2,871 –––––––– –––––––– 37.6p 37.5p 2,678 (1,194) –––––––– 1,484 –––––––– –––––––– 24.7p 24.6p page 31 71701 PRE 2 16/4/07 22:01 Page 32 Consolidated Statement of Total Recognised Gains and Losses for the year ended 31 December 2006 Profit for the financial year Actuarial gain on defined benefit pension scheme (note 21) Movement on deferred tax related to the actuarial gain on defined benefit pension scheme (note 20) Currency translation differences Total gains and losses recognised for the year Prior period adjustment (note 28) Total gains and losses recognised since the last annual report 2005 (as restated – note 28) £’000 2,678 1,051 (315) 7 –––––––– 3,421 –––––––– 2006 £’000 4,088 1,110 (333) (10) –––––––– 4,855 (13) –––––––– 4,842 –––––––– –––––––– Note of Historical Cost Profits and Losses for the year ended 31 December 2006 Reported profit on ordinary activities before taxation Difference between historical cost depreciation charge and the actual depreciation charge for the year calculated on the revalued amount Historical cost profit on ordinary activities before taxation Historical cost profit for the year retained after taxation and dividends 2006 £’000 5,747 12 –––––––– 5,759 –––––––– 2,883 –––––––– –––––––– 2005 (as restated – note 28) £’000 2,830 12 –––––––– 2,842 –––––––– 1,496 –––––––– –––––––– page 32 71701 PRE 2 16/4/07 22:01 Page 33 Consolidated Balance Sheet as at 31 December 2006 Fixed assets Intangible assets Tangible assets Investments Current assets Stocks Debtors: amounts falling due within one year Investments and other assets for sale Cash at bank and in hand Creditors: amounts falling due within one year Net current assets Total assets less current liabilities Creditors: amounts falling due after more than one year Provisions for liabilities and charges Net assets excluding pension liability Pension liability Net assets Capital and reserves Called up share capital Share premium account Revaluation reserve Other reserves Profit and loss account Equity shareholders’ funds Notes 2006 12 13 14 15 16 17 18 19 20 21 22 28 28 28 28 25 £’000 34 10,779 819 –––––––– 11,632 –––––––– 6,857 10,412 – 6,410 –––––––– 23,679 –––––––– (6,332) –––––––– 17,347 –––––––– 28,979 – (60) –––––––– 28,919 (2,764) –––––––– 26,155 –––––––– –––––––– 1,090 2,266 1,275 274 21,250 –––––––– 26,155 –––––––– –––––––– 2005 (as restated – note 28) £’000 56 11,485 825 –––––––– 12,366 –––––––– 8,646 10,537 1,022 2,629 –––––––– 22,834 –––––––– (6,268) –––––––– 16,566 –––––––– 28,932 (16) (6) –––––––– 28,910 (6,464) –––––––– 22,446 –––––––– –––––––– 1,086 2,207 1,287 266 17,600 –––––––– 22,446 –––––––– –––––––– The financial statements on pages 31 to 63 were approved by the Board of Directors on 21 March 2007 and were signed on its behalf by: E S Roper D J S Taylor } Directors page 33 71701 PRE 2 16/4/07 22:01 Page 34 Company Balance Sheet as at 31 December 2006 Fixed assets Investments Current assets Debtors: amounts falling due after one year Debtors: amounts falling due within one year Cash at bank and in hand Creditors: amounts falling due within one year Net current assets Total assets less current liabilities Net assets Capital and reserves Called up share capital Share premium account Other reserves Profit and loss account Equity shareholders’ funds Notes 2006 14 16 16 18 22 28 28 £’000 2,601 –––––––– 13,226 119 293 –––––––– 13,638 (33) –––––––– 13,605 –––––––– 16,206 –––––––– 16,206 –––––––– –––––––– 1,090 2,266 21 12,829 –––––––– 16,206 –––––––– –––––––– 2005 (as restated – note 28) £’000 2,601 –––––––– 14,440 115 227 –––––––– 14,782 (24) –––––––– 14,758 –––––––– 17,359 –––––––– 17,359 –––––––– –––––––– 1,086 2,207 13 14,053 –––––––– 17,359 –––––––– –––––––– The financial statements on pages 31 to 63 were approved by the Board of Directors on 21 March 2007 and were signed on its behalf by: E S Roper D J S Taylor } Directors page 34 71701 PRE 2 16/4/07 22:01 Page 35 Consolidated Cash Flow Statement for the year ended 31 December 2006 Net cash inflow from continuing operating activities (see page 36) Returns on investments and servicing of finance Interest received Taxation Capital expenditure Purchase of tangible fixed assets Sale of tangible fixed assets Net cash inflow/(outflow) from capital expenditure Equity dividends paid to shareholders Financing Issue of ordinary shares Payment of principal under finance leases Net cash inflow from financing Increase in cash 2006 £’000 2,747 –––––––– 230 –––––––– (316) –––––––– (747) 3,053 –––––––– 2,306 –––––––– (1,217) –––––––– 63 (22) –––––––– 41 –––––––– 3,791 –––––––– –––––––– 2005 (as restated – note 28) £’000 4,105 –––––––– 67 –––––––– (368) –––––––– (2,380) 1,287 –––––––– (1,093) –––––––– (1,194) –––––––– 99 (6) –––––––– 93 –––––––– 1,610 –––––––– –––––––– page 35 71701 PRE 2 16/4/07 22:01 Page 36 Reconciliation of Operating Profit to Net Cash Inflow from Continuing Activities for the year ended 31 December 2006 Continuing operating activities Operating profit before exceptional costs Exceptional items Operating profit after exceptional costs Depreciation Profit on disposal of tangible fixed assets Goodwill amortisation Pension adjustment – exceptional curtailment (see note 3) Charge for share based payments Decrease in stocks (Increase)/decrease in debtors Increase/(decrease) in creditors Decrease in provisions and liabilities Net cash inflow before additional pension costs Additional cash contributions to the pension scheme (see note 21) Other cash pension costs Net cash inflow from continuing operating activities Reconciliation of Net Cash Flow to Movement in Net Funds Increase in net cash during the year Cash outflow from decrease in debt and lease financing Changes in net funds resulting from cash flows New finance leases Exchange adjustment Net funds at the start of the year Net funds at the end of the year Analysis of Net Funds 2006 £’000 2,777 784 –––––––– 3,561 1,314 (16) 22 (1,150) 8 1,789 (9) 197 (6) –––––––– 5,710 (2,800) (163) –––––––– 2,747 –––––––– –––––––– 2006 £’000 3,791 22 –––––––– 3,813 – (10) 2,591 –––––––– 6,394 –––––––– –––––––– 2005 (as restated – note 28) £’000 2,696 – –––––––– 2,696 1,007 (53) 28 – 7 1,346 838 (403) (72) –––––––– 5,394 (1,200) (89) –––––––– 4,105 –––––––– –––––––– 2005 £’000 1,610 6 –––––––– 1,616 (44) 7 1,012 –––––––– 2,591 –––––––– –––––––– At 1 January 2006 £’000 2,629 (38) –––––––– 2,591 –––––––– –––––––– Cash flow £’000 3,791 22 –––––––– 3,813 –––––––– –––––––– Non cash flow movements £’000 – – –––––––– – –––––––– –––––––– Currency movements £’000 (10) – –––––––– (10) –––––––– –––––––– At 31 December 2006 £’000 6,410 (16) –––––––– 6,394 –––––––– –––––––– Cash at bank and in hand Finance leases page 36 71701 NOTES 16/4/07 22:09 Page 37 Notes to the Financial Statements for the year ended 31 December 2006 1 Principal accounting policies The financial statements have been prepared in accordance with applicable Accounting Standards in the United Kingdom and the Companies Act 1985. A summary of the more important accounting policies, which have been applied consistently except where noted is set out below. Basis of accounting The financial statements are prepared in accordance with the historical cost convention as modified by the revaluation of certain fixed assets. Changes in accounting policies The Group has adopted FRS 20 ‘Share Based Payments’. FRS 20 requires the restatement of previously reported results. The impact of the adoption of FRS 20 can be seen in Note 28. Basis of consolidation The consolidated financial statements include the Company and all its subsidiary undertakings. The financial statements of each undertaking in the Group are prepared to the balance sheet date. Intra-Group sales and profits are eliminated fully on consolidation. Associate The Group’s share of profits less losses of the associate is included in the consolidated profit and loss account, and the Group’s share of its net assets after any impairment to the carrying value of those assets is included in the consolidated balance sheet. These amounts are taken from the latest financial statements of the undertaking concerned, which has the same accounting reference date as the Group. Since the accounting policies of the associate do not necessarily conform in all respects to those of the Group, adjustments are made on consolidation where the amounts involved are material to the Group. Goodwill Goodwill arising on acquisitions made since the introduction of FRS 10 represents the excess of the fair value of the consideration given over the fair value of the assets and liabilities acquired and is amortised on a straight line basis over the period over which, in the opinion of the Directors, the value of the underlying business acquired is expected to exceed the value of the underlying assets. This period is not normally expected to exceed 20 years. Prior to the introduction of the new accounting standard goodwill was written off immediately to reserves. Tangible fixed assets Tangible fixed assets are shown at cost, as adjusted for the revaluation of certain land and buildings. Depreciation is calculated so as to write off the cost, or valuation, of tangible fixed assets, less their estimated residual values over the expected useful economic lives of the assets concerned. The principal annual rates used for this purpose are: Freehold buildings Plant and machinery Motor vehicles Fixtures and fittings Freehold land is not depreciated. % 2 on cost or valuation 10-25 on cost 25 on reducing net book value 25-33 on cost page 37 71701 NOTES 16/4/07 22:09 Page 38 Notes to the Financial Statements for the year ended 31 December 2006 1 Principal accounting policies (continued) Impairment of fixed assets and goodwill Impairments are provided for where it is believed the assets concerned have been subject to an impairment event and that their carrying value is above the higher of their net realisable values and values in use. Values in use are calculated using discounted cash flows using the Group’s cost of capital where applicable. Impairment write downs on previously revalued assets are charged against revaluation reserves, with any additional write down in excess of previous revaluations being charged to the profit and loss account. Operating and finance leases Costs in respect of operating leases are charged on a straight line basis over the lease term. Leasing agreements which transfer to the Group substantially all the benefits and risks of ownership of an asset are treated as if the asset had been purchased outright. The assets are included in fixed assets and the capital element of the leasing commitments is shown as obligations under finance leases. The lease rentals are treated as consisting of capital and interest elements. The capital element is applied to reduce the outstanding obligations and the interest element is charged against profit so as to give a constant periodic rate of charge on the remaining balance outstanding at each accounting period. Assets held under finance leases are depreciated over the shorter of the lease terms and the useful lives of equivalent owned assets. Stocks and work in progress Stocks and work in progress are stated at the lower of cost and net realisable value. In general, cost is determined on a first in first out basis and includes transport and handling costs. Provision is made where necessary for obsolete, slow moving and defective stocks. Foreign currencies Monetary assets and liabilities in foreign currencies are translated into sterling at rates of exchange ruling at the end of the financial year except where those assets and liabilities are covered by forward exchange contracts. All foreign exchange differences are taken to the profit and loss account in the year in which they arise. Trading transactions denominated in foreign currencies are translated into sterling at the exchange rate ruling when the transaction was entered into. For consolidation purposes the results of the overseas subsidiary are translated at the average rate for the year and its assets and liabilities at the year end are translated at the closing rate. Exchange differences on the retranslation of opening net assets are taken to reserves. Assets and liabilities are translated at the rate of exchange ruling at the balance sheet date. Financial instruments Gains and losses on forward exchange contracts matching foreign currency assets and liabilities are recognised in the profit and loss account in the year in which the gain or loss on the matched asset or liability is included in the financial statements. Turnover Turnover, which excludes value added tax, sales between Group companies and trade discounts, represents the invoiced value of goods and services supplied. Investment income Income from investments, other than from the associate, is included, together with the related tax credit, in the consolidated profit and loss account on an accruals basis. page 38 71701 NOTES 16/4/07 22:09 Page 39 1 Principal accounting policies (continued) Deferred taxation Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more tax in the future or a right to pay less tax in the future have occurred at the balance sheet date. Timing differences are differences between the Company’s taxable profits and its results as stated in the financial statements. Deferred tax assets are not recognised to the extent that the transfer of future economic benefits in the future is uncertain. Deferred tax is measured at the tax rates that are expected to apply in the periods in which the timing differences are expected to reverse, based on tax rates and laws that have been enacted or substantially enacted by the balance sheet date. Deferred tax is measured on a non-discounted basis. Provisions Provisions for liabilities and charges are made where an obligation exists at the balance sheet date. Provisions for liabilities and charges are calculated to provide for the cost of completing the restructuring of operations. Provisions are discounted only where it is expected that payments in respect of the amounts provided will be incurred after more than one year from the balance sheet date. Pension scheme arrangements The Group operates a defined benefit pension scheme and defined contribution pension schemes. The defined benefit pension scheme is contracted out of the state scheme. The defined benefit scheme is valued every three years by a professionally qualified independent actuary, the rate of contribution payable being determined by the actuary. In the intervening years the actuary reviews the continuing appropriateness of the valuation. Following the adoption of FRS17, the regular service cost of providing retirement benefits to employees during the year, together with the cost of any benefits relating to past service, is charged to operating profit in the year. A credit representing the expected return on the assets of the scheme during the year is included within other financing cost. This is based on the market value of the assets of the scheme. A charge representing the expected increase in the present value of the liabilities in the scheme is included within other financing costs. This arises from the liabilities of the scheme being one year closer to payment. The difference between the market value of assets and the present value of accrued pension liabilities is shown as an asset or liability in the balance sheet, net of deferred tax. Differences between actual and expected return on assets during the year are recognised in the statement of total recognised gains and losses in the year, together with differences arising from changes in assumptions. The treatment of curtailment benefits is outlined in note 3. The defined contribution pension schemes are not contracted out of the state scheme. Costs are charged as they are incurred. Share based payment Where share options have been issued to employees, the fair value of options at the date of grant is charged to the profit and loss account over the period over which the options are expected to vest. The number of ordinary shares expected to vest at each balance sheet date are adjusted to reflect non market vesting conditions such that the total charge recognised over the vesting period reflects the number of options that ultimately vest. Market vesting conditions are reflected within the fair value of the options granted. If the terms and conditions attaching to options are amended before the options vest any change in the fair value of the options is charged to the profit and loss account over the remaining period to the vesting date. National insurance contributions payable by the Company in relation to unapproved share option schemes are provided for on the difference between the share price at the balance sheet date and the exercise price of the option where the share price is higher than the exercise price. page 39 71701 NOTES 16/4/07 22:09 Page 40 Notes to the Financial Statements for the year ended 31 December 2006 2 Turnover analysis The Directors consider that the Group’s activities are a single class of business. The analysis by geographical area of the Group’s turnover by destination is set out below: Geographical segment United Kingdom Rest of Europe North America Australasia Far East Other 2006 £’000 29,906 8,525 6,667 692 404 1,563 ––––––– 47,757 ––––––– ––––––– 2005 £’000 30,953 9,549 4,208 575 197 917 ––––––– 46,399 ––––––– ––––––– Materially all turnover and profit before taxation arise from the management of trading relationships from the UK and net assets are mainly UK based. 3 Operating profit Before exceptional items 2006 £’000 Exceptional items 2006 £’000 47,757 (1,599) (2,581) (15,084) (24,688) (1,028) ––––––– 2,777 ––––––– ––––––– – – – 1,092 – (308) ––––––– 784 ––––––– ––––––– Total (as restated – note 28) 2005 £’000 46,399 (1,079) (2,709) (15,326) (23,554) (1,035) ––––––– 2,696 ––––––– ––––––– Total 2006 £’000 47,757 (1,599) (2,581) (13,992) (24,688) (1,336) ––––––– 3,561 ––––––– ––––––– Turnover Changes in stocks of finished goods and work in progress Raw materials Staff costs (note 4) Other external charges Depreciation and other amounts written off tangible and intangible fixed assets Operating profit All of the above relate to continuing operations. Exceptional items Costs arising from the restructuring of certain manufacturing operations during 2006 and the resulting write down of tangible fixed assets have been treated as exceptional and have been charged in arriving at the operating profit for the year. The cessation of future accrual to the retirement benefit scheme on 31 March 2006 led to a one off adjustment under FRS 17 ‘Retirement Benefits’ in relation to the curtailment of future benefits. This amount has been treated as exceptional given its size. page 40 71701 NOTES 16/4/07 22:09 Page 41 3 Operating profit (continued) Restructuring costs Curtailment benefit – defined benefit pension scheme 2006 £’000 (366) 1,150 ––––––– 784 ––––––– ––––––– 2005 £’000 – – ––––––– – ––––––– ––––––– A charge of £235,000 (2005: £nil) has been included in the overall tax charge in relation to the exceptional items. The cash outflow in relation to these exceptional items during the year was £55,000 (2005: £78,000). 4 Employee information The average weekly number of persons (including executive Directors) employed by the Group during the year was: By activity Production Sales and administration Employment costs – all employees including executive Directors: Staff costs (for the above persons) Wages and salaries Social security costs Current service cost less curtailments (see note 21) Defined contribution pension cost (see note 21) Other pension costs (see note 21) Cost of employee share schemes (see note 24) 2006 Number 401 195 ––––––– 596 ––––––– ––––––– 2006 £’000 13,291 1,121 (943) 341 174 8 ––––––– 13,992 ––––––– ––––––– 2005 Number 478 185 ––––––– 663 ––––––– ––––––– 2005 (as restated – note 28) £’000 13,392 1,070 604 134 119 7 ––––––– 15,326 ––––––– ––––––– Directors’ emoluments The statutory disclosures for Directors’ emoluments, being the aggregate emoluments, the aggregate amount of gains made by Directors on the exercise of share options and the amount of money receivable by Directors under long term incentive plans in respect of qualifying services have been included within the Remuneration Report. In addition statutory disclosures in respect of the number of Directors to whom retirement benefits are accruing under defined benefit schemes is disclosed. page 41 71701 NOTES 16/4/07 22:09 Page 42 Notes to the Financial Statements for the year ended 31 December 2006 5 Share of operating profit of associate net of impairment Share of operating profit of associate Impairment of investment in associate 2006 £’000 89 (84) ––––––– 5 ––––––– ––––––– 2005 £’000 15 (36) ––––––– (21) ––––––– ––––––– The Directors have performed a review of the carrying value of the investment in the Group’s associated company, Furlong Mills Limited, using a rate of 4.7% (2005: 5.6%) to discount cash flows arising from the investment. Given changes in the market place in which Furlong Mills Limited operates the Directors have concluded that it is appropriate to reduce the carrying value of the Group’s investment. As a result an impairment charge of £84,000 (2005: £36,000) has been recognised. 6 Profit on disposal of fixed assets Profit on disposal of fixed assets 2006 £’000 2005 £’000 1,876 ––––––– ––––––– 269 ––––––– ––––––– The profit on disposal recognised in 2006 is in relation to the sale of Alexander Pottery in January 2006. A taxation charge of £550,000 has been charged in the Group’s overall tax charge in respect of this disposal. Net receipts of £2,898,000 were received in respect of this disposal in the year. The profit on disposal recognised in 2005 is in relation to the sale of Anchor Pottery, Longton in October 2005. A taxation charge of £57,000 has been included in the Group’s overall charge in respect of this disposal. Net receipts of £1,166,000 were received in respect of the disposal during the year. page 42 71701 NOTES 16/4/07 22:09 Page 43 7 Net interest receivable and similar items Other interest receivable Other interest payable Share of interest receivable of associate Income from fixed asset investment 8 Profit on ordinary activities before taxation Profit on ordinary activities before taxation is stated after charging/(crediting) Depreciation charge for the year: Tangible owned fixed assets Tangible fixed assets held under finance leases Tangible owned fixed assets – exceptional Amortisation of goodwill Auditors’ remuneration (Company £1,500 (2005: £1,500)) Profit on disposal of tangible fixed assets Profit on disposal of tangible fixed assets – exceptional Operating lease rentals plant and machinery Auditors’ remuneration Amounts paid to the Group’s auditors were as follows: Audit services (Company £1,500 (2005: £1,500)) Non-audit services – taxation advice 2006 £’000 230 – 11 – ––––––– 241 ––––––– ––––––– 2006 £’000 989 17 308 22 70 (16) (1,876) 83 ––––––– ––––––– 2006 £’000 70 12 ––––––– 82 ––––––– ––––––– 2005 £’000 40 (27) 8 54 ––––––– 75 ––––––– ––––––– 2005 £’000 1,007 – – 28 78 (53) (269) 83 ––––––– ––––––– 2005 £’000 78 20 ––––––– 98 ––––––– ––––––– page 43 71701 NOTES 16/4/07 22:09 Page 44 Notes to the Financial Statements for the year ended 31 December 2006 9 Tax on profit on ordinary activities United Kingdom Corporation tax charge at 30% (2005: 30%): Current year Under/(over) provision in respect of prior years Share of corporation tax of associate Foreign tax Current year Total current tax Deferred tax Reversal of timing differences Recognition of deferred tax asset (see note 20) Total deferred tax Tax on profit on ordinary activities 2006 £’000 122 50 23 16 ––––––– 211 ––––––– ––––––– 1,448 – ––––––– 1,448 ––––––– 1,659 ––––––– ––––––– 2005 (as restated – note 28) £’000 396 (125) 2 10 ––––––– 283 ––––––– ––––––– 419 (550) ––––––– (131) ––––––– 152 ––––––– ––––––– The corporation tax charge for the year includes a credit of £17,000 in relation to restructuring costs which have been treated as exceptional. The deferred taxation charge for the year includes a charge of £550,000 in respect of the disposal of Alexander Pottery, a charge of £345,000 in respect of curtailment benefits under FRS 17 and a credit of £93,000 in relation to restructuring costs all of which have been treated as exceptional. The corporation tax charge for 2005 included a charge of £57,000 in relation to the disposal of Anchor Pottery which has been treated as exceptional. The deferred tax credit for 2005 included the recognition of a deferred tax asset of £550,000 in accordance with FRS 19 “Deferred Tax”. This deferred tax asset reflects the recognition of capital losses which were expected to be realised in 2006 offsetting capital gains arising from the profit on disposal of the Alexander Pottery. This credit has been treated as exceptional. page 44 71701 NOTES 16/4/07 22:09 Page 45 9 Tax charge on profit on ordinary activities (continued) The tax assessed for the year is lower than the standard rate of corporation tax in the UK (30%). The differences are explained below: Profit on ordinary activities Profit on ordinary activities multiplied by the standard rate of corporation tax in the UK of 30% (2005: 30%) Effects of: Expenses not deductible for tax purposes Difference between pension charge and cash contributions Depreciation for the year less than capital allowances Capital losses utilised Adjustment to tax charge in respect of previous years Other Total current tax There are no significant factors affecting the future tax charge. 10 Dividends Ordinary Final 2005 7.3p per 10p ordinary share (Final 2004: 7.3p) Interim 2006 3.9p per 10p ordinary share paid (Interim 2005: 3.7p) 2006 £’000 5,747 ––––––– 1,724 28 (860) (155) (563) 50 (13) ––––––– 211 ––––––– ––––––– 2006 £’000 793 424 ––––––– 1,217 ––––––– ––––––– 2005 (as restated – note 28) £’000 2,830 ––––––– 849 9 (330) (114) – (125) (6) ––––––– 283 ––––––– ––––––– 2005 £’000 792 402 ––––––– 1,194 ––––––– ––––––– page 45 71701 NOTES 16/4/07 22:09 Page 46 Notes to the Financial Statements for the year ended 31 December 2006 11 Earnings per ordinary share The basic earnings per ordinary share is based on the profit on ordinary activities after taxation and on 10,867,167 (2005: 10,844,567) ordinary shares, being the weighted average number of ordinary shares in issue during the year. The adjusted earnings per ordinary share is based on the profit on ordinary activities after taxation and adjusted to take into account exceptional items, profit on disposal of fixed assets and the recognition of related deferred tax assets. The Directors believe that adjusted earnings per share more closely reflects the underlying performance of the Group. 2006 Pence per share 2005 (as restated – note 28) Pence per share Basic earnings per share (Based on earnings £4,088,000 (2005: £2,678,000)) 37.6 24.7 Adjustments: Exceptional items (note 3) Profit on disposal of fixed assets Curtailment of pension benefits (note 3) Recognition of deferred tax asset Adjusted earnings per share 2.4 (12.2) (7.4) – ––––––– 20.4 ––––––– ––––––– – (2.0) – (5.1) ––––––– 17.6 ––––––– ––––––– Diluted basic earnings per ordinary share is based on the profit on ordinary activities after taxation and on 10,910,580 (2005: 10,882,287) ordinary shares, being the weighted average number of ordinary shares in issue during the year of 10,867,167 (2005: 10,844,567) increased by 43,413 (2005: 37,720) shares, being the weighted average number of ordinary shares which would have been issued if the outstanding options to acquire shares in the Group had been exercised at the average share price during the year. Diluted adjusted earnings per ordinary share is based on the profit on ordinary activities after taxation and adjusted to take into account exceptional items, profit on disposal of fixed assets and the recognition of deferred tax assets. 2006 Pence per share 2005 (as restated – note 28) Pence per share Diluted basic earnings per share (Based on earnings £4,088,000 (2005: £2,678,000) 37.5 24.6 Adjustments: Exceptional items (note 3) Profit on disposal of fixed assets Curtailment of pension benefits (note 3) Recognition of deferred tax asset Diluted adjusted earnings per share page 46 2.4 (12.2) (7.4) – ––––––– 20.3 ––––––– ––––––– – (1.9) – (5.1) ––––––– 17.5 ––––––– ––––––– 71701 NOTES 16/4/07 22:09 Page 47 12 Intangible fixed assets The Company has no intangible fixed assets. Details of these relating to the Group are as follows: Cost At 1 January 2006 and 31 December 2006 Aggregate amortisation At 1 January 2006 Charge for the year At 31 December 2006 Net book value At 31 December 2006 At 31 December 2005 Goodwill £’000 444 ––––––– 388 22 ––––––– 410 ––––––– ––––––– 34 ––––––– 56 ––––––– ––––––– The goodwill arising on the acquisition of Wren Giftware was amortised on a straight line basis over 10 years. This period is the period over which the Directors estimate that the value of the underlying business acquired is expected to exceed the value of underlying assets. 13 Tangible fixed assets The Company has no tangible fixed assets. Details of those relating to the Group are as follows: Cost/valuation At 1 January 2006 Additions Disposals At 31 December 2006 Depreciation At 1 January 2006 Charge for the year Disposals At 31 December 2006 Net book value At 31 December 2006 At 31 December 2005 Freehold land and buildings £’000 Plant and machinery £’000 Motor vehicles £’000 9,578 33 – ––––––– 9,611 ––––––– ––––––– 1,305 146 – ––––––– 1,451 ––––––– ––––––– 8,160 ––––––– ––––––– 8,273 ––––––– ––––––– 14,768 221 (831) ––––––– 14,158 ––––––– ––––––– 12,486 836 (831) ––––––– 12,491 ––––––– ––––––– 1,667 ––––––– ––––––– 2,282 ––––––– ––––––– 795 346 (359) ––––––– 782 ––––––– ––––––– 336 146 (220) ––––––– 262 ––––––– ––––––– 520 ––––––– ––––––– 459 ––––––– ––––––– Fixtures and fittings £’000 3,501 147 – ––––––– 3,648 ––––––– ––––––– 3,030 186 – ––––––– 3,216 ––––––– ––––––– 432 ––––––– ––––––– 471 ––––––– ––––––– Total £’000 28,642 747 (1,190) ––––––– 28,199 ––––––– ––––––– 17,157 1,314 (1,051) ––––––– 17,420 ––––––– ––––––– 10,779 ––––––– ––––––– 11,485 ––––––– ––––––– The Group adopted FRS 15 ‘Tangible Fixed Assets’ and has followed the transitional provisions to retain the book value of land and buildings, certain of which were revalued in 1992. page 47 71701 NOTES 16/4/07 22:09 Page 48 Notes to the Financial Statements for the year ended 31 December 2006 13 Tangible fixed assets (continued) Freehold land and buildings are included at valuation on an existing use basis as follows: Valuations in 1992 £’000 3,315 ––––––– ––––––– The historical cost and related depreciation of freehold land and buildings included at a valuation are set out below: Freehold land and buildings Historical cost Depreciation based on cost Historical cost net book value The above figures may be reconciled to the overall cost/valuation of land and buildings shown above as follows: 2006 £’000 7,905 (1,516) ––––––– 6,389 ––––––– ––––––– Historical cost of land and buildings held at 1992 valuation Historical cost of land and buildings additions post 1992 held at cost Historical cost of land and buildings Increase in value – 1992 valuation Cost/valuation of land and buildings Assets at 1992 value £’000 Additions post 1992 £’000 1,609 – ––––––– 1,609 1,706 ––––––– 3,315 ––––––– ––––––– – 6,296 ––––––– 6,296 – ––––––– 6,296 ––––––– ––––––– 2005 £’000 7,872 (1,382) ––––––– 6,490 ––––––– ––––––– Total £’000 1,609 6,296 ––––––– 7,905 1,706 ––––––– 9,611 ––––––– ––––––– The net book value of plant and machinery includes an amount of £51,000 (2005: £68,000) in respect of assets held under finance leases and hire purchase contracts. Depreciation charged on these assets during the year was £17,000 (2005: £nil). page 48 71701 NOTES 16/4/07 22:09 Page 49 14 Investments Group Fixed asset investments Cost At 1 January 2006 Share of retained profit At 31 December 2006 Impairment At 1 January 2006 Impairment of interest in associate At 31 December 2006 Net book value At 31 December 2006 At 31 December 2005 Interest in associate Interest in Associate £’000 Other investment £’000 1,392 78 ––––––– 1,470 ––––––– ––––––– 589 84 ––––––– 673 ––––––– ––––––– 797 ––––––– ––––––– 803 ––––––– ––––––– 22 – ––––––– 22 ––––––– ––––––– – – ––––––– – ––––––– ––––––– 22 ––––––– ––––––– 22 ––––––– ––––––– Total £’000 1,414 78 ––––––– 1,492 ––––––– ––––––– 589 84 ––––––– 673 ––––––– ––––––– 819 ––––––– ––––––– 825 ––––––– ––––––– This represents a holding of 34.4% of the issued £1 ordinary shares of Furlong Mills Limited, a company registered in England, whose principal activity is that of a potters miller. Share of associate’s net assets 2006 £’000 2005 £’000 1,526 ––––––– ––––––– 1,448 ––––––– ––––––– During the year the Group purchased raw materials to a value of £1,804,000 (2005: £1,756,000) from Furlong Mills Limited. Amounts due to that company at 31 December 2006 were £171,000 (2005: £85,000). The difference between the carrying value of the Group’s interest in associate and the share of associate’s net assets reflects the impairment charged in the Group’s accounts and adjustments in relation to accounting policies. Further detail on the impairment charged during the year is given in note 5 to the financial statements. Other investment Shares in unlisted company at cost 2006 £’000 2005 £’000 22 ––––––– ––––––– 22 ––––––– ––––––– Shares in unlisted company represents 35.9% (2005: 35.9%) of the issued ordinary share capital of Shraff Management Limited, a company registered in Great Britain. The Directors do not consider that the investment in Shraff Management Limited should be accounted for as an associate as Churchill China plc is not in a position to exercise significant influence over Shraff Management Limited, taking into account other large third party shareholdings. page 49 71701 NOTES 16/4/07 22:09 Page 50 Notes to the Financial Statements for the year ended 31 December 2006 14 Investments (continued) Company Fixed asset investments Cost or valuation At 1 January 2006 and 31 December 2006 Impairment At 1 January 2006 and 31 December 2006 Net book value At 1 January 2006 and 31 December 2006 Interests in Group undertakings £’000 Other Investments £’000 2,627 ––––––– ––––––– 424 ––––––– ––––––– 2,203 ––––––– ––––––– 398 ––––––– ––––––– – ––––––– ––––––– 398 ––––––– ––––––– Total £’000 3,025 ––––––– ––––––– 424 ––––––– ––––––– 2,601 ––––––– ––––––– The above impairment reduces the carrying value of the Company’s investment in Churchill Fine Bone China (Holdings) Limited and its subsidiaries, to match the underlying net asset value of the subsidiaries concerned. Interests in Group undertakings Interests in Group undertakings comprise the cost of investments in subsidiary undertakings. The principal operating subsidiaries of the Group are as follows: Name of company Country of incorporation Description of shares held Proportion of nominal value of issued shares held Principal activity Churchill China (UK) Limited Great Britain Ordinary 100% Manufacture and sale of ceramic and related products Churchill Ceramics (UK) Limited Great Britain Ordinary 100% Provision of management and property Churchill China, Inc USA Ordinary 100% Sale of ceramic and related products services within the Group Dormant companies within the Group are not included in the above analysis. 15 Stocks The Company has no stocks. Details of stocks relating to the Group are as follows: Raw materials and consumables Work in progress Finished goods and goods for resale 2006 £’000 197 690 5,970 ––––––– 6,857 ––––––– ––––––– 2005 £’000 387 491 7,768 ––––––– 8,646 ––––––– ––––––– The Directors do not consider there is a material difference between the carrying value and replacement cost of stocks. page 50 71701 NOTES 16/4/07 22:09 Page 51 16 Debtors Amounts falling due after one year: Amounts owed by subsidiary undertakings Amounts falling due within one year: Trade debtors Amounts owed by subsidiary undertakings Other debtors Prepayments and accrued income Deferred tax (see note 20) Total debtors Group Company 2006 £’000 2005 £’000 2006 £’000 2005 £’000 – ––––––– – ––––––– 13,226 ––––––– 14,440 ––––––– 9,869 9,721 – 23 219 301 ––––––– 10,412 ––––––– 10,412 ––––––– ––––––– – 9 372 435 ––––––– 10,537 ––––––– 10,537 ––––––– ––––––– – 119 – – – ––––––– 119 ––––––– 13,345 ––––––– ––––––– – 115 – – – ––––––– 115 ––––––– 14,555 ––––––– ––––––– Some element of the deferred tax asset may be due in more than one year. As the timing and extent of future profits and capital expenditure are not certain, this has not been quantified. Debtors include the following amounts receivable in currencies other than sterling: US dollars Euro 17 Investments and other assets for sale Land and buildings, plant and machinery Group Company 2006 £’000 1,318 1,039 ––––––– 2,357 ––––––– ––––––– 2005 £’000 1,006 1,038 ––––––– 2,044 ––––––– ––––––– 2006 £’000 – – ––––––– – ––––––– ––––––– 2005 £’000 – – ––––––– – ––––––– ––––––– 2006 £’000 2005 £’000 – ––––––– ––––––– 1,022 ––––––– ––––––– At 31 December 2005 the above amount represented the carrying value less deposits received of certain land, buildings, plant and machinery at Alexander Pottery, Cobridge, Stoke on Trent, held as an asset for sale. The sale of this asset was completed on 10 January 2006 for total proceeds of £3,000,000. page 51 71701 NOTES 16/4/07 22:09 Page 52 Notes to the Financial Statements for the year ended 31 December 2006 18 Creditors: amounts falling due within one year Trade creditors Amounts due to subsidiary company Obligations under finance leases Taxation and social security Corporation tax Other creditors Accruals and deferred income Group Company 2006 £’000 2005 £’000 2006 £’000 2005 £’000 1,787 2,246 – 16 934 191 2,864 540 ––––––– 6,332 ––––––– ––––––– – 22 1,160 318 1,975 547 ––––––– 6,268 ––––––– ––––––– – 13 – 19 – – – 13 – 6 4 – 1 ––––––– 33 ––––––– ––––––– 1 ––––––– 24 ––––––– ––––––– Trade creditors include an amount of £1,042,000 (2005: £874,000) due in US dollars, and amounts of £2,000 (2005: £1,000) due in Euros. 19 Creditors: amounts falling due after more than one year Obligations under finance leases Finance leases: Repayable in one year or less Repayable between one and two years 20 Provisions for liabilities and charges As at 1 January 2006 Charged to the profit and loss account Utilised in year At 31 December 2006 Included in debtors (note 16) Provisions at 31 December 2006 page 52 2006 £’000 2005 £’000 – ––––––– 16 ––––––– 16 – ––––––– 16 ––––––– ––––––– 22 16 ––––––– 38 ––––––– ––––––– Restructuring provision £’000 Deferred tax £’000 6 – (6) ––––––– – – ––––––– – ––––––– ––––––– (435) 194 – ––––––– (241) 301 ––––––– 60 ––––––– ––––––– 71701 NOTES 16/4/07 22:09 Page 53 20 Provisions for liabilities and charges (continued) Deferred taxation Deferred taxation has been provided to the extent that the Directors believe on the basis of reasonable assumptions and the intentions of management, it is probable that a liability or asset will crystallise. The amount provided is: Accelerated capital allowances Short term timing differences Deferred tax asset Deferred tax asset on pension liability (note 21) Deferred tax asset including asset on pension fund liability The above deferred tax asset is disclosed as follows: Deferred tax current asset (note 16) Deferred tax provision Deferred tax on pension scheme liability (note 21) The movement on deferred tax is as follows: At 1 January 2006 Amount debited to profit and loss account (note 9) Amount debited to statement of total recognised gains and losses At 31 December 2006 including deferred tax asset on pension liability 2006 £’000 172 (413) ––––––– (241) (1,184) ––––––– (1,425) ––––––– ––––––– 2006 £’000 (301) 60 (1,184) ––––––– (1,425) ––––––– ––––––– 2005 £’000 135 (570) ––––––– (435) (2,771) ––––––– (3,206) ––––––– ––––––– 2005 £’000 (435) – (2,771) ––––––– (3,206) ––––––– ––––––– 2006 £’000 (3,206) 1,448 333 ––––––– (1,425) ––––––– ––––––– Deferred tax provision A deferred taxation liability in respect of the 1992 revaluation of Marlborough Pottery of £132,000 (2005: £132,000) has not been provided for as there is no present intention to dispose of the revalued property, therefore such liability is unlikely to crystallise. Any liability would also be matched by available capital losses. In addition to the above, the Group have capital losses amounting to £6,251,000 (2005: £7,056,000) which at the date of approval of the financial statements have been agreed by the tax authorities. The related deferred tax asset has not been recognised except in relation to the proportion that the Directors believe may be recovered in the foreseeable future (£nil (2005: £550,000)). Restructuring provisions A provision was established in 2005 for redundancy and similar costs charged to the profit and loss account, but not paid during the year. These costs were paid in 2006. page 53 71701 NOTES 16/4/07 22:09 Page 54 Notes to the Financial Statements for the year ended 31 December 2006 21 Pension and similar obligations The Group operates three principal pension schemes; a funded pension scheme, the Churchill Group Retirement Benefit Scheme, providing benefits based on final pensionable salary which was closed to new entrants in 1999 and to which the accrual of future benefits ceased on 31 March 2006, the Churchill China 1999 Pension Scheme and the Churchill China 2006 Group Personal Pension Plan. Both of the latter schemes are defined contribution schemes providing benefits based on contributions paid. The assets of the schemes are held separately from those of the Group. The total pension cost for the Group was £722,000 less an exceptional credit of £1,150,000 re curtailment benefits giving a net credit of £428,000 (2005: cost £857,000). Of this cost, £207,000 less an exceptional credit of £1,150,000 re curtailment benefits, giving a net credit of £943,000 (2005: charge of £604,000), related to the Churchill Group Retirement Benefit Scheme, £136,000 (2005: £134,000) was in respect of the Churchill China 1999 Pension Scheme and £205,000 (2005: £nil) was in respect of the Churchill China 2006 Group Personal Pension Scheme. The balance of cost was incurred in respect of overseas and other pension arrangements. At the year end amounts due to pension funds in respect of Company contributions were £36,000 (2005: £69,000). In the period up to the date of cessation of the future accrual of benefits under the Churchill Group Retirement Benefit Scheme on 31 March 2006 the Group paid contributions to the Scheme at a rate of 13.6% of pensionable salary (2005: 13.1%). In addition a contribution of £3,009,000 (2005: £1,200,000) was made in respect of the amortisation of past service liabilities. The forward funding rate of the Scheme following this additional payment and the closure of the Scheme to future accrual was agreed with the Scheme Trustees and Actuary in May 2006. The Group will continue to make payments of £240,000 per annum in respect of the amortisation of past service deficits. These payments will be reviewed at the date of the next triennial actuarial valuation on 31 May 2008. FRS 17 The most recent full valuation of the Group’s defined benefit pension scheme, the Churchill Group Retirement Benefit Scheme (performed on 31 May 2005) has been updated to 31 December 2006 to take account of the requirements of FRS 17. The major assumptions, as recommended by the Scheme Actuary, used to calculate the present value of scheme liabilities were as follows: 2004 % per annum % per annum % per annum 2005 2006 Discount rate Inflation rate Rate of increase in salaries Rate of increase of pensions in payment Rate of increase of deferred pensions 5.1% 3.1% N/A 3.1% 3.1% 4.8% 2.7% 3.9% 2.7% 2.7% 5.2% 2.8% 4.0% 2.8% 2.8% page 54 71701 NOTES 16/4/07 22:09 Page 55 21 Pension and similar obligations (continued) The assets of the scheme and the expected rate of return and liabilities of the scheme at 31 December were: Long term rate of return expected at Value 31 December 31 December 2006 £’000 2006 % Long term rate of return expected at 31 December 2005 % Value 31 December 2005 £’000 Long term rate of return expected at 31 December 2004 % Value 31 December 2004 £’000 Equities Bonds Other Market value of scheme assets Present value of scheme liabilities Deficit in the scheme Related deferred tax asset Net liability 7.5% 4.7% 4.7% ––––––– 7.1% 4.4% 4.4% ––––––– 20,215 1,893 4,904 ––––––– 27,012 (30,960) ––––––– (3,948) 1,184 ––––––– (2,764) ––––––– ––––––– 18,112 1,575 2,230 ––––––– 21,917 (31,152) ––––––– (9,235) 2,771 ––––––– (6,464) ––––––– ––––––– An analysis of the amounts that have been charged to operating profit is as follows: Current service cost Settlements or curtailments Total operating (credit)/charge An analysis of the amounts that have been charged to other financing income is as follows: Expected return on pension scheme assets Interest on pension scheme liabilities Net cost 7.9% 4.7% 4.7% ––––––– 2006 £’000 207 (1,150) ––––––– (943) ––––––– ––––––– 14,461 1,360 1,267 ––––––– 17,088 (28,474) ––––––– (11,386) 3,416 ––––––– (7,970) ––––––– ––––––– 2005 £’000 722 (118) ––––––– 604 ––––––– ––––––– £’000 £’000 1,559 (1,495) ––––––– 64 ––––––– ––––––– 1,292 (1,481) ––––––– (189) ––––––– ––––––– page 55 71701 NOTES 16/4/07 22:09 Page 56 Notes to the Financial Statements for the year ended 31 December 2006 21 Pension and similar obligations (continued) An analysis of the amounts that have been recognised in the statement of total recognised gains and losses (STRGL) is as follows: Actual return less expected return on pension scheme assets Experience gains and losses arising on pension scheme liabilities Changes in assumptions underlying the present value of the scheme liabilities Actuarial gain recognised in STRGL An analysis of the movement in deficit during the year is as follows: Deficit in scheme at beginning of the year Movement in year: Current service cost Contributions (including additional contribution of £2,800,000 (2005: £1,200,000) Settlements or curtailments Other financing income/(cost) Actuarial gain Deficit in scheme at end of the year A history of experience gains and losses at 31 December is as follows: 2006 £’000 839 310 (39) ––––––– 1,110 ––––––– ––––––– 2005 £’000 2,111 53 (1,113) ––––––– 1,051 ––––––– ––––––– £’000 £’000 (9,235) (11,386) (207) 3,170 1,150 64 1,110 ––––––– (3,948) ––––––– ––––––– (722) 1,893 118 (189) 1,051 ––––––– (9,235) ––––––– ––––––– Difference between the expected and actual return on scheme assets: Amounts (£’000) Percentage of scheme assets Experience gains and losses on scheme liabilities: Amount (£’000) Percentage of present value of scheme liabilities Total amount recognised in statement of total recognised gains and losses: Amount (£’000) Percentage of present value of scheme liabilities 2006 2005 2004 2003 2002 839 3% ––––––– ––––––– 310 1% ––––––– ––––––– 1,110 4% ––––––– ––––––– 2,111 10% ––––––– ––––––– 53 0% ––––––– ––––––– 1,051 3% ––––––– ––––––– 296 2% ––––––– ––––––– (133) 1% ––––––– ––––––– 1,234 8% ––––––– ––––––– (90) 0% ––––––– ––––––– (4,244) 35% ––––––– ––––––– (164) 1% ––––––– ––––––– (3,601) 13% ––––––– ––––––– (499) 2% ––––––– ––––––– (5,557) 28% ––––––– ––––––– page 56 71701 NOTES 16/4/07 22:09 Page 57 22 Called up share capital Authorised 14,300,000 ordinary shares of 10p each (2005: 14,300,000) Allotted, called up and fully paid 10,902,126 ordinary shares of 10p each (2005: 10,862,126) 2006 £’000 1,430 ––––––– ––––––– 1,090 ––––––– ––––––– 2005 £’000 1,430 ––––––– ––––––– 1,086 ––––––– ––––––– During the year 40,000 ordinary shares of 10p each were allotted, called up and fully paid under the terms of the unapproved Executive Share Option scheme and Approved Executive Share Option. Consideration for the issue of these ordinary shares was received in the form of cash. 23 Options in shares of Churchill China plc The following options exercisable over ordinary shares were outstanding at 21 March 2007: Number of shares The Executive share option scheme 20,250 47,000 The unapproved Executive share option scheme 12,500 42,000 60,000 53,000 Exercise price 151p 208p 118.5p 151p 171p 208p Date from which exercisable December 2003 April 2007 April 2003 December 2003 April 2005 April 2007 Expiry date December 2010 April 2014 April 2010 December 2010 April 2012 April 2014 24 Share based payments The Executive share option scheme was introduced in October 1994, a complementary unapproved Executive share option scheme was approved by shareholders in October 1996. Options under these schemes are granted with a fixed exercise price equal to the market price of the shares at the date of issue. Options are normally only exercisable after three years from the date of grant and expire ten years from the date of grant. Options granted will be exercisable given satisfaction of the requirement that adjusted earnings per ordinary share will increase by at least 6% above the increase in the Retail Price Index over the three year period from the beginning of the financial year in which the option was granted. Payment of the exercise price of options exercised is received in cash. As required by FRS 20 “Share Based Payments”, a charge to the profit and loss account has been made to reflect the fair value of options granted since 7 November 2002. Options have been valued using the Black-Scholes option pricing model. No performance conditions were used in the fair value calculations. The fair value per option granted and the assumptions used in the calculation were as follows: page 57 71701 NOTES 16/4/07 22:09 Page 58 Notes to the Financial Statements for the year ended 31 December 2006 24 Share based payments (continued) Grant date Share price at grant date Exercise price Number of employees Shares under option (10,000 lapsed) Vesting period (years) Expected volatility Option life (years) Expected life (years) Risk free rate Expected dividends expressed as a dividend yield Fair value per option 30 April 2004 208p 208p 12 110,000 3 25% 10 5 ––––––– ––––––– 4.8% ––––––– ––––––– 5.2% ––––––– ––––––– 24p ––––––– ––––––– Expected volatility is based on historical volatility over the last three years. The expected life is the average expected period to exercise. The risk free rate of return is the yield on zero coupon UK government bonds of a term consistent with the assumed option life. A reconciliation of option movements for the year to 31 December 2006 is set out below. 2006 Number ’000 307,250 (32,500) (40,000) ––––––– 234,750 ––––––– 134,750 2006 Weighted average exercise price 175.5p 173.2p 158.5p ––––––– 178.7p ––––––– 156.9p 2005 Number ’000 2005 Weighted average exercise price 375,250 169.9p – (68,000) ––––––– 307,250 ––––––– 197,250 – 145.0p ––––––– 175.5p ––––––– 157.3p Outstanding at 1 January Forfeited Exercised Outstanding at 31 December Exercisable at 31 December There were no share options granted during the year. page 58 71701 NOTES 16/4/07 22:09 Page 59 24 Share based payments (continued) 2006 Number ’000 2006 Weighted average exercise price 2006 Weighted average remaining life 2006 Weighted average remaining life (expected) (contractual) 2005 Weighted average exercise price 2005 Number ’000 2005 Weighted average remaining life (expected) 2005 Weighted average remaining life (contractual) 100p - 149p 150p - 199p 200p – 250p 118.5p 160.8p 208.0p ––––––– ––––––– 12,500 122,250 100,000 ––––––– ––––––– 0.0 0.0 3.3 4.6 2.3 ––––––– ––––––– 7.3 ––––––– ––––––– 118.5p 159.9p 208.0p ––––––– ––––––– 12,500 184,750 110,000 ––––––– ––––––– 0.0 0.5 4.3 5.5 3.3 ––––––– ––––––– 8.3 ––––––– ––––––– The weighted average share price for options exercised in the period was 158.5p (2005: 145.0p). The total charge during the year for employee share based payment plans was £8,000 (2005: £7,000), all of which related to equity settled share based payment transactions. After deferred tax, the total charge was £6,000 (2005: £5,000). 25 Reconciliation of movements in shareholders’ funds Profit for the year Ordinary dividends New share capital issued Share based payment charge Net exchange adjustments Actuarial gain on defined benefit pension scheme less related deferred tax Net addition to shareholders’ funds Opening shareholders’ funds Closing shareholders’ funds 2006 £’000 4,088 (1,217) 63 8 (10) 777 ––––––– 3,709 ––––––– 22,446 ––––––– 26,155 ––––––– ––––––– 2005 (as restated – note 28) £’000 2,678 (1,194) 99 7 7 736 ––––––– 2,333 ––––––– 20,113 ––––––– 22,446 ––––––– ––––––– page 59 71701 NOTES 16/4/07 22:09 Page 60 Notes to the Financial Statements for the year ended 31 December 2006 26 Analysis of changes in financing during the year 2006 2005 Share capital (including Loans and share finance lease obligations £’000 premium) £’000 Share capital (including share premium) £’000 Loans and finance lease obligations £’000 At 1 January Shares issued net of expenses Cash outflow from financing New finance leases At 31 December 27 Financial instruments Interest rate risk of financial assets and liabilities Variable rate assets: Sterling US Dollar Euro Other Variable rate liabilities: US Dollar Net variable rate assets Fixed rate liabilities Sterling 3,293 63 – – ––––––– 3,356 ––––––– ––––––– 38 – (22) –– ––––––– 16 ––––––– ––––––– 3,194 99 – 44 ––––––– 3,293 ––––––– ––––––– – – (6) ––––––– 38 ––––––– ––––––– 2006 £’000 2005 £’000 6,306 2,156 187 200 14 (297) ––––––– 6,410 (16) ––––––– 6,394 ––––––– ––––––– 305 165 3 – ––––––– 2,629 (38) ––––––– 2,591 ––––––– ––––––– A right of set off exists between variable rate assets and liabilities. The Group’s variable rate financial liabilities attract interest charges based on the Lloyds TSB plc base lending rate. The Group’s variable rate sterling and foreign currency assets are comprised entirely of cash and bank deposits. Interest rates on bank deposits are based on the appropriate Lloyds TSB plc base rate. During the year short term deposits were made for periods between 1 and 11 days and earned interest at rates between 2.7% and 4.8%. The numerical disclosures above do not include details regarding short-term debtors and creditors as permitted by Financial Reporting Standard 13 “Derivatives and other financial instruments”. Fixed rate liabilities mature over the period shown in note 19. page 60 71701 NOTES 16/4/07 22:09 Page 61 27 Financial instruments (continued) Borrowing facilities The Group has undrawn committed borrowing facilities of £5,000,000 expiring within one year. These facilities are subject to an annual review. Fair value of financial assets and liabilities There is no difference between the fair value of financial assets and liabilities and their book value except as noted within “Hedges”. Currency exposures The table below shows the extent to which the Group has monetary assets and liabilities other than sterling. Foreign exchange differences on retranslation of these net assets and liabilities are taken to the Group’s profit and loss account. Currency: US Dollar Euro Other currencies These monetary assets and liabilities may be analysed as follows: Debtors (note 16) Financial assets and liabilities (above) Creditors due within one year (note 18) 2006 £’000 166 1,237 14 ––––––– 1,417 ––––––– ––––––– 2,357 104 (1,044) ––––––– 1,417 ––––––– ––––––– 2005 £’000 437 1,202 3 ––––––– 1,642 ––––––– ––––––– 2,044 473 (875) ––––––– 1,642 ––––––– ––––––– Hedges As explained in the Directors’ Report on page 18, the Group’s policy is to hedge the currency risks to which it is exposed using forward option contracts. At 31 December 2006, the Group had losses of £102,000 (2005: gains of £111,000) on forward option contracts which had been recognised in the profit and loss account and gains of £nil (2005: £nil) on forward option contracts which had not been recognised in the profit and loss account as they relate to transactions which will be completed in future years. All the gains and losses on hedging instruments are expected to be matched by gains and losses on the hedged transactions. page 61 71701 NOTES 16/4/07 22:09 Page 62 Notes to the Financial Statements for the year ended 31 December 2006 28 Reserves Group At 1 January 2006 as previously reported Prior year adjustment FRS 20 Premium on allotment during the year Net exchange adjustments Actuarial gain on defined benefit pension scheme net of deferred tax Share based payment charge for the year Transfer from revaluation reserve to profit and loss account Retained profit for the year At 31 December 2006 Churchill China plc and subsidiaries Associate At 31 December 2006 At 31 December 2005 Share premium Revaluation reserve account £’000 £’000 2,207 – ––––––– 2,207 59 – – – – – ––––––– 2,266 ––––––– ––––––– 2,266 – ––––––– 2,266 ––––––– ––––––– 2,207 ––––––– ––––––– 1,287 – ––––––– 1,287 – – – – (12) – ––––––– 1,275 ––––––– ––––––– 1,275 – ––––––– 1,275 ––––––– ––––––– 1,287 ––––––– ––––––– Other reserves £’000 253 13 ––––––– 266 – – – 8 – – ––––––– 274 ––––––– ––––––– 274 – ––––––– 274 ––––––– ––––––– 266 ––––––– ––––––– Profit and loss account £’000 17,613 (13) ––––––– 17,600 – (10) 777 – 12 2,871 ––––––– 21,250 ––––––– ––––––– 19,862 1,388 ––––––– 21,250 ––––––– ––––––– 17,600 ––––––– ––––––– Cumulative goodwill relating to acquisitions made prior to 2006 which has been eliminated against reserves amounts to £31,000 (2005: £31,000). This goodwill will be credited against any disposal of the acquired businesses. The profit and loss reserve is shown after a charge for £2,764,000 (2005: £6,464,000) in respect of pension liability in relation to the Group’s defined benefit pension scheme. Prior year adjustment and impact of new standards The adoption of FRS 20 “Share Based Payments” has resulted in an increase in staff costs of £8,000 (2005: £7,000). Company At 1 January 2006 as previously reported Prior year adjustment FRS 20 At 1 January 2006 as restated Premium on allotment during the year Loss for the year Less dividends At 31 December 2006 page 62 Share premium account £’000 2,207 – ––––––– 2,207 59 – – ––––––– 2,266 ––––––– ––––––– Profit and loss account £’000 14,066 (13) ––––––– 14,053 – (7) (1,217) ––––––– 12,829 ––––––– ––––––– 71701 NOTES 16/4/07 22:09 Page 63 29 Financial commitments Capital commitments Capital expenditure contracted but not provided for Group Company 2006 £’000 2005 £’000 2006 £’000 2005 £’000 315 ––––––– ––––––– 273 ––––––– ––––––– – ––––––– ––––––– – ––––––– ––––––– Operating lease commitments The Group has financial commitments in respect of non cancellable operating leases of plant and machinery for which the payments extend over a number of years as follows: Annual commitments under non-cancellable operating leases expiring within two to five years Group Company 2006 £’000 2005 £’000 2006 £’000 2005 £’000 141 ––––––– ––––––– 224 ––––––– ––––––– – ––––––– ––––––– – ––––––– ––––––– 30 Company profit and loss account As permitted by Section 230 of the Companies Act 1985, the holding company’s profit and loss account has not been included in these financial statements. The profit for the year, after dividends and other distributions received from subsidiary Companies, is made up as follows: Holding company’s (loss)/profit on ordinary activities for the financial year before tax 2006 £’000 2005 £’000 (7) ––––––– ––––––– 75 ––––––– ––––––– 31 Related party transactions Details of related party transactions are shown in the Directors’ Report and in the Notes to the financial statements appropriate to the type of transaction being dealt with (see note 14). The Group has taken advantage of the exemption under FRS 8 allowing details of related party transactions with subsidiary companies not to be disclosed. The Directors do not consider the Company to have an ultimate controlling party. page 63 71701 NOTES 16/4/07 22:09 Page 64 Five Year Financial Record 2002 2003 2004 £’000 £’000 £’000 2005 (as restated – note 28) £’000 2006 £’000 Turnover 50,904 49,474 48,972 46,399 47,757 Operating profit before exceptional items 1,971 2,727 3,220 2,696 2,777 Share of operating profit/(loss) of associate net of impairment Net interest receivable and similar income Other financing income/(costs) 30 42 – 29 27 – 100 74 (118) (21) 75 (189) 5 241 64 ––––––– ––––––– ––––––– ––––––– ––––––– Profit on ordinary activities before profit on disposal of fixed asset and exceptional items Exceptional items Profit on disposal of fixed assets Profit before taxation Taxation charge Profit after taxation Dividends Retained profit/(loss) Net assets employed Ratios Operating margin before exceptional items Basic earnings per share (pence) Adjusted earnings per share (pence) 2,043 (338) 75 2,783 (1,639) 18 3,276 2,561 (866) 19 – 269 ––––––– ––––––– ––––––– ––––––– 1,780 (352) 1,162 (553) 2,429 (703) 2,830 (152) ––––––– ––––––– ––––––– ––––––– 3,087 784 1,876 ––––––– 5,747 (1,659) ––––––– 1,428 (959) ––––––– 469 ––––––– ––––––– 27,827 ––––––– ––––––– 3.9% 13.4 15.0 609 1,726 2,678 4,088 (1,070) ––––––– (461) ––––––– ––––––– 26,723 ––––––– ––––––– 5.5% 5.7 18.2 (1,117) ––––––– 609 ––––––– ––––––– 20,113 ––––––– ––––––– 6.6% 16.0 21.5 (1,194) ––––––– 1,484 ––––––– ––––––– 22,446 ––––––– ––––––– 5.8% 24.7 17.6 (1,217) ––––––– 2,871 ––––––– ––––––– 26,155 ––––––– ––––––– 5.8% 37.6 20.4 The adjusted earnings per share is based on the profit on ordinary activities after taxation and adjusted to take into account exceptional items, profit on disposal of fixed assets and the recognition of related deferred tax assets. page 64 71701 NOTES 16/4/07 22:09 Page 65 Notice of Annual General Meeting Notice is hereby given that the Annual General Meeting of Churchill China plc will be held at Marlborough Pottery, High Street, Sandyford, Tunstall, Stoke-on-Trent on Wednesday 16 May 2007 at 12.00 noon for the following purposes: Ordinary Business To consider and, if thought fit, to pass the following resolutions which will be proposed as ordinary resolutions: 1. 2. 3. 4. 5. 6. That the reports of the Directors and the Auditors and the Financial Statements for the year ended 31 December 2006 be received. That, as recommended by the Directors, a final dividend of 8.1p on each ordinary share for the year ended 31 December 2006 be declared. That D J S Taylor be re-elected as a Director. That D M O’Connor be re-elected as a Director. That I T Hicks be re-elected as a Director. That the Auditors, PricewaterhouseCoopers LLP, be re-appointed and that the Directors be authorised to fix their remuneration for the year ending 31 December 2007. 7. That the Directors’ Remuneration Report for the year ended 31 December 2006 be approved. Special Business To consider and, if thought fit, to pass the following resolutions which will be proposed as special resolutions: 8. That the Directors of the Company be empowered pursuant to Section 95(1) of the Companies Act 1985 (“the Act”) to allot equity securities (as defined in Section 94(2) of the Act) pursuant to the authority under Section 80 of the Act granted by resolution of the Company passed on 14 May 2003, and/or to sell relevant shares (as defined in Section 94(5) of the Act) of the Company if, immediately before such sale, such shares were held by the Company as treasury shares (within the meaning of Section 162A(3) of the Act), as if Section 89(1) of the Act did not apply to such allotment or sale, provided that this power shall be limited to:- (a) the allotment of equity securities and/or sale of relevant shares in connection with a rights issue (which for this purpose shall mean an offer of equity securities open for acceptance for a period fixed by the Directors in favour of the holders of ordinary shares on the register on a fixed record date where the equity securities respectively attributable to the interests of such holders are proportionate (as nearly as may be) to the respective numbers of ordinary shares held by them, but subject to such exclusions or arrangements as the Directors may deem necessary or desirable to deal with fractional entitlements otherwise arising or legal or practical problems under the laws of, or the regulations or requirements of any regulatory body or authority or stock exchange in, any territory); and (b) the allotment of equity securities and/or sale of relevant shares (otherwise than as mentioned in sub-paragraph (a) of this resolution) up to an aggregate nominal amount of £54,510; and shall expire at the conclusion of the next Annual General Meeting of the Company after the passing of this resolution (or, if earlier, on 15 August 2008) and provided that the Company may make any offer or agreement before the expiry of this power which would or might require equity securities to be allotted pursuant thereto after it has expired. 9. That, in accordance with Chapter VII of Part V of the Act, the Company be generally and unconditionally authorised for the purposes of Section 166 of the Act to make market purchases (within the meaning of Section 163(3) of the Act) of ordinary shares of 10p each in the capital of the Company (“Ordinary Shares”) on such terms and in such manner as the Directors of the Company may from time to time determine, provided that: (a) the maximum aggregate number of Ordinary Shares hereby authorised to be purchased is 1,090,212 representing approximately 10 per cent of the present issued share capital of the Company; page 65 71701 NOTES 16/4/07 22:09 Page 66 Notice of Annual General Meeting (b) (c) the minimum price which may be paid for an Ordinary Share, exclusive of all expenses, shall be 10p; the maximum price which may be paid for an Ordinary Share, exclusive of all expenses, shall not be more than 5 per cent above the average of the middle market quotations for an Ordinary Share as derived from the London Stock Exchange Daily Official List for the five business days immediately preceding the date on which such Ordinary Share is purchased and, unless previously renewed, varied or revoked by special resolution of the Company in general meeting, the authority hereby conferred shall expire at the conclusion of the Company’s next Annual General Meeting after the passing of the resolution (or, if earlier, on 15 August 2008). The Company may prior to the expiry of the authority hereby conferred make a contract or contracts to purchase Ordinary Shares under such authority which will or may be executed wholly or partly after the expiry of such authority. Any Ordinary Shares purchased under the authority hereby conferred will be either cancelled immediately upon completion of the purchase or held, sold, transferred or otherwise dealt with as treasury shares in accordance with the provisions of the Act. By order of the Board D J S Taylor Company Secretary Registered Office Marlborough Pottery High Street Tunstall Stoke-on-Trent ST6 5NZ Registered Number 2709505 Dated 18 April 2007 Explanatory Notes 1. 2. 3. 4. 5. A member entitled to vote at this Meeting is entitled to appoint one or more proxies to attend and, on a poll, vote instead of him. A proxy need not also be a member. A form of proxy for the use of members is enclosed and the attention of the members is drawn to the notes thereon. The appointment of a proxy will not preclude a member from attending at the Meeting and voting thereat in person. There will be available at the Registered Office of the Company during business hours on any weekday (excluding Saturdays and public holidays) from the date of this Notice until the conclusion of the Annual General Meeting, and at Marlborough Pottery, High Street, Sandyford, Tunstall, Stoke-on-Trent from 9.15 a.m. until the conclusion of the Annual General Meeting, the register of Directors’ interests and copies of all service contracts of the Directors of the Company having an unexpired term of at least 12 months. Item 8 in the notice of Annual General Meeting is a special resolution to empower the Directors at any time prior to 15 August 2008 (or, if earlier, the conclusion of the 2008 Annual General Meeting) to allot equity securities (or sell relevant shares out of treasury) for cash without pre-emption up to an aggregate nominal value of £54,510 (equivalent to 545,100 ordinary shares, representing approximately 5 per cent of the present issued share capital). This resolution will also empower the Directors (within the period mentioned above) to allot pursuant to the authority under section 80 of the Companies Act 1985 which was granted at the 2003 Annual General Meeting up to 3,397,874 ordinary shares (representing approximately 31.2 per cent of the present issued share capital) in connection with a rights or similar issue with such modifications as they may consider necessary or desirable to deal with fractions or legal or practical problems. Item 9 in the notice of Annual General Meeting is a special resolution to allow the Company at any time prior to 15 August 2008 (or, if earlier, the conclusion of the 2008 Annual General Meeting) to repurchase up to 1,090,212 ordinary shares (representing approximately 10 per cent of the present issued share capital). The Directors undertake that the authority conferred by this resolution, if approved, will only be used if to do so would result in an increase in earnings per share and be in the best interests of shareholders generally. In accordance with Regulation 41(1) of the Uncertificated Securities Regulations 2001 the Company specifies that only those shareholders who are registered in the Company’s register of members at 12 noon on 14 May 2007 (or, in the case of adjournment, 48 hours before the time of the adjourned meeting) will be entitled to attend or vote at the Meeting and that the number of votes which any such shareholder may cast, upon a poll, will be determined by reference to the number of shares registered in such shareholder’s name at that time. page 66 71701 NOTES 16/4/07 22:09 Page 67 Shareholders’ Notes page 67 71701 NOTES 16/4/07 22:09 Page 68 Shareholders’ Notes page 68 71701 NOTES 16/4/07 22:09 Page 69 Financial Calendar Financial Year End 31 December Preliminary Announcement Annual Report Annual General Meeting & Final Dividend Interim Announcement Interim Dividend March April May August October China plc Churchill China plc Marlborough Pottery, High Street, Tunstall, Stoke-on-Trent ST6 5NZ www.churchillchina.com ©Churchill China plc 2007 China plc Annual Report 2006