25452.04 19 April 2017 7:14 AM proof 425452.04 19 April 2017 7:14 AM proof 4CHINA PLCANNUAL REPORT 2016 Over 200 years of . . . INNOVATION, PASSION & EXPERTISE Within the hospitality sector, the choice of tableware must meet the highest standards for presentation, practicality and performance. Over 200 years of innovation, passion and expertise make Churchill the natural partner for providing tabletop solutions. The Churchill brand has achieved global recognition and is a reputable supplier of the highest quality ceramics. Respected for service excellence, product quality, environmental responsibilities and product innovation. Pictured: Raku Topaz Blue 25452.04 19 April 2017 7:14 AM proof 4 25452.04 19 April 2017 7:14 AM proof 4 Churchill China plc Annual Report for the year ended 31 December 2016 Discover Stonecast Homespun Company Profile Churchill China plc is a manufacturer and distributor of high performance tabletop products to the Hospitality and Retail sectors worldwide. Our principal business services the growing Hospitality market worldwide, providing high performance tableware and other products to a number of sectors. Our customers include pub, restaurant and hotel chains, sports and conference venues, health and education establishments and contract caterers. We are the market leader in hospitality tableware in the UK and have significant and growing positions in many export markets. We also manufacture and source product sold through Retail customers for consumer use in the home, again in many markets across the world. At the heart of our business are our UK based design, technical and production operations. We offer a high level of service and design and manufacture an engineered performance, product. Our steady investment in new product development produces a leading edge range meeting exacting customer requirements. We maintain our manufacturing and technical excellence through a consistent programme of investment in improved capability process development and new manufacturing technology. We maintain a strong, ungeared balance sheet. We aim to improve performance steadily on a long term basis and to generate cash each year to reinvest within our business and to provide an attractive return to shareholders. Contents Company Profile Five Year Performance Financial Highlights Directors, Secretary and Advisers Chairman’s Statement Strategic Report Directors’ Report Remuneration Report Corporate Governance Independent Auditors’ Report Consolidated Income Statement Consolidated Statement of Comprehensive Income Consolidated Balance Sheet Company Balance Sheet Consolidated Statement of Changes in Equity Company Statement of Changes in Equity Consolidated Cash Flow Statement Reconciliation of Operating Profit to Net Cash Inflow from Operating Activities Notes to the Financial Statements Five Year Financial Record Notice of Annual General Meeting 1 2 4 5 6 14 22 28 37 40 42 43 44 45 46 47 48 49 50 80 81 1 25452.04 19 April 2017 7:14 AM proof 4 Churchill China plc Annual Report for the year ended 31 December 2016 FIVE YEAR PERFORMANCE Revenue (£m) Segment Revenue (£m) 2016 2015 2014 2013 2012 51.1 46.8 44.5 43.2 41.4 2016 2015 2014 2013 2012 44.0 7.1 38.8 8.0 36.0 8.5 32.8 10.4 29.4 12.0 Hospitality Retail Operating Profit (£’000) Operating Margin (%) 2016 2015 2014 2013 2012 6,398 4,959 4,249 3,371 2,830 2016 2015 2014 2013 2012 12.5 10.6 9.5 7.8 6.8 Pre Tax Profit (£’000) Capital Expenditure (£’000) 2016 2015 2014 2013 2012 3,370 2,717 6,515 6,515 5,014 4,317 2016 2015 2014 2013 2012 2,701 1,989 1,331 1,499 1,275 Other Highlights ●● Basic EPS up 29% to 48.2p ●● Final dividend up 16% to 14.8p ●● Cash generated from operations £6.7m (2015: £5.3m) Right: Vintage prints, Stonecast and Homespun 2 25452.04 19 April 2017 7:14 AM proof 4 Churchill China plc Annual Report for the year ended 31 December 2016 25452.04 19 April 2017 7:14 AM proof 4 3 Churchill China plc Annual Report for the year ended 31 December 2016 FINANCIAL HIGHLIGHTS Results Revenue Operating profit Share of results of associate company Net finance cost Profit before income tax Dividends paid Key ratios Operating margin Earnings before interest, tax, depreciation and amortisation (£000) Basic earnings per share Diluted basic earnings per share Dividends per share paid Stonecast Patina 2016 £’000 2015 £’000 51,102 46,829 6,398 4,959 157 (40) 135 (80) 6,515 5,014 2,085 1,816 12.5% 8,114 48.2p 47.8p 19.0p 10.6% 6,454 37.3p 36.9p 16.6p 4 25452.04 19 April 2017 7:14 AM proof 4 Churchill China plc Annual Report for the year ended 31 December 2016 DIRECTORS, SECRETARY AND ADVISERS Bankers Lloyds Bank plc 8th Floor 40 Spring Gardens Manchester M2 1EN Registrars Equiniti Aspect House Spencer Road Lancing West Sussex BN99 6ZX Executive Directors D J S Taylor D M O’Connor J A Roper Non-Executive Directors A J McWalter (Chairman)†* A D Roper †* B M Hynes †* A C Bromford †* Company Secretary and Registered Office D J S Taylor ACA No.1, Marlborough Way Sandyford Stoke-on-Trent Staffordshire ST6 5NZ * Member of the Audit Committee † Member of the Remuneration Committee Independent Auditors PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Cornwall Court 19 Cornwall Street Birmingham B3 2DT Solicitors Addleshaw Goddard 100 Barbirolli Square Manchester M2 3AB Stockbrokers and Advisers N+1 Singer West One Wellington Street Leeds LS1 1BA Alchemy Little Rhymes 25452.04 19 April 2017 7:14 AM proof 4 5 Churchill China plc Annual Report for the year ended 31 December 2016 CHAIRMAN’S STATEMENT “ The strategies we have developed and implemented over several years continue to deliver strong returns.” Introduction I am pleased to announce that our 2016 results again show a strong performance across our business. The strategies we have developed and implemented over several years continue to deliver strong returns. We have prioritised market development in export, product innovation and a shift towards added value ranges. All of these, together with our traditional strengths of service and efficiency, have combined to deliver substantial value. 2016 has undoubtedly been a successful year and we have reached many of our targets earlier than we expected. We intend to continue to build on this success with further development and investment although this is likely to be against a general backdrop of increased economic uncertainty across a number of our markets. Homespun Raku Homespun Right: Retro Blue and Wood 6 25452.04 19 April 2017 7:14 AM proof 4 Churchill China plc Annual Report for the year ended 31 December 2016 “ 2016 has undoubtedly been a successful year.” 25452.04 19 April 2017 7:14 AM proof 4 7 Churchill China plc Annual Report for the year ended 31 December 2016 CHAIRMAN’S STATEMENT Financial Review Total revenues increased by 9% to £51.1m (2015: £46.8m) with strong growth in Hospitality exports. More favourable exchange rates contributed £1.6m to this improvement. Gross margins have improved with much of our increased revenue coming from sales of value added product. Margins on export business also benefited from weaker sterling. Operating profit increased by 29% to £6.4m (2015: £5.0m). Operating margins improved to 12.5% (2015: 10.6%) due to our continued focus on developing profitable business across all our markets and careful management of our cost base. The positive impact of favourable currency rates on operating profit was £0.9m with the benefit to revenue partially offset by increased overhead and buying costs denominated in foreign currency. We have continued to invest in support of our strategic targets. Earnings before interest, tax, depreciation and amortisation increased by 26% to £8.1m (2015: £6.5m). Profit before tax rose by 30% to £6.5m (2015: £5.0m), which was largely a result of our improved operating performance. Our share of the operating profit of our associate company also increased. Basic earnings per share improved by 29% to 48.2p (2015: 37.3p). We have once again generated strong operating cash flows. Operating cash generation was £6.7m (2015: £5.3m). Working capital requirements were neutral despite an increase in inventory to support higher sales and service levels. The cash spend on capital projects increased to £2.5m (2015: £1.2m) with the completion of new building projects and the expansion of capacity in the manufacture of added value products. We expect capital spend to rise again in 2017 as we continue to invest in capacity, capability and efficiency. At the year end, net cash and deposit balances had risen by £0.9m to £12.7m (2015: £11.8m). The present value of the deficit in our defined benefit pension scheme increased during the year by £4.8m to £8.7m as a result of a fall in the discount rate on liabilities following substantial reductions in gilt and bond yields. We have accelerated payments into the scheme to provide more flexibility and security and deficit reduction payments increased by £0.7m to £1.4m in the year. The scheme was closed to future accrual in 2006. Dividend and shareholder return The Board is recommending a 16% increase in the final dividend to 14.8p per share (2015: 12.7p), giving a total of 21.1p for the year (2015: 18.3p). We are pleased that the growth in profitability and continued strong cash generation in the year has allowed us to again raise the dividend at an above average rate. If approved, the final dividend will be paid on 24 May 2017 to shareholders on the register on 28 April 2017, with the ex-dividend date being 27 April 2017. Total shareholder returns have again been good, reflecting both dividend growth and our improved share price performance. Overall returns were 22% (2015: 33%) during the year. Business Revenues have increased across our business with strong progress in Hospitality more than offsetting a further planned contraction in Retail activity. Exports now represent 49% of Group sales. Total sales to our Hospitality customers increased by £5.2m (13%) and reached a new record of £44.0m (2015: £38.8m). Contribution to Group operating profits rose by 29% to £9.2m from £7.2m. The exceptional performance in export markets reported in the first half of 2016 was matched by further growth in the second half. Overall export sales grew by 31%. Whilst there has undoubtedly been some additional benefit from currency this year our progress over the medium term has been good, with export sales increasing by a compound annual rate in excess of 20% over a three year period. This progress has been driven by a combination of extending our distribution networks, investment in sales resource and a strong pipeline of new product introductions. Growth has been strongest in Europe, the region where we first prioritised export development and where we have benefited from Anti- Dumping Duties on imports from China, but has also been good in North America and the Rest of the World. As we expected, progress in the UK has been more difficult to sustain as hospitality market growth has slowed. The rate of opening of new hospitality outlets has reduced and there is less clarity in relation to future growth prospects. We have retained our market leading position and continue to benefit from long term replacement sales. The strength of our established relationships with end users, distributors and agents in the UK and worldwide continues to be of great value to the business. 8 25452.04 19 April 2017 7:14 AM proof 4 Churchill China plc Annual Report for the year ended 31 December 2016 “ We have continued to invest in support of our stragetic targets.” Ripple Retail has continued to perform at a satisfactory level in line with our expectations and established strategy. Revenues reduced from £8.0m to £7.1m reflecting lower licensed sales and an increase in UK manufactured product. Higher margins on manufactured ranges have offset lower profitability on product sourced in US dollars. Contribution to Group profit was again maintained at £0.9m. The core of our strategy has been to progressively move the mix of product we offer away from price competitive areas towards higher value added ranges offering profit opportunities to our customers as well as to Churchill. These products retain our existing technical performance benefits, but also increasingly deliver a differentiated range to customers. This has required a long term investment in both design and process innovation as well as in our people and operations. The rate of progress of new product sales across our markets has exceeded our expectations, with our hand-crafted Stonecast range becoming our most successful product in the three years since its launch. We have a forward programme of new product development targeted at continuing this process of change and re- positioning. Operations Our manufacturing and logistics operations have performed well against demanding targets. The record level of hospitality revenue and the changing mix of production has required significant development and effort to deliver. We have made progress in refining our long term objectives and clearly aligning our fulfilment functions with the strategic aims of the business. Our ability to bring innovative new products from inception and through manufacture to market has been fundamental to the delivery of this year’s performance. Our UK manufacturing operations will remain a key driver and facilitator of our strategy. A number of important manufacturing projects, including the completion of additional production space, the improvement of process flow and the installation of additional capacity, have been delivered on time and on budget. In 2016 capital expenditure on manufacturing and operations was £2.3m (2015: £1.1m). We have also strengthened our team in this area during the year both through the development of our workforce and selective recruitment. We expect to make further progress and investment during 2017. 9 25452.04 19 April 2017 7:14 AM proof 4 Churchill China plc Annual Report for the year ended 31 December 2016 CHAIRMAN’S STATEMENT People The Company continues to benefit from the effort and commitment of our workforce. In an industry reliant on craft, skill, knowledge and experience we greatly appreciate the substantial advantage that our people bring to us. Training and development have been prioritised at all levels across our business and we have committed further resource to building the capability of our workforce. The business’ objectives increasingly require our employees to operate with autonomy and new skills. Our Masterclass process, which identifies opportunities to improve our quality and output, is working well beyond our original expectations and has identified several incremental improvements to our operations. We have supplemented the development of our staff with targeted recruitment where there are opportunities to accelerate our rate of progress. Important long term appointments have been made in sales, marketing and in operations during the year. We have previously noted the retirement of Jonathan Morgan after nine years of service as a Non Executive Director and the recruitment of Angela Bromfield to the Board, again in a Non Executive role. Once more we thank Jonathan for his contribution and welcome Angela. Stonecast Homespun Stone Grey Raku Topaz Blue Homespun Charcoal Black 10 25452.04 19 April 2017 7:14 AM proof 4 Churchill China plc Annual Report for the year ended 31 December 2016 “ We greatly appreciate the substantial advantage that our people bring to us.” Bamboo 11 25452.04 19 April 2017 7:14 AM proof 4 Churchill China plc Annual Report for the year ended 31 December 2016 CHAIRMAN’S STATEMENT Prospects 2016 was a year of strong performance across our business. The progress we made during the year was faster than we originally expected with profit growth ahead of long term average levels. We continue to believe that our strategy is well founded and that it can continue to be successfully executed. Our markets continue to develop and a number of initiatives are in place which we expect to consolidate progress made to date and to provide further opportunities for future profitable growth. Our strategy of innovation, our focus on value added products and the competitive advantage brought by our established position remain important. We expect to continue to expand export revenues, but are more cautious in relation to prospects for the UK. We have clear long term strategic goals in relation to design, quality and service. These encourage us to continue to invest steadily and progressively to deliver long term value to our customers, our employees and also to our shareholders. We look forward to the coming year with confidence. A J McWalter Chairman 27 March 2017 Stonecast Peppercorn Grey Discover RHS Blooms 12 25452.04 19 April 2017 7:14 AM proof 4 Churchill China plc Annual Report for the year ended 31 December 2016 “ We have clear long term strategic goals in relation to design, quality and service.” Stonecast Patina 13 25452.04 19 April 2017 7:14 AM proof 4 Churchill China plc Annual Report for the year ended 31 December 2016 STRATEGIC REPORT The Directors present their Strategic Report for the Group for the year ended 31 December 2016. A review of the operations of the Group during the year and its future prospects are given in the Chairman’s Statement on page 6 and in the following pages. Principal activity and business environment The Group serves hospitality and retail customers in many different geographic areas around the world, supplying a range of tabletop products, principally ceramic tableware. The majority of our revenues are generated from production within our UK manufacturing plant, supplemented by products sourced from third party suppliers. Our revenues are almost equally split between the UK and overseas markets. Our principal exports are to Europe and North America. Hospitality markets are generally recognised as being long term markets linked to economic growth and increased levels of leisure spending by consumers. Our product is a high quality, engineered ceramic designed to meet exacting design, performance and technical standards within the hospitality industry. It is generally sold to end users through well developed distribution networks with a high service level requirement. A significant proportion of sales each year will be repeat or replacement sales to existing customers. Hospitality markets benefit from barriers to entry given the premium customers place on service, quality and technical performance. Whilst larger in scale than hospitality markets, retail markets are normally faster moving and are subject to a higher level of competition. Product life cycles are generally shorter, particularly in more price sensitive sectors of the marketplace. We believe that there has been continued growth in our markets during the year. This growth has been most evident in export markets where dining out continues to grow. We believe we have increased our market share in most export markets that we serve. The rate of growth in the UK market has reduced as investment in new pubs, restaurants and hotels has slowed, although market data continues to indicate that market growth is still positive. Our competitive position has benefited from Anti Dumping Duties imposed on the import of Chinese ceramics to the EU and the relative weakness of Sterling against the US$, Euro and other major currencies since the Brexit Referendum. We have continued our programme of investment in product innovation, market development and capacity expansion. Forecasts for the UK and our major export markets suggest that economic growth will continue in 2017, although the benefits of this may be offset by other macroeconomic changes. Resources and relationships Our key resources remain our customers and employees, our technical and business skills, our long heritage of manufacturing and willingness to embrace new methods to deliver an outstanding service. Whilst Churchill is not a global consumer brand, it is recognised in the hospitality and housewares markets as representing performance, innovation, uncompromising service and responsiveness. Churchill, along with other UK manufacturers, has a significant technical advantage in the nature of the product we offer to our markets. Whilst it is not the lowest cost product, it offers significant benefits in terms of durability and overall lifetime cost to users. We have long-standing relationships with our customers. Whilst many of these are not contractual, we continue to supply the same customers year after year with products that meet their requirements. Our customers value our technical ability, our service and our commitment to high quality design and innovation. Our employees also give us significant advantage. We believe we recruit, retain and develop high quality individuals at all levels within the business who contribute towards the success and growth of the Company and maintain our core values. Almost without exception our employees demonstrate enviable commitment, skill and loyalty. The Group operates principally from one site in Stoke-on-Trent, England, a leading centre for ceramic excellence worldwide. This gives us access to key suppliers, technical support and experienced staff. Our manufacturing plant and logistics facilities have benefited from significant and regular long term investment to improve our business’s efficiency and effectiveness. We believe we operate a high quality, flexible and cost-effective manufacturing process which allows us to respond quickly to customer needs. We also use a number of smaller locations and representative offices around the world. 14 25452.04 19 April 2017 7:14 AM proof 4 Churchill China plc Annual Report for the year ended 31 December 2016 Strategy The Group’s objective is to generate long term benefits to all stakeholders in the business by the provision of value to customers through excellence in design, quality and service. We aim to increase shareholder returns principally through steady increments to sales and margins, through alignment of our cost base with profit opportunities and a focus on cash generation. Our long term aim is to build our presence in markets offering sustainable levels of revenue and profitability and to reduce our exposure to markets where the margin on sales does not adequately cover our costs of operation. For several years this has led us towards development of our position in hospitality markets worldwide and by increased focus on particular sectors of the retail market. Revenue by Market (£’000) 2016 2011 26.2 14.6 5.0 5.3 26.8 8.0 3.0 4.5 RoW • • UK • Europe • North America Our strategic process is designed to allow us to identify markets where we may profitably grow our revenues on a long term basis. We research customer product requirements and the distribution structure in new markets and then invest to generate revenue, margin and ultimately a return for shareholders. We continue to expect short to medium term growth to be weighted towards export markets. Innovation is increasingly important to support our ambition to grow our business. We have invested significant resource in new staff and flexible technology to increase our capability in this area. We also invest steadily in increasing our production capability and in improving our ability to offer innovation and added value to our customers. This involves investment in new product development as well as capital expenditure on productive capacity. We expect to continue to invest long term in our UK manufacturing facility in the future. Hospitality Innovation (£’000) 2016 2011 32.1 11.9 25.1 4.1 • Existing • New It is a key strategic aim to design products that meet our end users’ requirements in terms of performance, shape and surface design. Our target markets require products that are aesthetically appealing whilst also performing to appropriate customer and technical standards. Value added products (£’000) 2016 2011 36.3 13.8 38.6 3.7 • Non Value added • Value added 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. Customer service remains a major part of our strategy and the fulfilment of customer expectations is critical to the maintenance of good relationships. Our production and logistic facilities have been designed to balance efficiency and flexibility within manufacturing to ensure that we can respond quickly to unexpected demand levels and to meet ambitious on time, in full, delivery targets. We invest regularly in these facilities to maintain a market leading position in customer service. 25452.04 19 April 2017 7:14 AM proof 4 15 Churchill China plc Annual Report for the year ended 31 December 2016 STRATEGIC REPORT Performance A more detailed report on our performance is contained in the Chairman’s Statement on page 16. Hospitality markets have generally performed well. Innovation within our product range, distribution network and increased sales and marketing resource have all contributed to strong growth in revenues. The continued popularity of dining out as a leisure activity and further investment by hospitality providers such as pubs, restaurants and hotels remains a major driver of demand for our products. We have seen a further return on our investment in the development of European markets where we have a relatively small market share. We have again increased our investment in building our business in North America, the Middle East, Australasia and Central and South America. These markets are at an early stage of development and our target is to build them steadily to provide a balance to our larger UK and European operations. Revenues from Retail markets have decreased reflecting our decision to allocate increased resource to Hospitality markets. We continue to prioritise profit rather than scale in our Retail business. The maintenance of EU duties on Chinese imports should continue to be positive for all UK ceramics manufacturers. We have benefited from the relative weakness of Sterling against other major currencies during the year. Labour and material costs have risen again at slightly higher rates than underlying inflation. We have invested significantly in new products and our manufacturing process over several years and a number of these investments have contributed to our margin position both through cost reduction and improving our ability to offer cost-effective added value products to our customers. Stonecast Barley White Homespun Stone Grey Homespun Charcoal Black 16 25452.04 19 April 2017 7:14 AM proof 4 Churchill China plc Annual Report for the year ended 31 December 2016 Principal risks and uncertainties The Group’s operations are subject to a number of risks, which are formally reviewed by the Board in a systematic manner on a regular basis. We then build processes to manage appropriately and mitigate risks where possible. The key business risks currently affecting the Group are set out below: Market and economic change The Group operates in dynamic markets where there have been significant recent changes to economic conditions, distribution channels within each market and product requirements in these markets. The Group actively manages its market exposure and profitability, but risks losing revenue if we do not anticipate market trends. The risk inherent in each market is offset by regular review of market conditions and forecasts, 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 actively developing new geographic markets and introducing new product ranges. As we enter new markets this introduces new risks to the Group although it does also diversify our overall market exposure and reliance on existing products. The long term impact of the June Brexit Referendum is not yet clear in respect of the degree of its impact on future economic growth in the UK market or on any additional tariffs that may apply to UK businesses trading with the European Union. The Group monitors this position and adjusts its forward plans where appropriate. It is believed that the Group’s strategies of developing revenues outside of the UK and EU and in building sales of hospitality product where there is a higher level of repeat business would act to mitigate the impact of any adverse changes. 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 revenues and the costs of operation denominated in overseas currencies. Our non Sterling receipts are principally denominated in Euros and US dollars. Against US dollar receipts we have a partial natural offset due to our overseas purchasing. We normally expect to have more significant net Euro receipts. We review and control our transactional foreign currency exposure regularly and take appropriate action to manage net exposures using simple option forward contracts. We also review currency rate changes as part of our pricing policy. Manufacturing and supply chain Approximately 80% of our sales revenues are of products manufactured in our UK facility. Whilst this provides a high quality and effective source of products, it exposes us to risk in the case of the potential loss of availability of all or parts of our factory for an extended period. This risk is controlled through management procedures, appropriate investment and ultimately insurance arrangements. We have augmented our UK production facilities with a range of third party suppliers. The use of these suppliers exposes us to risks in relation to interruption to supply and changes in cost structures arising from economic or regulatory change. We manage this risk by diversifying our sources. As a major user of energy within our production process we have an exposure to changes in availability and price of gas and electricity. 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 efficiently. People Our business depends upon the skills and knowledge of a number of people at all levels within our operation and within supplier companies. Certain of these skills and experience may only be acquired through extensive training and experience and it is possible that they may not be available through the recruitment of new employees in the future. We aim to limit this risk through the establishment of appropriate manpower and succession planning, identifying training, development and recruitment needs. As a substantial employer and manufacturer we need to comply with extensive health and safety requirements. We limit the risks associated with Health and Safety through the application of appropriate systems, regular review and training and investment in risk mitigation. 25452.04 19 April 2017 7:14 AM proof 4 17 Churchill China plc Annual Report for the year ended 31 December 2016 STRATEGIC REPORT Regulation, compliance and taxation Our operations are subject to regulation by many government and non government organisations. The Group aims to manage conformance to these regulations such that it is able to continue to operate and meet appropriate standards. As the majority of our products are used in the consumption of food, 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. New and more stringent standards may be introduced. 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. The markets in which the Group operates are generally subject to various taxes, tariffs and duties levied by national and pan-national governments. These taxes, tariffs and duties and particularly changes in them may affect the Group’s operations and competitive position both positively and negatively. The imposition of Anti Dumping Duty by the EU on imports from China has generally been positive to the Group’s trading operations. This Duty is due for review in 2018 and its application may change following that date. The operation of the Duty may also be affected by changes resulting from the United Kingdom’s exit from the Single Market. The Group assesses and meets its obligations under taxes, tariffs and duties in the markets in which it operates and reflects potential changes in them within strategic and operational plans. Stonecast Peppercorn Grey and Barley White 18 25452.04 19 April 2017 7:14 AM proof 4 Churchill China plc Annual Report for the year ended 31 December 2016 Key performance indicators Revenue and revenue growth The absolute levels of revenue and revenue growth are reviewed regularly by business segment through the year against previous year, current year targets and against strategic expectations. Revenue 2016: Hospitality Retail Revenue growth Hospitality Retail £51.1m (2015: £46.8m) £44.0m (2015: £38.8m) £7.1m (2015: £8.0m) 2016: 9% (2015: 5%) 13% (2015: 8%) -10% (2015: -6%) Sales to Hospitality customers performed strongly, recording growth of 13% against a strong comparative. Export sales rose by 31%, largely as our European business again delivered returns on the investments we have made in the market and more favourable exchange rates. UK sales were maintained despite a reduction in new build activity in the market. Retail sales were lower, reflecting lower sales of licensed products and our focus on profit rather than scale in this market. Operating profit and profit before income tax The level of operating profit and significant factors affecting its delivery are reviewed and controlled on a regular basis. Operating profit 2016: £6.4m (2015: £5.0m) Group operating profit increased by 29%. Performance in our Hospitality division was significantly stronger as high revenue levels, particularly in export markets, offset the cost of additional revenue investment in future development. Retail profits reflected reduced sales and some cost savings. Central costs increased with higher employee benefit costs. Operating margins increased satisfactorily to 12.5% (2015: 10.6%) reflecting an increased mix of added value product and withdrawal from less profitable market sectors in both Hospitality and Retail. The level of profit before income tax is reviewed on a monthly basis against previous performance and target levels. Profit before income tax 2016: £6.5m (2015: £5.0m) Profit before income tax grew by 30% mainly as a result of the strong increase in operating profits. The notional interest charge associated with our pension scheme reduced. Our share of the profit of our associate company Furlong Mills increased. Operating cash generation The Group believes that over an extended time period it is important to generate cash at an operating level at least equivalent to declared operating profit. 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 meet taxation payments and to ensure that our shareholders receive an appropriate return. Operating cash generation 2016: £6.7m (2015: £5.3m) Percentage of operating cash generation to operating profit for the year: 105% (2015: 106%). Three year average percentage of operating cash generation to operating profit: 122% (2015: 134%). Operating cash generation was maintained at satisfactory levels. The increased level of operating profit was offset by a rise in working capital requirement to support increased trading levels. 25452.04 19 April 2017 7:14 AM proof 4 19 Churchill China plc Annual Report for the year ended 31 December 2016 STRATEGIC REPORT Customer service and inventory Customer service and inventory holding 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. Inventory 2016: £9.1m (2015: £8.4m) The rise in inventory holding levels reflects increased stock holdings to support the strong trading levels experienced in Hospitality markets offset by a further reduction of stock holdings associated with the Retail business. Future outlook The Board believes that the strong position we hold in a number of hospitality markets will mean that we will continue to be able to improve our overall business performance. We expect to benefit from continued investment in new product development for hospitality products and from increases in capacity. We believe that the return from our Retail business will remain affected in the short term by a continued reduction in revenues, although this will be mitigated by a continued focus on margins and tight cost controls. The Group’s financial position allows us to invest for the long term and reduces the risk to the business from sudden changes in market conditions. The Board continues to believe that long term demand for hospitality products in developed markets will continue to increase as leisure related spending grows. There has been a long term expansion in eating out in the UK and the Group intends to continue to maintain its leading UK position whilst investing in the development of export markets where our current low market share allows us to grow more easily. In the UK we believe that we will continue to reinforce our market leadership based on our programme of introducing new products specifically targeted at meeting customer requirements. Our progress in export markets over the last five years provides us with an opportunity to grow future revenues steadily across a number of geographic sectors. It is therefore believed that there will be further opportunities for sustained growth in the medium and long term. Our market and product development strategies are well resourced and have generated a number of new options for us to address. We believe that we can continue to generate an acceptable return for shareholders from our reduced position in Retail markets. Our relatively small size and increased focus on profitable market sectors should continue to generate new opportunities. We remain mindful of heightened political and economic risks in certain markets. We will continue to support long term, investment led, development for all our markets. On behalf of the Board D J S Taylor Company Secretary 27 March 2017 Right: Raku Topaz Blue 20 25452.04 19 April 2017 7:14 AM proof 4 Churchill China plc Annual Report for the year ended 31 December 2016 25452.04 19 April 2017 7:14 AM proof 4 2121 Churchill China plc Annual Report for the year ended 31 December 2016 DIRECTORS’ REPORT The Directors present their annual report and the audited consolidated financial statements of the Group for the year ended 31 December 2016. The Company is a public limited company listed on the Alternative Investment Market (AIM) and is incorporated and domiciled in the UK. The registered office is disclosed at the front of the Annual Report and the Company number is 02709505. The consolidated income statement for the year is set out on page 42. A review of the operations and future prospects of the Group is given in the Chairman’s Statement on page 6 and in the Strategic Report on page 14. The principal activity of the Group is the manufacture and sale of ceramic and related products for hospitality and household markets around the world. Dividends The Directors have paid the following dividends in respect of the years ended 31 December 2016 and 31 December 2015: Ordinary dividend: Final dividend 2015 12.7p (Final dividend 2014: 11.0p) per 10p ordinary share Interim dividend 2016 6.3p (2015: 5.6p) per 10p ordinary share The Directors now recommend payment of the following dividend: Ordinary dividend: Final dividend 2016 14.8p (2015: 12.7p) per 10p ordinary share Dividends on treasury shares held by the Company are waived. 2016 £’000 1,395 690 2,085 2015 £’000 1,200 616 1,816 1,621 1,395 The Company recognises that dividend income is important to shareholders and aims to pay a sustainable and progressive dividend linked to the medium and long term performance of the business, consistent with the maintenance of appropriate levels of dividend cover allowing the Company to meet other demands on its cash generation. Directors The Directors of the Company who have served during the year and up to the date of signing of the financial statements are as follows: A J McWalter* (Chairman) D M O’Connor D J S Taylor J A Roper A D Roper* J W Morgan* (resigned 26 May 2016) B M Hynes * A C Bromfield* (appointed 1 July 2016) * Non Executive The Directors retiring by rotation are D M O’Connor and A J McWalter who being eligible, offer themselves for re- election. The unexpired terms of the service contracts of D M O’Connor and A J McWalter are twelve and three months respectively. A C Bromfield was appointed as a Director of the Company on 1 July 2016 and in accordance with the Company’s articles retires at the next Annual General Meeting. The unexpired term of A C Bromfield’s service contract is three months. 22 25452.04 19 April 2017 7:14 AM proof 4 Churchill China plc Annual Report for the year ended 31 December 2016 The biographical details of the Directors are as follows: David O’Connor, Chief Executive Officer, has worked for Churchill for 26 years in a number of production, operations, marketing and senior management roles. He has extensive experience within the ceramics industry and joined the Board in 1999. He has an MBA and is an alumnus of the Harvard Business School Advanced Management Program. He was appointed Chief Executive Officer in August 2014, having previously served as Chief Operating Officer since 2010. He has responsibility for the development of Group strategy and for operational performance and development. David Taylor, Finance Director and Company Secretary, has worked for the Group for 25 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. James Roper, Sales and Marketing Director, joined Churchill in 2001 and over the last 15 years has worked in a number of sales and marketing roles across the Group. He has an MBA. He was appointed to the Board in 2015. Alan McWalter, Non Executive Chairman, joined the Group in January 2011. He is a director of several listed and private companies and has extensive high level experience within marketing roles in a number of major companies in the Retail and Consumer Goods sectors. Andrew Roper, Non Executive Director has worked for the Company since 1973. He was appointed to his present role in 2014 following his retirement from his executive role as Chief Executive Officer. Brendan Hynes, Non Executive Director, is currently Chairman of Swallowfield plc alongside other directorships. He was previously Chief Executive Officer of Nichols plc from 2007 to 2013. He joined the Board in 2013. Angela Bromfield, Non Executive Director, is currently a Non Executive director of Zotefoams plc. She has held a number of board appointments at listed companies including Morgan Sindall plc. She joined the Board in 2016. Taxation The majority of the Group’s operations and the profits derived from them are subject to taxation in the United Kingdom. Ethical standards and trading The Group expect high ethical standards to be met in all areas of its operation and from all its employees and recognises the role of the Board in defining and meeting these standards. We have a published ethical policy. Churchill China sources materials and products from a range of national and international suppliers. We have an ethical trading policy and take steps, including factory visits and audits, to ensure that our standards are implemented within our supply chain and that local legislation and regulations are complied with. Employees The Company recognise that well trained and motivated employees are core to the current and future success of our business. We involve our workforce through open communication including team briefs and works committees to encourage engagement with the strategy and goals of the business. We work closely with the union representing our employees’ interest to develop a relationship that will benefit our employees and meet our business needs. Our training and development programme has been formalised with the appointment of a dedicated manager in this area. We have continued to work with our local further educational colleges and training organisations to provide functional and vocational training for employees. Our manufacturing based apprenticeship scheme targets the development of important ceramic skills within our team. A number of employees are pursuing external qualifications in various areas. Our multi-skilling training programmes, particularly for supervisory and engineering employees, will help to enable us to meet our strategic manufacturing objectives. Our long term commitment to the training and development of all our employees has helped morale, motivation and labour retention. 25452.04 19 April 2017 7:14 AM proof 4 23 Churchill China plc Annual Report for the year ended 31 December 2016 DIRECTORS’ REPORT We remain committed to our graduate training programme helping local graduates into our industry. In the thirteen years since we established this initiative we have recruited a number of graduates who now hold senior posts within the business and are key to our succession plans for the future. We have introduced a Profit Improvement scheme in which all employees with over one year’s service share in a bonus scheme linked to Group profitability. This scheme is intended to recognise all our employees’ efforts, to encourage performance aligned to value creation and allow them to share in the Group’s success. We remain fully committed to equal opportunities employment policy offering equality in recruitment, training and career development irrespective of gender, ethnic origin, age, marital status, religion, sexual orientation or disability. We actively work with employees who suffer ill health during their employment with us to rehabilitate them back into the workforce wherever possible. Health and safety The health and safety of our employees is central to our operations and we invest significant effort and resource to target continuous improvement. Health and safety is a Board responsibility and receives constant management focus; the Board has access to appropriately trained and skilled assistance to meet its obligations. We have a published health and safety policy. In practice, our approach to health and safety is embedded in our day-to-day working practices. We aim to identify and to reduce health and safety risks associated with our operations to the lowest practical levels. We work to continually improve health and safety providing a safe and healthy working environment for all our employees and visitors. NEBOSH, NVQs and internal training programmes are regularly offered to update safety skills for all our employees. Environment, social and community The Group considers and manages the impact of its actions on the environment and wider social and community issues. We assess our economic, social and environmental impact locally, nationally and internationally. The principal impacts of the Group’s operations on the environment are in relation to the energy it consumes and the waste products produced as part of its operations. Whilst the Company manufactures a product which may be reused many thousands of times, a significant amount of energy is consumed in its production. As a result of this we have invested steadily to reduce our energy consumption and have replaced older systems and machinery with more modern energy efficient machinery and procedures. We run ongoing programmes to minimise energy usage and waste. We have increased our focus on managing and minimising the production of waste products from our processes during the year and are investing to reduce our impact on the environment. We have instituted a programme of continuous improvement in relation to waste reduction. Where possible we source our materials and services locally. A strong support industry is important to the long term future of the Group. We also take an active role in supporting both the local ceramic industry and wider initiative within the hospitality sector and support a number of training programmes. We understand that we have an impact on our local community and consider the effect of our actions on our local area. Where possible we work to reduce any adverse effects of our operations, consistent with the needs of other stakeholders within our business. We actively engage within our community through contact with our neighbours and local schools and particularly through local charity initiatives. We encourage and support our employees to become involved in community and charitable work. We run a number of events each year in support of charitable causes. 24 25452.04 19 April 2017 7:14 AM proof 4 Churchill China plc Annual Report for the year ended 31 December 2016 Research and development The introduction of new and innovative products, designs and process technology 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. We have increased our investment in the development of new products across the year to take advantage of new market opportunities. A significant effort is made to develop our materials and process technologies 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. Insurance for Directors The Group maintains liability insurance for the Directors in respect of their duties as Directors. Financing The Group currently utilises equity and retained earnings to finance its operations in relation to short, medium and long term requirements. The Group has historically enjoyed a good record of operating cash generation and forward investment and other cash requirements have been financed from this source. If additional financing is needed in the short term the Group has access to short term variable rate financing arrangements on an unsecured basis to provide finance for working capital requirements should they be required. The Group is currently ungeared and there are no assets currently subject to security, although cross guarantees exist between different Group companies. These assets would therefore form an alternative source of short to medium term funding if this were required. Larger long term funding requirements may be met from debt and equity sources if this is required. During the year the Group generated £6.7m of cash flow from operating activities and after payment of corporate taxation of £0.8m, invested £2.4m net in capital projects and returned £2.7m to shareholders by way of dividend and buy-back of shares. The Group reviews and maintains adequate levels of liquidity to meet short term operating commitments as part of its day-to-day treasury management. Longer term liquidity and cash requirements are reviewed as part of the Group’s budgetary and strategic planning processes. Financial instruments The Group uses its own cash resources and 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. A proportion of net currency exposures are generally covered up to twelve 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 returns on short term cash deposits and borrowings. Note 2 to the financial statements includes financial management risk considerations. Land and buildings The current value of land and buildings is in the opinion of the Directors in excess of the value included in these financial statements. This has not been quantified because independent valuations have not been undertaken. 25452.04 19 April 2017 7:14 AM proof 4 25 Churchill China plc Annual Report for the year ended 31 December 2016 DIRECTORS’ REPORT Events after the reporting period On 6 January 2017 the Group received an offer to purchase certain surplus land which the Directors resolved to accept on 17 January 2017. This offer exceeds the carrying value of the land and no impairment of the asset is required. This sale had not completed by the date of approval of the financial statements (see Note 30). 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 in the Remuneration Report, held by persons acting together, which at 10 March 2017 exceeded 3% of the Company’s issued share capital: Shareholder Investec Wealth and Investment S Roper Hargreave Hale Limited Rathbone Nominees Limited E S & SJ Roper Henderson Global Investors Limited M J & G Roper Miton Asset Management Number of ordinary shares Percentage 1,389,063 970,000 945,000 765,706 561,765 440,000 432,565 355,415 12.7% 8.9% 8.6% 7.0% 5.1% 4.0% 3.9% 3.2% Share repurchase The maximum number of shares held in treasury by the Company during the year was 75,000 10p ordinary shares. During the year the Company repurchased 75,000 (2015: 20,000) 10p ordinary shares at a total cost of £575,000 (2015: £134,000) in order to improve overall shareholder return. 21,900 (2015: 46,100) shares were reissued in respect of employee share option schemes for a total consideration of £2,000 (2015: £5,000). The Company retains a power, subject to the fulfilment of certain conditions and as approved at the 2016 Annual General Meeting, for the further purchase of its own shares. Political contributions The Group made no political contributions (2015: £nil) during the year. Statement of Directors’ responsibilities The Directors are responsible for preparing the Annual Report, the Director’s Remuneration Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the Group and Company financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union, and have been prepared in accordance with the Companies Act 2006. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group for that period. In preparing these financial statements, the Directors are required to: ●● select suitable accounting policies and then apply them consistently; ●● make judgements and accounting estimates that are reasonable and prudent; ●● state whether IFRSs as adopted by the European Union have been followed, subject to any material departures disclosed and explained in the Group and Company financial statements respectively; ●● prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. 26 25452.04 19 April 2017 7:14 AM proof 4 Churchill China plc Annual Report for the year ended 31 December 2016 The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group and Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements and the Directors’ Remuneration Report comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. The Directors 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 Directors are responsible for the maintenance and integrity of the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. The Directors consider the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s performance, business model and strategy. Each of the Directors, whose names and functions are listed in Directors, Secretary and Advisers, confirm that, to the best of their knowledge: ●● the Group financial statements, which have been prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group; and ●● the Company financial statements, which have been prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Company; and ●● the Directors’ Report includes a fair review of the development and performance of the business and the position of the Group and Company, together with a description of the principal risks and uncertainties that it faces. Disclosure of information to auditors In the case of each of the Directors in office at the date of the Directors’ Report is approved, so far as each Director is aware, there is no relevant audit information of which the Group and Company’s auditors are unaware. They have taken all the steps that they ought to have taken as a Director in order to make themselves aware of any relevant audit information and to establish that the Group and Company’s auditors are aware of that information. Independent auditors The auditors, PricewaterhouseCoopers LLP, have indicated their willingness to continue in office and a resolution that they be reappointed will be proposed at the Annual General Meeting. By order of the Board D J S Taylor Company Secretary 27 March 2017 25452.04 19 April 2017 7:14 AM proof 4 27 Churchill China plc Annual Report for the year ended 31 December 2016 REMUNERATION REPORT Annual Statement This section of the Remuneration Report is not audited. The Remuneration Committee considered a number of matters during the year including; Basic pay levels were assessed to ensure that the changes in the experience and performance of job holders was reflected in salary levels; The operation and scope of the annual bonus scheme was reviewed to ensure that it provided adequate incentive to executive Directors without disproportionate cost to shareholders; Performance levels for vesting of new awards granted under the Long Term Incentive Plan (‘LTIP’) in May 2016 were considered; and The level of compensation given for the surrender of pension and car benefits. In each case the Committee was conscious of the need to clearly align Executive Directors’ remuneration packages with shareholders interests. Details of the outcome of this work are set out below and later in the Annual Report on Remuneration. The backdrop to the Remuneration Report this year is that the Group has continued to progress well. Performance in 2016 was again strong with operating and pre tax profits well ahead of last year. We have made progress in the development and implementation of our strategy, and made substantial gains in export hospitality markets. A number of changes were also made within our manufacturing operations to support both increased output levels and changes necessitated by increased production of value added products. In financial terms we grew operating profit by 29% and pre tax profit by 30% and cash and deposit balances have grown by £0.9m. We have increased the dividend declared in relation to the year by 15%. Total shareholder return over the year rose substantially by 22%, or over £19m in absolute terms, well ahead of the AIM All Share Index. These increases continue the established trend of improved profitability and value creation over the last five years. Given this strong performance, we are pleased to report that annual profit related bonus payments were again at a high level. The challenging targets under our LTIP have also been achieved. Overall the aggregate cost of Board remuneration increased by 11%, largely as a result of an increase in the number of Executive Directors. There has been no substantial change to our Remuneration Policy over the year. The Policy will be resubmitted to the 2017 Annual General Meeting for approval. Whilst as an AIM listed company we are not required to satisfy the Directors Remuneration Report (‘DRR’) guidelines, we continue to provide information on certain requirements of the Regulations to reflect good practice where this in the interests of shareholders and where the cost and benefit of supplying this information is appropriate. The Remuneration Committee is composed of A C Bromfield, who acts as Chair, A J McWalter, A D Roper and B M Hynes, all of whom are Non Executive Directors. D M O’Connor (Chief Executive Officer) and A M Basnett, HR Director, Churchill China (UK) Limited, attended the Remuneration Committee meetings. J W Morgan was Chair of the Remuneration Committee until his retirement on 26 May 2016. Directors’ remuneration policy This section of the Remuneration Report is not audited. This section sets out the Company’s Directors’ Remuneration policy, which will apply from the date of the 2017 Annual General Meeting. The Policy is determined by the Remuneration Committee of the Company and is subject to regular and detailed review in relation to market practice and alignment with the Group’s strategy. The Policy that will apply from 2017 has not changed significantly from that adopted in 2014. The Remuneration Committee also reserves the right to make any remuneration payments and payments for loss of office notwithstanding that they are not in line with the Policy set out below where the terms of the payment were agreed: ●● before the Policy came into effect; or ●● at a time when the relevant individual was not a Director of the Company and, in the opinion of the Remuneration Committee, the payment was not in consideration for the individual becoming a director of the Company. 28 25452.04 19 April 2017 7:14 AM proof 4 Churchill China plc Annual Report for the year ended 31 December 2016 For these purposes “payments” includes the Remuneration Committee satisfying awards of variable remuneration and, in relation to an award over shares, the terms of the payment are “agreed” at the time the award is granted. For the avoidance of doubt, the Remuneration Committee’s discretion includes discretion to determine, in accordance with the rules of the LTIP, the extent to which awards under that plan may vest in the event of a change of control or in a “good leaver” circumstance. The Remuneration Committee may make minor changes to this Policy, provided they do not materially advantage Directors, to aid in its operation or implementation. Future policy table Executive Directors The table below describes each of the elements of the remuneration package for the Executive Directors. Purpose and link to strategy Operation Maximum potential value Performance metrics Basic pay Core element of fixed remuneration to help recruit and retain employees of the appropriate calibre and experience Basic pay for Executive Directors is normally reviewed annually (but may be reviewed more frequently if required). Consideration is given to the following when determining basic pay levels: ●● Market conditions including typical pay levels for comparator companies taking into account the relative scale and complexity of the role and business ●● Scale and scope of the role, experience and performance of the individual ●● Average change in salary for the workforce as a whole Not applicable, although overall performance of the individual and the Company is considered by the Remuneration Committee when setting and reviewing salaries. There is no prescribed maximum annual increase. However, consideration is normally given to the average change in salary for the workforce as a whole. The Remuneration Committee considers any salary increases above the workforce average carefully. The Remuneration Committee may award salary increases above the workforce average in certain circumstances including, but not limited to: ●● An Executive Director assuming additional responsibilities ●● Significant improvement in individual performance ●● Significant change in the size or scope of an Executive Director’s role. ●● Where salary is initially set below market levels for a newly appointed Executive Director to allow for progress in their role. 25452.04 19 April 2017 7:14 AM proof 4 29 Churchill China plc Annual Report for the year ended 31 December 2016 REMUNERATION REPORT Operation Maximum potential value Performance metrics Purpose and link to strategy Annual Bonus Rewards the achievement of annual financial and strategic business targets as well as the delivery of personal objectives Executive Directors are entitled to earn up to 100% of basic pay as a bonus. Bonus payments are made in cash following the completion of the audit for the year in which bonuses are earned. The Remuneration Committee may adjust the bonus pay-out should the formulaic outcome be considered not to reflect underlying business performance. Bonus payments are non-pensionable. The bonus plan is based on the achievement of challenging performance targets. The financial measures which account for the majority of the bonus will generally include a measure of profitability and/ or cash generation. Other targets may include the achievement of strategic objectives and specific personal objectives. Not applicable. Benefits Provide a market competitive benefits package to help recruit and retain employees of the appropriate calibre and experience Executive Directors are entitled to receive benefits including healthcare benefits and a fully expensed company car (or cash allowance) where it is deemed necessary to their role. Executive Directors are entitled to receive repayment of costs deemed necessary for them to perform their duties. Set at a level which the Remuneration Committee considers to be appropriately positioned taking into account the scale and scope of the role and market conditions in comparator companies. Pensions Provide market competitive post- employment benefits to help recruit and retain employees of the appropriate calibre and experience 30 Other benefits may be provided based on individual circumstances including, but not limited to, housing or relocation expenses. Executive Directors are entitled to membership of Company pension schemes in operation from time to time. Up to 10% of basic pay under the defined contribution scheme. Not applicable. The Company currently operates a defined contribution scheme. The Company previously operated a defined benefit scheme, which was closed for future accrual in 2006. Two Executive Directors are deferred members of this scheme. Executive Directors may choose to receive a salary supplement in lieu of pensions up to the value of the normal contribution level at no extra cost to the Company. Bonus and other benefits received by Executive Directors do not count towards pensionable pay. 25452.04 19 April 2017 7:14 AM proof 4 Churchill China plc Annual Report for the year ended 31 December 2016 Purpose and link to strategy Long term incentive schemes Incentivises employees to achieve a higher and sustained level of return to shareholders over a longer period of time Supports retention and promotes share ownership Clawback and malus applies to enable the Company to mitigate risk Operation Maximum potential value Performance metrics Executive Directors may be granted LTIP awards up to 100% of salary each year. For threshold performance, 25% of the award vests. For on-target performance, 40% of the award vests. Straight line vesting applies between threshold, target and maximum vesting. Challenging performance targets are set each year reflecting the business priorities that underpin longer term Group strategy. At least 50% of the LTIP award will normally vest based on adjusted Earnings Per Share performance targets. The Company operates an LTIP approved by shareholders on 16 May 2012. LTIP awards are made on an annual basis typically in the form of nil or nominal cost options with vesting dependent on the achievement of performance conditions, normally over a three year period. Vested LTIP options must be exercised within ten years of the date of grant. No dividend equivalents are offered between grant and vesting. The Remuneration Committee has the right to operate both clawback and malus provisions in respect of LTIP awards in relation to circumstances of corporate failure which may have occurred at any time before clawback is operated. LTIP payments are non-pensionable. There were no significant changes to Remuneration Policy during the year. Non-Executive Directors The table below sets out an overview of the remuneration of Non-Executive Directors. Purpose and link to strategy Operation Chairman and Non-Executive Director fees Provide an appropriate reward to help recruit and retain Non- Executive Directors of the appropriate calibre and experience Fees for Non-Executive Directors are normally reviewed annually (but may be reviewed more frequently if required). Consideration is given to the following when determining fee levels: ●● Market conditions including typical fee levels for comparator companies ●● A Non-Executive Director’s role and responsibilities Non-Executive Directors do not participate in any incentive scheme. There were no changes to Remuneration Policy during the year. 25452.04 19 April 2017 7:14 AM proof 4 31 Churchill China plc Annual Report for the year ended 31 December 2016 REMUNERATION REPORT Explanation of performance metrics chosen The annual bonus is assessed against financial, strategic and personal performance conditions, as determined by the Remuneration Committee. This incentivises Executive Directors to focus on delivering the financial goals of the Company, wider Company performance and bespoke individual objectives for each Executive Director. We believe that this encourages behaviour that facilitates the future development of the business. The LTIP is assessed against longer term financial performance conditions, including adjusted earnings per share, to provide a robust measurement of the Company’s financial performance over the longer term and ability to deliver a higher and sustained level of return to shareholders. The Remuneration Committee retains the discretion to adjust the performance conditions and targets where it considers it appropriate to do so. Pay policy for other employees The Company values its wider workforce and aims to provide a remuneration package that is market competitive, complies with any statutory requirements and is applied fairly and consistently across the wider employee population. Where remuneration is not determined by statutory regulation, the key principles of the compensation philosophy are as follows: ●● We remunerate people in a manner that allows for stability of the business and the opportunity for sustainable long term growth ●● We seek to remunerate fairly and consistently for each role with due regard to market conditions, internal consistency and the Company’s ability to pay Total reward for Executive Directors will be set with sensitivity to subordinate staff within the Group with whom the packages will, as far as possible, be consistent and fair. The Company takes into account the following when setting the remuneration policy for Executive Directors: ●● Salary increases for the wider workforce ●● Company-wide benefit (including pension) offerings ●● Overall spend and participation levels in the annual bonus and LTIP Statement of consideration of shareholder views The Remuneration Committee considers a proactive and transparent dialogue with its shareholders to be important. The Remuneration Committee will consult with major shareholders when it proposes to make any major changes to the remuneration policy for Directors. 32 25452.04 19 April 2017 7:14 AM proof 4 Churchill China plc Annual Report for the year ended 31 December 2016 Annual report on remuneration This section of the Remuneration Report is audited. Emoluments of the Directors were as follows: 2016 Executive D J S Taylor D M O’Connor J A Roper Non Executive A J McWalter A D Roper J W Morgan* B M Hynes A C Bromfield** 2015 Executive D J S Taylor D M O’Connor J A Roper Non Executive A J McWalter A D Roper J W Morgan B M Hynes Salary £ Benefits £ Pensions £ Annual bonus £ Long term incentive plan £ Total remuneration £ 214,994 256,400 166,817 71,667 82,683 16,667 40,333 23,667 873,228 196,100 238,333 68,925 65,000 80,833 39,417 39,417 728,025 748 503 18,135 – – – – – 19,386 695 444 11,058 – – – – 12,197 5,000 25,640 11,502 – – – – – 42,142 19,610 23,833 4,825 – – – – 48,268 137,088 181,790 116,620 – – – – – 435,498 140,000 175,000 112,000 – – – – 427,000 162,887 172,624 – – – – – – 335,511 153,335 162,505 – – – – – 315,840 520,717 636,957 313,074 71,667 82,683 16,667 40,333 23,667 1,705,765 509,740 600,115 196,808 65,000 80,833 39,417 39,417 1,531,330 *J W Morgan resigned as a Director on 26 May 2016 **A C Bromfield was appointed as a Director on 1 July 2016 On 1 May 2016, the salary payable to A J McWalter, which had remained unchanged since 2013, was increased from £65,000 to £75,000 reflecting the general inflationary rise given to employees during the period and increased responsibilities and performance. On 1 August 2016, in recognition of their increased responsibilities and performance, base salaries were adjusted as follows: D M O’Connor’s salary increased by 6% to £265,000 per annum and J A Roper’s salary rose by 6.3% to £170,000. The salaries of other Directors rose by 2.0% in line with the general inflationary rise given to employees. During the year the salaries of D J S Taylor and J A Roper were adjusted to reflect changes in their pension and car benefits at no net additional cost to the Company. These allowances do not form part of their pay for bonus or LTIP purposes. 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. No Director waived emoluments in respect of the years ended 31 December 2015 and 2016. Pension costs above represent contributions made by the Group to defined contribution schemes. 25452.04 19 April 2017 7:14 AM proof 4 33 Churchill China plc Annual Report for the year ended 31 December 2016 REMUNERATION REPORT Performance bonuses Performance bonuses were awarded given the achievement of growth in Operating Profit substantially above target levels and also successful performance against personal objectives. During 2016 Executive Directors were able to earn a maximum of 70% of salary as a performance bonus. Of this figure, 14% of salary was payable for achievement of threshold profit levels, 28% for on target performance and 56% for achieving maximum profit objectives. A further 14% of salary could be earned against specified personal objectives. Straight-line vesting applied between threshold, target and maximum performance levels. In 2016 threshold profit bonus levels were payable on the achievement of an operating profit of £5,285,000, on target profit levels were payable on the achievement of operating profits of £5,563,000 and maximum target profit levels were operating profits of £5,875,000. Profit based awards during the year were of 56% base salary and personal objectives represented between 11% and 13% of base salary. No change has been made in the operation of annual profit bonus scheme for 2017, with the exception that profit target levels have been increased to reflect higher target profitability. Long term incentive plan This section of the Remuneration Report is audited. Details of share options granted under the Long Term Incentive Plan are as follows. Each option has an exercise price of 10p per ordinary share. Number of options 31 December 2016 Number of options granted Number of options exercised Number of options 31 December 2016 Date from which exercisable 21,333 16,580 14,123 – 22,609 17,571 16,804 – – – – 10,159 – – – 12,698 (21,333) – – – (22,609) – – – – 16,580 14,123 10,159 – 17,571 16,804 12,698 May 2016 May 2017 May 2018 May 2019 May 2016 May 2017 May 2018 May 2019 Expiry date May 2023 May 2024 May 2025 May 2026 May 2023 May 2024 May 2025 May 2026 – 8,127 – 8,127 May 2019 May 2026 D J S Taylor Long Term Incentive Plan Long Term Incentive Plan Long Term Incentive Plan Long Term Incentive Plan D M O’Connor Long Term Incentive Plan Long Term Incentive Plan Long Term Incentive Plan Long Term Incentive Plan J A Roper Long Term Incentive Plan Exercise of the above options is subject to the achievement of performance conditions as specified by the Remuneration Committee and they are also subject to clawback and malus provisions which may be enacted in certain circumstances. The above number of options represent the amount that will vest based on the achievement of maximum performance targets. A lower percentage of the above options will vest given the achievement of lower than maximum performance. At target performance levels 40% of the above options would be expected to vest. Below threshold performance no options will vest. 30,984 options were granted on 16 May 2016. The market price of the Company’s shares at the date of grant was 787p. For the options granted on 16 May 2016, 100% of the shares will vest given an increase of 45% in adjusted EPS* (‘maximum performance’) in the year to 31 December 2018 over the base year of 31 December 2015, 40% of the above shares for an increase of 38% in adjusted EPS (‘target performance’) and 25% of the above shares for an increase of 31% in adjusted EPS (‘threshold performance’). Between those levels shares will vest on a pro rata basis. No shares will vest if threshold performance targets are not reached. * Notional pension fund interest has been excluded from both the base and target EPS levels. 34 25452.04 19 April 2017 7:14 AM proof 4 Churchill China plc Annual Report for the year ended 31 December 2016 Share price movements during the year The market price of the Company’s shares at the end of the financial year was 873.5p (2015: 720p). The range of prices for the year to 31 December 2016 was 676.5p to 885p (2015: 517.5p to 720p) per ordinary share. Pensions This section of the Remuneration Report is audited. D J S Taylor, D M O’Connor and J A Roper were members of the Churchill China 2006 Group Personal Pension Plan during the year. Contributions made by the Group were as shown on page 33 and were at a rate of 10% of basic salary for D J S Taylor and D M O’Connor and 7% for J A Roper whilst they remained in the Scheme. All scheme members have the opportunity to pay Additional Voluntary Contributions. Neither the contributions nor the resulting benefits are included in the above table. D J S Taylor and D M O’Connor are deferred members of the Churchill Retirement Benefit 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 benefit of D M O’Connor is funded to allow retirement at 65 with a pension based on accrued service to 31 March 2006. A D Roper receives benefits as a pensioner member of the Churchill Group Retirement Benefit Scheme. Directors’ service contracts This section of the Remuneration Report is not audited. Executive Directors are not appointed on contracts for a fixed duration. All Executive Directors have contracts of service which can be terminated with a notice period of twelve months from the Company or six months from the Director. D J S Taylor’s service contract was signed on 6 October 2009, D M O’Connor’s on 15 May 2012 and J A Roper’s on 3 November 2015. Non Executive Directors are generally appointed on fixed term contracts. A J McWalter has signed a fixed term contract of three years’ duration expiring on 18 May 2019. B M Hynes has signed a fixed term contract of one year’s duration expiring on 24 September 2017. A D Roper has signed a fixed term contract of one year’s duration expiring on 15 August 2017. A C Bromfield has signed a fixed term contract of three years’ duration expiring on 1 July 2019. Non Executive Directors contracts may normally be terminated with a notice period of three months. There are no defined contractual payments in the event of termination of a Directors’ service contract. Directors’ interests This section of the Remuneration Report is not audited. The interests of the Directors and their immediate families and family trusts at 31 December 2016 in the 10p ordinary shares of the Company were as follows: A D Roper D J S Taylor D M O’Connor A J McWalter B M Hynes J A Roper A C Bromfield 2016 2015 637,430 54,489 41,613 5,000 4,000 1,067,500 – 1,810,032 637,430 45,349 31,805 5,000 4,000 1,077,500 – 1,801,084 A D Roper’s interest in the 10p ordinary shares of the Company at 31 December 2016 represented 5.8% (2015: 5.8%) of the Company’s issued share capital. J A Roper’s interest in the 10p ordinary shares of the Company at 31 December 2016 represented 9.7% (2015: 9.8%) of the Company’s issued share capital. There has been no change in the interests set out above between 31 December 2016 and 27 March 2017. 25452.04 19 April 2017 7:14 AM proof 4 35 Churchill China plc Annual Report for the year ended 31 December 2016 REMUNERATION REPORT Director shareholding requirements Directors are expected to hold shares in the Company in order to align their interests with those of shareholders. In the longer term Executive Directors are encouraged to hold the equivalent of 100% of annual base salary as shares in the Company and it is expected that this target level will be achieved by the retention of shares vesting under the Long Term Incentive Plan after the payment of associated tax. Shareholder consultation The Remuneration Committee will consult with major shareholders in relation to its operation and particularly in relation to any major changes in remuneration policy. During the year, with the exception of the standard resolution at the Annual General Meeting, the Remuneration Committee did not believe there was any requirement to make any approach to shareholders on remuneration issues. No significant comments have been received from shareholders in relation to remuneration matters. At the 2016 Annual General Meeting, the standard resolution in relation to the approval of the Report of the Remuneration Committee contained in the Annual Report for 2015 was passed. 99.9% of votes were cast in favour of the resolution, 0.1% against, with no abstentions. Performance Graph This section of the Remuneration Report is not audited. Total Shareholder Return 400.00 350.00 300.00 250.00 200.00 150.00 100.00 50.00 0.00 2011 2012 2013 2014 2015 2016 Churchill FTSE AIM All Share (Source: N+1 Singer) Over a five year period the Group’s total return to shareholders has been substantially above that generated by the AIM index. Total returns from the Group in the year have been supported by a further improvement in profitability and continuation of our progressive dividend policy. Our overall five year return has remained positive at an average compound rate of 30% (AIM: 5 %). Over the five year period total shareholder return from the Group has been 269% whilst that achieved by the AIM index as a whole was 29%. In the year to 31 December 2016 the overall return from the Group was 22%, (AIM: 16%). In the opinion of the Directors the above index is the most appropriate to measure the total shareholder return of Churchill China plc against. On behalf of the Board A C Bromfield Chair of the Remuneration Committee 27 March 2017 36 25452.04 19 April 2017 7:14 AM proof 4 Churchill China plc Annual Report for the year ended 31 December 2016 CORPORATE GOVERNANCE This statement is unaudited. As a Company quoted on the Alternative Investment Market of the London Stock Exchange, the Company is not required to comply with the UK Corporate Governance Code (“the Code”); however, the Board supports the standards required by the Code and seeks to apply the principles of the Code where, in the opinion of the Directors, this provides value to shareholders. The Company uses the Quoted Companies Alliances ‘Corporate Governance Guidelines for Smaller Quoted Companies’ as a benchmark to define and review its governance procedures. The Board of Directors The Board is currently composed of three Executive and four 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. A senior independent Non Executive Director, B M Hynes, was appointed, replacing J W Morgan, who retired from during the year. The Code recommends that the Boards of listed companies include at least three independent Non Executive Directors. The Board has fully reviewed the independence of Non Executive Directors and all Non Executive Directors are considered to be independent under the terms of the Code with the exception of A D Roper. A D Roper is not considered to be independent under the terms of the Code given his previous service as an Executive Director and his substantial shareholding. As the Board contains three independent Non Executive Directors this is not believed to be of major significance. 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. A D Roper D J S Taylor D M O’Connor J W Morgan (until resignation 26 May 2016) A J McWalter B M Hynes J A Roper A C Bromfield (from appointment 1 July 2016) Meetings held Meetings attended 11 11 11 5 11 11 11 6 9 11 11 4 11 11 9 5 The Directors consider that the Board of Directors includes key management for all areas of the business and that there are no other key management which require disclosure. There are two principal sub-committees of the Board. 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 B M Hynes. The Audit Committee has considered the independence of the Auditors, PricewaterhouseCoopers LLP and is satisfied that they are independent. The Audit Committee has reviewed and approved the Audit Plan received from PricewaterhouseCoopers LLP, the external auditors, and received a detailed report on the findings of the audit process for the year to 31 December 2016. 25452.04 19 April 2017 7:14 AM proof 4 37 Churchill China plc Annual Report for the year ended 31 December 2016 CORPORATE GOVERNANCE The Remuneration Committee is wholly composed of Non Executive Directors and is normally attended by the Chief Executive Officer who takes no part in discussions on his own remuneration. The Remuneration Committee is chaired by A C Bromfield. 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. 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 misstatement 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 those 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 on a regular basis. Individual reviews of 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, risk is assessed as part of the strategic process. 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 economical 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. 38 25452.04 19 April 2017 7:14 AM proof 4 Churchill China plc Annual Report for the year ended 31 December 2016 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 misstatement 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. Going Concern The Board confirms that, having made enquiries, the Directors have a reasonable expectation that the Group and the Company have 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 27 March 2017 25452.04 19 April 2017 7:14 AM proof 4 39 Churchill China plc Annual Report for the year ended 31 December 2016 INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF CHURCHILL CHINA PLC Report on the financial statements Our opinion In our opinion: ●● Churchill China plc’s Group financial statements and Company financial statements (the “financial statements”) give a true and fair view of the state of the Group’s and of the Company’s affairs as at 31 December 2016 and of the Group’s profit and cash flows for the year then ended; ●● the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards (“IFRSs”) as adopted by the European Union; ●● the Company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and ●● the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. What we have audited The financial statements, included within the Annual report and financial statements (the “Annual Report”), comprise: ●● the Consolidated balance sheet as at 31 December 2016; ●● the Company balance sheet as at 31 December 2016; ●● the Consolidated income statement and Consolidated statement of comprehensive income for the year then ended; ●● the Consolidated cash flow statement for the year then ended; ●● the Consolidated statement of changes in equity for the year then ended; and ●● the notes to the financial statements, which include a summary of significant accounting policies and other explanatory information. The financial reporting framework that has been applied in the preparation of the Group financial statements is IFRSs as adopted by the European Union, and applicable law. The financial reporting framework that has been applied in the preparation of the Company financial statements is United Kingdom Accounting Standards, comprising FRS 101 “Reduced Disclosure Framework” (United Kingdom Generally Accepted Accounting Practice), and applicable law. In applying the financial reporting framework, the Directors have made a number of subjective judgements, for example in respect of significant accounting estimates. In making such estimates, they have made assumptions and considered future events. Opinions on other matters prescribed by the Companies Act 2006 In our opinion, based on the work undertaken in the course of the audit: ●● the information given in the Strategic Report and the Directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and ●● the Strategic Report and the Directors’ report have been prepared in accordance with applicable legal requirements. In addition, in light of the knowledge and understanding of the Group, the Company and their environment obtained in the course of the audit, we are required to report if we have identified any material misstatements in the Strategic Report and the Directors’ report. We have nothing to report in this respect. Other matters on which we are required to report by exception Adequacy of accounting records and information and explanations received Under the Companies Act 2006 we are required to report to you if, in our opinion: ●● we have not received all the information and explanations we require for our audit; or ●● adequate accounting records have not been kept by the Company, or returns adequate for our audit have not been received from branches not visited by us; or ●● the Company financial statements are not in agreement with the accounting records and returns. We have no exceptions to report arising from this responsibility. 40 25452.04 19 April 2017 7:14 AM proof 4 Churchill China plc Annual Report for the year ended 31 December 2016 Directors’ remuneration Under the Companies Act 2006 we are required to report to you if, in our opinion, certain disclosures of Directors’ remuneration specified by law are not made. We have no exceptions to report arising from this responsibility. Responsibilities for the financial statements and the audit Our responsibilities and those of the Directors As explained more fully in the Statement of Directors’ responsibilities, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland) (“ISAs (UK & Ireland)”). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, 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. What an audit of financial statements involves We conducted our audit in accordance with ISAs (UK & Ireland). An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: ●● whether the accounting policies are appropriate to the Group’s and the Company’s circumstances and have been consistently applied and adequately disclosed; ●● the reasonableness of significant accounting estimates made by the Directors; and ●● the overall presentation of the financial statements. We primarily focus our work in these areas by assessing the Directors’ judgements against available evidence, forming our own judgements, and evaluating the disclosures in the financial statements. We test and examine information, using sampling and other auditing techniques, to the extent we consider necessary to provide a reasonable basis for us to draw conclusions. We obtain audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. With respect to the Strategic Report and Directors’ report, we consider whether those reports include the disclosures required by applicable legal requirements. Paul Norbury (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors East Midlands 27 March 2017 ●● 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. 25452.04 19 April 2017 7:14 AM proof 4 41 Churchill China plc Annual Report for the year ended 31 December 2016 CONSOLIDATED INCOME STATEMENT for the year ended 31 December 2016 Revenue Operating profit Share of results of associate company Finance income Finance costs Profit before income tax Income tax expense Profit for the year attributable to owners of the Company Basic earnings per ordinary share Diluted earnings per share Notes 4 5 15 8 8 10 11 11 2016 £’000 51,102 6,398 157 80 (120) 6,515 (1,230) 5,285 2015 £’000 46,829 4,959 135 82 (162) 5,014 (928) 4,086 48.2p 37.3p 47.8p 36.9p All of the above figures relate to continuing operations. The notes on pages 50 to 79 are an integral part of these consolidated financial statements. The Company has elected to take the exemption under section 408 of the Companies Act 2006 not to present the Company profit and loss account. The profit of the Company for the year was £2,926,000 (2015: £1,602,000). 42 25452.04 19 April 2017 7:14 AM proof 4 Churchill China plc Annual Report for the year ended 31 December 2016 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME for the year ended 31 December 2016 Other comprehensive (expense) / income Items that will not be reclassified to profit and loss: Remeasurements of post employment benefit obligations net of tax Items that may be reclassified subsequently to profit and loss: Impact of change in UK tax rate on deferred tax on revaluation reserve Currency translation differences Other comprehensive (expense) / income for the year Profit for the year Total comprehensive income for the year Attributable to: Equity holders of the Company 2016 £’000 (5,188) 12 60 (5,116) 5,285 169 2015 £’000 104 24 16 144 4,086 4,230 169 4,230 Amounts in the statement above are disclosed net of tax. The income tax relating to each component of other comprehensive income is disclosed in note 10. The Company has no recognised gains and losses other than those included in its profit and loss account and therefore no separate Statement of Total Recognised Gains and Losses has been presented. 25452.04 19 April 2017 7:14 AM proof 4 43 Churchill China plc Annual Report for the year ended 31 December 2016 CONSOLIDATED BALANCE SHEET as at 31 December 2016 Assets Non current assets Property, plant and equipment Intangible assets Investment in associate Deferred income tax assets Current assets Inventories Trade and other receivables Other financial assets Cash and cash equivalents Total assets Liabilities Current liabilities Trade and other payables Current income tax liabilities Non current liabilities Deferred income tax liabilities Retirement benefit obligations Total liabilities Net assets Equity attributable to owners of the Company Issued share capital Share premium account Treasury shares Other reserves Retained earnings Total equity Notes 2016 £’000 2015 £’000 13 14 15 21 17 18 19 20 21 22 23 23 24 25 26 14,897 89 1,388 1,658 18,032 9,102 9,479 3,005 9,734 31,320 49,352 (10,310) (852) (11,162) (834) (8,731) (20,727) 28,625 1,103 2,348 (575) 1,544 24,205 28,625 14,046 59 1,231 848 16,184 8,360 8,648 2,500 9,307 28,815 44,999 (8,721) (580) (9,301) (936) (3,837) (14,074) 30,925 1,101 2,348 (144) 1,439 26,181 30,925 The notes on pages 50 to 79 are an integral part of these consolidated financial statements. The financial statements on pages 42 to 79 were approved by the Board of Directors on 27 March 2017 and were signed on its behalf by: D M O’Connor Director D J S Taylor Director Company number 02709505 44 25452.04 19 April 2017 7:14 AM proof 4 Churchill China plc Annual Report for the year ended 31 December 2016 COMPANY BALANCE SHEET as at 31 December 2016 Assets Non current assets Investment in associate Investments in subsidiaries Deferred income tax assets Current assets Trade and other receivables: non current Trade and other receivables: current Cash at bank and in hand Current liabilities Trade and other payables Net current assets Total assets less current liabilities Net assets Equity attributable to owners of the Company Issued share capital Share premium account Treasury shares Other reserves Retained earnings Total equity Notes 15 16 21 18 18 20 23 23 24 25 26 2016 £’000 762 2,195 72 3,029 5,247 207 295 5,749 (84) 5,665 8,694 2015 restated £’000 605 2,195 78 2,878 4,560 185 681 5,426 (67) 5,359 8,237 8,694 8,237 1,103 2,348 (575) 227 5,591 8,694 1,101 2,348 (144) 184 4,748 8,237 The notes on pages 50 to 79 are an integral part of these consolidated financial statements. The financial statements on pages 42 to 79 were approved by the Board of Directors on 27 March 2017 and were signed on its behalf by: D M O’Connor Director D J S Taylor Director 25452.04 19 April 2017 7:14 AM proof 4 45 Churchill China plc Annual Report for the year ended 31 December 2016 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY for the year ended 31 December 2016 Retained earnings £’000 Issued share capital £’000 Share premium account £’000 Treasury shares £’000 Other reserves £’000 Total equity £’000 23,654 1,096 2,348 (224) 1,532 28,406 4,086 12 (2) – 104 – 4,200 (1,816) – 250 102 (209) (1,673) – – – – – – – – 5 – – – 5 – – – – – – – – – – – – – – – – – – – – – 5 – – 75 80 – 4,086 (12) 2 24 – 16 30 – – (123) – – (123) – – 24 104 16 4,230 (1,816) 10 127 102 (134) (1,711) 26,181 1,101 2,348 (144) 1,439 30,925 – 5,285 – – – – – – – – 2 – – – – – – – – – – – – – – – – – – – 2 – – – 2 1,103 – – – 2,348 – (433) (431) (575) – – 43 1,544 (12) 2 12 – 60 62 – – 43 – – 12 (5,188) 60 169 (2,085) 4 160 27 (575) (2,469) 28,625 Balance at 1 January 2015 Comprehensive Income: Profit for the year Other comprehensive income / (expense): Depreciation transfer – gross Depreciation transfer – tax Deferred tax – change in rate Remeasurement of post employment benefit obligations – net of tax Currency translation Total comprehensive income Transactions with owners Dividends relating to 2014 and 2015 (note 12) Proceeds of share issue Share based payment Deferred tax – share based payment Treasury shares (note 24) Total transactions with owners Balance at 1 January 2016 Comprehensive Income: Profit for the year Other comprehensive (expense) / income: Depreciation transfer – gross Depreciation transfer – tax Deferred tax – change in rate Remeasurement of post employment benefit obligations – net of tax Currency translation Total comprehensive income Transactions with owners Dividends relating to 2015 and 2016 (note 12) Proceeds of share issue Share based payment Deferred tax – share based payment Treasury shares (note 24) Total transactions with owners Balance at 31 December 2016 46 5,285 12 (2) – (5,188) – 107 (2,085) – 117 27 (142) (2,083) 24,205 25452.04 19 April 2017 7:14 AM proof 4 Churchill China plc Annual Report for the year ended 31 December 2016 COMPANY STATEMENT OF CHANGES IN EQUITY for the year ended 31 December 2016 Balance at 1 January 2015 Comprehensive Income: Profit for the year Total comprehensive income Transactions with owners Dividends relating to 2014 and 2015 (note 12) Proceeds of share issue Share based payment Deferred tax – share based payment Treasury shares (note 24) Total transactions with owners Balance at 1 January 2016 Comprehensive Income: Profit for the year Total comprehensive income Transactions with owners Dividends relating to 2015 and 2016 (note 12) Proceeds of share issue Share based payment Deferred tax – share based payment Treasury shares (note 24) Total transactions with owners Balance at 31 December 2016 Retained earnings £’000 4,819 1,602 1,602 (1,816) – 250 102 (209) (1,673) 4,748 2,926 2,926 (2,085) – 117 27 (142) (2,083) 5,591 Issued share capital £’000 1,096 Share premium account £’000 Treasury shares £’000 Other reserves £’000 2,348 (224) 307 – – – 5 – – – – – – – – 5 1,101 – – – 2,348 – – – 2 – – – – – – – – 2 1,103 – – – 2,348 – – – 5 – – 75 80 (144) – – – 2 – – (433) (431) (575) – – – – (123) – – (123) 184 – – – – 43 – – 43 227 25452.04 19 April 2017 7:14 AM proof 4 Total equity £’000 8,346 1,602 1,602 (1,816) 10 127 102 (134) (1,711) 8,237 2,926 2,926 (2,085) 4 160 27 (575) (2,469) 8,694 47 Churchill China plc Annual Report for the year ended 31 December 2016 CONSOLIDATED CASH FLOW STATEMENT for the year ended 31 December 2016 Cash flows from operating activities Cash generated from operations (see page 49) Interest received* Interest paid Income tax paid Net cash generated from operating activities Cash flows investing activities Purchases of property, plant and equipment Proceeds on disposal of property, plant and equipment Purchases of intangible assets Net cash used in investing activities Cash flows from financing activities Issue of ordinary shares Purchase of treasury shares Dividends paid Sale of other financial assets Purchase of other financial assets Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Exchange gain on cash and cash equivalents Cash and cash equivalents at the end of the year 2016 £’000 6,744 80 (1) (813) 6,010 (2,436) 93 (81) (2,424) 4 (575) (2,085) 2,500 (3,005) (3,161) 425 9,307 2 9,734 2015 £’000 5,316 82 (1) (922) 4,475 (1,214) 52 (27) (1,189) 10 (134) (1,816) 1,500 (2,500) (2,940) 346 8,961 – 9,307 * Conventionally interest received is included under the heading ‘Investing activities’; however, the Directors believe that as the Group holds cash in support of operating activities it should be disclosed as part of cash generated from operating activities. 48 25452.04 19 April 2017 7:14 AM proof 4 Churchill China plc Annual Report for the year ended 31 December 2016 RECONCILIATION OF OPERATING PROFIT TO NET CASH INFLOW FROM OPERATING ACTIVITIES Continuing operating activities Operating profit Adjustments for: Depreciation and amortisation (Gain) / loss on disposal of property, plant and equipment Charge for share based payments Defined benefit pension cash contribution (see note 22) Changes in working capital: Inventory Trade and other receivables Trade and other payables Net cash inflow from operations 2016 £’000 2015 £’000 6,398 4,959 1,716 (8) 160 (1,430) (742) (750) 1,400 6,744 1,495 4 128 (758) (86) (371) (55) 5,316 25452.04 19 April 2017 7:14 AM proof 4 49 Churchill China plc Annual Report for the year ended 31 December 2016 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2016 1 Summary of significant accounting policies The consolidated financial statements of Churchill China plc have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU) and the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of land and buildings, available-for-sale financial assets, and financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in note 3. The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. Going concern After making enquiries, the Directors have a reasonable expectation that the Group and the Company have adequate resources to continue in operational existence for the foreseeable future. The Group and the Company therefore continue to adopt the going concern basis in preparing their consolidated financial statements. Changes in accounting policy and disclosures (a) New and amended standards adopted by the Group No new standards applying to the Group for the first time for the financial year beginning on 1 January 2016 have had a material impact on the Group: (b) New standards and interpretations not yet adopted A number of new standards and amendments to standards and interpretations are effective for annual periods beginning on or after 1 January 2017, and have not been applied in preparing these consolidated financial statements. None of these are expected to have a significant effect on the consolidated financial statements of the Group, except the following set out below: IFRS 9 ‘Financial instruments’ addresses the classification, measurement and recognition of financial assets and financial liabilities. It replaces the guidance in IAS 39 that relates to the classification and measurement of financial instruments. IFRS 9 retains but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets: amortised cost, fair value through OCI and fair value through P&L. The basis of classification depends on the entity’s business model and the contractual cash flow characteristics of the financial asset. The standard is effective for accounting periods beginning on or after 1 January 2018. The Group does not believe IFRS 9 will have a material impact. IFRS 15 ‘Revenue from contracts with customers’ deals with revenue recognition and establishes principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. Revenue is recognised when a customer obtains control of a good or service and has thus the ability to direct the use and obtain the benefits from the good or service. The standard replaces IAS 18 ‘Revenue’. The standard is effective for accounting periods beginning on or after 1 January 2018. The Group is assessing the impact of IFRS 15, but at present does not believe there will be a material impact. IFRS 16 ‘Leases’ addresses the definition of a lease, recognition and measurement of leases and establishes principles for reporting useful information to users of the financial statements about the leasing activities of both lessees and lessors. A key change arising from IFRS 16 is that most operating leases will be accounted for on balance sheet for lessees. The standard replaces IAS 17 ‘Leases’. The standard is effective for accounting periods beginning on or after 1 January 2019. The Group is assessing the impact of IFRS 15, but at present does not believe there will be a material impact. There are no other IFRSs or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Group. 50 25452.04 19 April 2017 7:14 AM proof 4 Churchill China plc Annual Report for the year ended 31 December 2016 1 Summary of significant accounting policies (continued) Basis of consolidation The consolidated financial statements of Churchill China plc include the results of the Company, its subsidiaries and associate company. The financial statements of each undertaking in the Group are prepared to the balance sheet date under FRS 101. Subsidiaries and associates accounting policies are amended, where necessary, to ensure consistency with the Group accounting policies under IFRS. (a) Subsidiaries Subsidiaries are all entities over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one-half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. The acquisition method of accounting is used to account for the purchase of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange. Acquisition related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement. Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated. (b) Associates Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting and are initially recognised at cost. The Group’s investment in associates includes goodwill identified on acquisition, net of any accumulated impairment loss. The Group’s share of its associate’s post-acquisition profits or losses is recognised in the income statement and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. The Group determines at each reporting date whether there is any objective evidence that the investment in its associate is impaired. If this is the case, the Group calculates the impairment as the difference between the recoverable amount of the associate and its carrying value and recognises the amount within ‘share of results of associated company’ in the Income Statement. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Dilution in gains and losses arising in investments in associates are recognised in the income statement. 25452.04 19 April 2017 7:14 AM proof 4 51 Churchill China plc Annual Report for the year ended 31 December 2016 NOTES TO THE FINANCIAL STATEMENTS continued 1 Summary of significant accounting policies (continued) Segment reporting Operating segments are reported in a way consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Board of Churchill China plc. Income and expenditure arising directly from a business segment are identified to that segment. Income and expenditure arising from central operations which relate to the Group as a whole or cannot reasonably be allocated between segments are classified as unallocated. Revenue Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods provided in the normal course of business, net of discounts, rebates and sales related taxes. Sales of goods are recognised when goods have been delivered and title in those goods has passed. Discounts and rebates are recognised at their anticipated level as soon as any liability is expected to arise and are deducted from gross revenue. Interest income is recognised on a time basis by reference to the principal outstanding and at the effective interest rate applicable. Dividend income is recognised when the Group’s right to receive payment has been established. Leases Management reviews new leases and classify them as operating or finance leases in accordance with the balance of risk and reward between lessee and the lessor. Lease payments made under operating leases are charged to the Income Statement on a straight-line basis over the term of the lease. Operating profit and exceptional items Operating profit is stated both before and after the effect of exceptional items but before the Group’s share of results in associate companies, impairment of investment in associate companies, finance income and costs and taxation. The Group has adopted a columnar income statement format which seeks to highlight significant items within the Group results for the period. Such items are considered by the Directors to be exceptional in size and nature rather than being representative of the underlying trading of the Group, and may include such items as restructuring costs, material impairments of non-current assets, material profits and losses on the disposal of property, plant and equipment, material increases or reductions in pension scheme costs and material increases or decreases in taxation costs as a result of changes in legislation. The Directors apply judgement in assessing the particular items, which by virtue of their size and nature are separately disclosed in the income statement and notes to the financial statements as “Exceptional items”. The Directors believe that the separate disclosure of these items is relevant in understanding the Group’s financial performance. Dividends Dividends to the Company’s shareholders are recognised as a liability in the Group’s financial statements in the period in which the dividends are paid, following approval by the Company’s shareholders. Interest received/paid Interest received and paid is treated in the cash flow statement as a cash flow from operating activities as this reflects the nature of the Group’s business. 52 25452.04 19 April 2017 7:14 AM proof 4 Churchill China plc Annual Report for the year ended 31 December 2016 1 Summary of significant accounting policies (continued) Retirement benefit costs The Group operates a defined benefit pension scheme and defined contribution pension schemes. The defined benefit scheme is valued every three years by a professionally qualified independent Actuary. In intervening years, the Actuary reviews the continuing appropriateness of the valuation. Scheme liabilities are measured using the projected unit method and the amount recognised in the balance sheet is the present value of these liabilities at the balance sheet date. The discount rate used to calculate the present value of liabilities is the interest rate attaching to high quality corporate bonds. The assets of the scheme are held separately from those of the Group and are measured at fair value. The accrual of further benefits under the scheme ceased on 31 March 2006. The regular service cost of providing retirement benefits to employees during the year, together with the cost of any benefits relating to past service and any benefits arising from curtailments, is charged or credited to operating profit in the year. These costs are included within staff costs. A net interest cost on defined benefit plans is included within finance income or cost, based on the discount rate on the net post employment obligation measured at the beginning of the year. 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. Remeasurements of post employment benefit obligations are recognised in the statement of comprehensive income in the year, together with differences arising from changes in actuarial assumptions. Costs associated with defined contribution schemes represent contributions payable by the Group during the year and are charged to the income statement as they fall due. Share based payments Where equity settled share options have been issued to employees, the fair value of options at the date of grant is charged to the Income Statement 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 Income Statement 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. Foreign currencies The individual financial statements of each Group company are presented in the currency of the primary economic environment in which the company operates (its functional currency). For the purpose of the consolidated financial statements, the results of each entity are expressed in Sterling, which is the presentation currency of the Group and is the presentation currency for the consolidated financial statements. Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. Non monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. For the purpose of presenting consolidated financial statements, the assets and liabilities of the Group’s foreign operations are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at average exchange rates for the period. Exchange differences arising, if any, are accounted for in other comprehensive income. 25452.04 19 April 2017 7:14 AM proof 4 53 Churchill China plc Annual Report for the year ended 31 December 2016 NOTES TO THE FINANCIAL STATEMENTS continued 1 Summary of significant accounting policies (continued) In order to manage its exposure to certain foreign exchange risks, the Group enters into forward currency contracts (see “Derivative financial instruments” below). Derivative financial instruments The Group’s operations expose it to the financial risks of changes in exchange rates. The Group uses forward currency contracts to mitigate this exposure. The Group does not use derivative financial instruments for speculative purposes. Changes in the fair value of derivative financial instruments are recognised immediately in the income statement as soon as they arise. Contracts are initially recognised at fair value, gains and losses on all derivatives held at fair value outstanding at a balance sheet date are recognised in the income statement. Hedge accounting is not considered to be appropriate to the above currency risk management techniques and has not been applied. Taxation Income tax expense represents the sum of the current tax and deferred tax. Current tax is based on the taxable profit for the year. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred income tax is not accounted for, if it arises from the initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction there is no effect on either accounting or taxable profit or loss. The Group’s liability for deferred tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date or are expected to apply when the related deferred income tax asset is realised or deferred income tax liability is settled. Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred tax assets and liabilities may be set off against each other provided there is a legal right to do so and it is management’s intention to do so. Property, plant and equipment Property, plant and equipment is shown at cost, net of accumulated depreciation, as adjusted for the revaluation of certain land and buildings. Depreciation is calculated so as to write off the cost, less any provision for impairment, of plant, property and equipment, 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 Motor vehicles Fixtures and fittings % 2 on cost or valuation 10-25 on cost 25 on reducing net book value 25-33 on cost Freehold land is not depreciated. The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amounts. 54 25452.04 19 April 2017 7:14 AM proof 4 Churchill China plc Annual Report for the year ended 31 December 2016 1 Summary of significant accounting policies (continued) Intangible assets Intangible assets, which comprise computer software, are shown at cost net of accumulated amortisation. Amortisation is calculated so as to write off the cost, less any provision for impairment, of intangible assets, less their estimated residual values over the expected useful economic lives of the assets concerned. The principal annual rate used for this purpose is: Computer software % 33 on cost Neither the Group nor Company holds any goodwill. Impairment of non financial assets At each reporting date the Directors assess whether there is any indication that an asset may be impaired. If any such indicator exists the Group tests for impairment by estimating the recoverable amount of the asset. If the recoverable amount is less than the carrying value of an asset an impairment loss is required. In addition to this, assets with indefinite lives are tested for impairment at least annually. The recoverable amount is measured as the higher of net realisable value or value in use. Non financial assets other than goodwill that have suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. Inventories Inventories are stated at the lower of cost and net realisable value. Cost is determined on a first in, first out basis and includes, where appropriate, direct materials, direct labour, overheads incurred in bringing inventories to their present location and condition, and transport and handling costs. Net realisable value is the estimated selling cost less all further costs to sale. Provision is made where necessary for obsolete, slow moving and defective inventories. Available for sale financial assets Available for sale financial assets are non derivatives that are either designated in this category or not classified to any of the other financial asset categories. They are included in non-current assets unless the Directors intend to dispose of the investment within twelve months of the balance sheet date. At each reporting date the Directors assess whether there is an indication an asset may be impaired. If any such indicator exists the Group tests for impairment by estimating the recoverable amount of the asset. If the recoverable amount is less than the carrying value of an asset an impairment loss is required. Trade receivables Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment is established where there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. Other financial assets Other receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than twelve months after the end of the reporting period. These are classified as non current assets. Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held on call with banks, other short term highly liquid investments with original maturities of three months or less, and bank overdrafts. Cash and cash equivalents are as defined under IAS 7. 25452.04 19 April 2017 7:14 AM proof 4 55 Churchill China plc Annual Report for the year ended 31 December 2016 NOTES TO THE FINANCIAL STATEMENTS continued 1 Summary of significant accounting policies (continued) Non current assets held for sale Non current assets are classified as being held for sale when their value is expected to be recovered through disposal rather than continuing usage within the business and when the future sale is considered to be highly probable. Management must be committed to sale which should be expected to be completed to qualify for recognition as a completed sale within one year from the date of classification. Non current assets are measured at the lower of carrying value and fair value less disposal costs, and are no longer depreciated. Provisions Provisions are recognised when (i) the Group has a present legal or constructive obligation as a result of past events, (ii) it is probable that an outflow of resources will be required to settle the obligation and (iii) the amount has been reliably estimated. The Directors estimate the amount of provisions required to settle any obligation at the balance sheet date. Provisions are discounted to their present value where the effect would be material. Parent Company significant accounting policies The Company financial statements are prepared under FRS 101. The financial statements have been prepared under the historical cost convention in accordance with the Companies Act 2006 and applicable accounting standards in the United Kingdom. The principal accounting policies applied in the preparation of the Company financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. Fixed asset investments Fixed asset investments, comprising investments in subsidiary and associated companies, are stated as follows: Subsidiary companies are stated at cost less any provisions for impairment. The associate company is accounted for using the equity method of accounting and is initially recognised at cost. Where an event has occurred that gives rise to doubt about the recovery of the carrying value an impairment assessment is made. The impairment is calculated by comparing the investments carrying value to the recoverable amount as required by FRS 101. Other Policies in relation to dividends and share based payments are the same as the Group accounting policies. 2 Financial risk management Financial risk factors The Group’s activities expose it to a variety of financial risks: market risk (including currency risk, fair value interest rate risk, cash flow interest rate risk), credit risk, price risk and liquidity risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s financial performance. The Group uses derivative financial instruments to manage certain risk exposures. Financial risk management is carried out by the finance department under policies approved by the Board of Directors. (a) Market risk (i) Currency risk The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily in relation to the US dollar and Euro. Foreign exchange risk arises from future commercial transactions, recognised assets and liabilities and net investments in foreign operations. The Group’s treasury risk management policy is to secure all of the contractually certain cash flows (mainly export sales and the purchase of inventory) and to review likely forward exposures in each major currency. Contractual certainty is considered to be where the Group has received a firm sales order or placed a firm purchase order. 56 25452.04 19 April 2017 7:14 AM proof 4 Churchill China plc Annual Report for the year ended 31 December 2016 2 Financial risk management (continued) At 31 December 2016, if Sterling had weakened / strengthened by 5% against the US dollar with all other variables held constant, post tax profit for the year would have been £118,000 (2015: £70,000) higher / lower, mainly as a result of foreign exchange gains / losses on translation of US dollar denominated trade receivables, payables and cash balances. Equity would have been a further £20,000 (2015: £15,000) higher / lower, mainly as a result of differences in the translation of US dollar investments in subsidiary undertakings. If Sterling had weakened / strengthened by 5% against the Euro with all other variables held constant, post tax profit for the year would have been £374,000 (2015: £259,000) higher / lower, mainly as a result of foreign exchange gains / losses on translation of Euro denominated trade receivables and cash balances. There would have been no substantial other changes in equity. (ii) Cash flow and fair value interest rate risk The Group holds significant interest bearing assets and its finance income and operating cash flows are linked to changes in market interest rates. The Group has no significant short or long term borrowings. The Group identifies cash balances in excess of short and medium term working capital requirements (see liquidity risk) and invests these balances in short and medium term money market deposits. At 31 December 2016, had the interest rates achieved been 10% higher / lower with all other variables held constant then post tax profit for the year would have been £9,000 (2015: £8,000) higher / lower. Other components of equity would have been unchanged. (b) Credit risk Credit risk is managed on a Group basis. Credit risk arises from cash and cash equivalents, other financial assets and credit exposures including outstanding trade receivables and committed transactions. For banks with which the Group places balances on deposit, only independently rated parties with a minimum rating of ‘A-’ are accepted. Cash and cash equivalents are as follows: Lloyds Bank plc National Westminster Bank plc Santander UK plc Other Other financial assets are as follows: Lloyds Bank plc National Westminster Bank plc Credit rating A– A– A– Min A– Credit rating A– A– 2016 £’000 8,896 – 775 63 9,734 2016 £’000 2,629 376 3,005 2015 £’000 7,466 771 763 307 9,307 2015 £’000 2,500 – 2,500 Risk attached to the receipt of UK trade receivables is largely controlled through the assessment of the credit quality of each customer, taking into account its financial position, past experience and third party credit information. Risks attaching to export trade receivables are controlled through the use of export credit insurance and confirmed letters of credit. Where these cannot be obtained the credit control department assesses the credit quality of the customer, taking into account its financial position, past experience and other factors. The Group manages its debtor position and considers it is in a position of having limited credit risk (see note 18). 25452.04 19 April 2017 7:14 AM proof 4 57 Churchill China plc Annual Report for the year ended 31 December 2016 NOTES TO THE FINANCIAL STATEMENTS continued 2 Financial risk management (continued) (c) Price risk As explained in the Strategic report, the Group results are affected by changes in market prices. The risk attached to this is managed by close relationships with suppliers and ongoing product development. (d) Liquidity risk Prudent liquidity risk management implies maintaining sufficient cash and available funding through committed credit facilities. Liquidity risk is managed on a Group basis with expected cash flows being monitored against current cash and cash equivalents and committed borrowing facilities. The Group has no long term borrowing and funds its operations from its own cash reserves and the Directors do not consider there to be significant liquidity risk. All liabilities are generally due within three months. Capital risk management The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern, to provide finance for the long term development of the business and to generate returns for shareholders and benefits for other stakeholders in the business. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. The Group currently has no debt. Fair value estimation The carrying value less impairment provision of trade and other receivables and trade and other payables are assumed to approximate their fair values. 3 Critical accounting estimates and judgements Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities are discussed below. (a) Net realisable value of excess inventories: The Group identifies inventory where it is believed that the quantity held is in excess of that which may be realised at normal price levels. The realisable value of this inventory is assessed taking into account the estimated sales price less further costs of sale. If the estimated net realisable value of excess inventories were to be 10% higher or lower than management’s estimates the value of this provision would change by £206,000 (2015: £235,000). (b) Pension benefits: The present value of the pension obligations depend on a number of factors that are determined on an actuarial basis using a number of assumptions. The assumptions used in determining the net cost or income for pensions include the discount rate. Any changes in these assumptions will impact the carrying amount of pension obligations. The Group determines the appropriate discount rate at the end of each year. This is the interest rate that should be used to determine the present value of estimated future cash outflows expected to be required to settle the pension obligations. In determining the appropriate discount rate the Group considers the interest rates of high quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating the terms of the related pension liability. Other key assumptions for pension obligations are based in part on current market conditions. Additional information is disclosed in note 22. (c) Recognition of deferred tax assets The Group reassesses each year whether it is appropriate to recognise the deferred tax assets in the financial statements based upon the likelihood that the assets can be recovered. The assessment is based on the expected reversal of temporary timing differences. 58 25452.04 19 April 2017 7:14 AM proof 4 Churchill China plc Annual Report for the year ended 31 December 2016 4 Segmental analysis Management has determined the operating segments are based on the reports reviewed by the Chief Operating Decision Maker and the Strategic Steering Committee of the Board that are used to make strategic decisions. During 2016 the Board considered the business primarily based on the market and product groups, but also from a geographic perspective. Geographically, management considered the performance in relation to the UK, rest of Europe, North America and Rest of the World. The reportable operating product segments derive their revenue primarily from the sale of ceramic products to the Retail and Hospitality sectors. The Board assessed the performance of the operating segments based on the measure of operating profit, as analysed in the management accounts. This measurement basis excluded the effects of non-recurring expenditure from the operating segments such as restructuring costs and goodwill impairments when the impairment is the result of an isolated, non-recurring event. The measure also excluded the effects of equity- settled share-based payments and unrealised gains/losses on financial instruments. Interest income and expenditure are not allocated to segments, as this type of activity is driven by the central treasury function, which managed the cash position of the Group. The format of reporting to the Chief Operating Decision Maker and Strategic Steering Committee of the Board will change in 2017. The Group’s business has changed substantially since the present segmental reporting basis was first adopted and Hospitality revenues now represent 86% of Group revenue. At the same time management of the business, its assets and resources is now substantially conducted as a single operation. As such the following segmental analysis will not be reproduced in 2017 and will be replaced by information only in relation to revenue streams. (a) Primary reporting format – business segments During 2016 the business was managed in two main business segments, Hospitality and Retail. Hospitality £’000 43,961 10,630 (1,408) 9,222 Hospitality £’000 38,859 8,182 (1,033) 7,149 31 December 2016 Retail £’000 7,141 986 (113) 873 Unallocated £’000 – (3,502) (195) (3,697) 31 December 2015 Retail £’000 7,970 1,121 (225) 896 Unallocated £’000 – (2,849) (237) (3,086) Revenue from external customers Contribution to Group overheads excluding depreciation and amortisation Depreciation and amortisation Operating profit Share of results of associate company Finance income Finance cost Profit before income tax Revenue from external customers Contribution to Group overheads excluding depreciation and amortisation Depreciation and amortisation Operating profit Share of results of associate company Finance income Finance cost Profit before income tax Group £’000 51,102 8,114 (1,716) 6,398 157 80 (120) 6,515 Group £’000 46,829 6,454 (1,495) 4,959 135 82 (162) 5,014 59 25452.04 19 April 2017 7:14 AM proof 4 Churchill China plc Annual Report for the year ended 31 December 2016 NOTES TO THE FINANCIAL STATEMENTS continued 4 Segmental analysis (continued) The ‘Unallocated’ Group overheads principally comprise costs associated with the centralised functions of the Company Board, finance and administration and information technology. There are no material inter-segment revenues (2015: £nil). Any inter-segment revenues are carried out on an arm’s length basis. Revenue from external parties is measured in a manner consistent with the consolidated income statement. Segment assets consist primarily of property, plant and equipment, inventories, trade and other receivables. Unallocated assets comprise intangible assets, investment in associates, available-for-sale financial assets, deferred taxation and cash and cash equivalents. Segment liabilities comprise trade and other payables specific to operating segments. Unallocated liabilities comprise items such as trade and other payables, current taxation, deferred taxation and retirement benefit obligations. Capital expenditure comprises additions to property, plant and equipment (note 13) and intangible assets (note 14). Segment assets and liabilities at 31 December 2016 and capital expenditure for the year ended on that date are as follows: Assets excluding inventories Inventories Investment in associates Total assets Hospitality £’000 18,993 7,344 – 26,337 Retail £’000 3,325 1,758 – 5,083 Unallocated £’000 16,544 – 1,388 17,932 Group £’000 38,862 9,102 1,388 49,352 Total liabilities (6,690) (685) (13,352) (20,727) Capital expenditure 2,503 29 169 2,701 Segment assets and liabilities at 31 December 2015 and capital expenditure for the year ended on that date are as follows: Assets excluding inventories Inventories Investment in associates Total assets Hospitality £’000 16,856 6,283 – 23,139 Retail £’000 3,583 2,077 – 5,660 Unallocated £’000 14,969 – 1,231 16,200 Group £’000 35,408 8,360 1,231 44,999 Total liabilities (5,937) (557) (7,580) (14,074) Capital expenditure 1,191 78 62 1,331 60 25452.04 19 April 2017 7:14 AM proof 4 Churchill China plc Annual Report for the year ended 31 December 2016 4 Segmental analysis (continued) (b) Secondary reporting format – geographical segments The Group’s two business segments operate in four main geographical segments, even though they are managed on a worldwide basis. Geographical segment – Revenue United Kingdom Rest of Europe North America Rest of the World ` 2016 £’000 26,207 14,605 4,966 5,324 51,102 2015 £’000 27,192 10,997 4,193 4,447 46,829 The total assets of the business are allocated as follows: United Kingdom £48,700,000 (2015: £44,136,000), Rest of Europe £80,000 (2015: £29,000), North America £563,000 (2015: £827,000), Rest of the World £9,000 (2015: £7,000). Capital expenditure was made as follows: United Kingdom £2,630,000 (2015: £1,331,000), Europe £71,000 (2015: nil) 5 Expenses by nature Changes in inventories of finished goods and work in progress Raw materials used Purchase of goods for resale Employee benefit expense (note 7) Other external charges Depreciation and amortisation charges (Profit) / loss on disposal of property, plant and equipment Foreign exchange losses / (gains) Total cost of sales, distribution costs and administrative expenses 2016 £’000 (731) 4,361 5,517 19,539 14,284 1,716 (8) 26 44,704 2015 £’000 (98) 3,875 6,036 17,512 13,051 1,495 4 (5) 41,870 6 Average number of people employed The average monthly number of persons (including Executive Directors) employed by the Group during the year was: By activity Production and warehousing Sales and administration The Company had no employees (2015: none). 25452.04 19 April 2017 7:14 AM proof 4 2016 Number 2015 Number 412 194 606 369 192 561 61 Churchill China plc Annual Report for the year ended 31 December 2016 NOTES TO THE FINANCIAL STATEMENTS continued 7 Employee benefit expense Staff costs (for the employees shown in note 6) Wages and salaries Social security costs Defined contribution pension cost (see note 22) Other pension costs (see note 22) Share options granted to Directors and employees (see note 23) 2016 £’000 16,986 1,609 554 230 160 19,539 2015 £’000 15,160 1,499 549 176 128 17,512 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 is disclosed. Company The Company did not make any payments to employees (2015: nil). 8 Finance income and costs Interest income on cash and cash equivalents Finance income Interest on defined benefit schemes (note 22) Other interest Finance costs Net finance cost 9 Auditors’ remuneration During the year the Group obtained the following services from the Company’s auditors: Fees payable to the Company’s auditors for the audit of the Company and consolidated financial statements (Company £3,000, 2015: £3,000) Additional fees payable to the Company’s auditors for other services: The audit of the Company’s subsidiaries Total fees payable to the Group’s auditors 2016 £’000 80 80 (119) (1) (120) (40) 2015 £’000 82 82 (161) (1) (162) (80) 2016 £’000 2015 £’000 8 79 87 8 78 86 62 25452.04 19 April 2017 7:14 AM proof 4 Churchill China plc Annual Report for the year ended 31 December 2016 10 Income tax expense Group Current tax – current year – adjustment in respect of prior periods Deferred tax (note 21) Current year Income tax expense 2016 £’000 1,154 (68) 1,086 144 1,230 2015 £’000 852 (49) 803 125 928 The Finance Act 2016 was substantively enacted on 15 September 2016 and includes legislation to reduce the main rate of Corporation Tax from 20% to 17% from April 2020. Deferred tax balances have been remeasured accordingly. The tax on the Group’s profit before tax differs from the theoretical amount that would arise using the weighted average tax rate applicable to profit of the consolidated entities as follows: Profit before income tax Tax calculated at domestic tax rates applicable to profits in the respective countries Expenses not deductible for tax purposes Adjustment in respect of prior periods Change in tax rate Treatment of tax on share of profit of associate company Other Tax charge The weighted average applicable tax rate was 20.0% (2015: 20.25%). 2016 £’000 6,515 1,303 21 (68) (43) (32) 49 1,230 2015 £’000 5,014 1,015 18 (49) (81) (27) 52 928 During the year a credit of £1,017,000 (2015: charge of £136,000) in relation to deferred tax arising from actuarial gains and losses on the Group’s defined benefit pension obligation and a credit of £27,000 (2015: £102,000) in relation to deferred taxation on share based payments were adjusted directly within equity. 11 Earnings per ordinary share The basic earnings per ordinary share is based on the profit after income tax and on 10,972,257 (2015: 10,956,828) ordinary shares, being the weighted average number of ordinary shares in issue during the year. 2016 Pence per share 2015 Pence per share Basic earnings per share (Based on earnings £5,285,000 (2015: £4,086,000)) 48.2 37.3 Diluted earnings per ordinary share is based on the profit after income tax and on 11,067,101 (2015: 11,064,046) ordinary shares, being the weighted average number of ordinary shares in issue during the year of 10,972,257 (2015: 10,956,828) increased by 94,844 (2015: 107,218) 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 basic earnings per share (Based on earnings £5,285,000 (2015: £4,086,000)) 47.8 36.9 2016 Pence per share 2015 Pence per share 25452.04 19 April 2017 7:14 AM proof 4 63 Churchill China plc Annual Report for the year ended 31 December 2016 NOTES TO THE FINANCIAL STATEMENTS continued 12 Dividends The dividends paid in the year were as follows: Ordinary dividend: Final dividend 2015 12.7p (Final dividend 2014: 11.0p) per 10p ordinary share Interim 2016 6.3p per 10p ordinary share paid (Interim 2015: 5.6p) The Directors now recommend payment of the following dividend: Ordinary dividend: Final dividend 2016 14.8p (2015: 12.7p) per 10p ordinary share Dividends on treasury shares held by the Company are waived. 2016 £’000 1,395 690 2,085 2015 £’000 1,200 616 1,816 1,621 1,395 13 Property, plant and equipment The Company has no property, plant and equipment (2015: none). Details of property, plant and equipment relating to the Group are as follows: Group At 1 January 2015 Cost Accumulated depreciation Net book amount Year ended 31 December 2015 Opening net book amount Additions Disposals Depreciation charge Closing net book amount At 31 December 2015 Cost Accumulated depreciation Net book amount Year ended 31 December 2016 Opening net book amount Additions Disposals Depreciation charge Closing net book amount At 31 December 2016 Cost Accumulated depreciation Net book amount Freehold land and buildings £’000 12,734 (2,553) 10,181 10,181 187 – (236) 10,132 12,921 (2,789) 10,132 10,132 1,036 – (377) 10,791 13,957 (3,166) 10,791 Plant £’000 19,669 (16,466) 3,203 3,203 930 – (935) 3,198 20,599 (17,401) 3,198 3,198 1,273 (19) (1,015) 3,437 21,822 (18,385) 3,437 Motor vehicles £’000 Fixtures and fittings £’000 907 (393) 514 514 148 (52) (142) 468 922 (454) 468 468 232 (85) (143) 472 864 (392) 472 2,641 (2,281) 360 360 39 – (151) 248 2,680 (2,432) 248 248 79 – (130) 197 2,759 (2,562) 197 Total £’000 35,951 (21,693) 14,258 14,258 1,304 (52) (1,464) 14,046 37,122 (23,076) 14,046 14,046 2,620 (104) (1,665) 14,897 39,402 (24,505) 14,897 64 25452.04 19 April 2017 7:14 AM proof 4 Churchill China plc Annual Report for the year ended 31 December 2016 14 Intangible assets The Company has no intangible assets (2015: none). Details of intangible assets relating to the Group are as follows: Group At 1 January 2015 Cost Accumulated amortisation Year ended 31 December 2015 Opening net book amount Additions Amortisation charge Closing net book amount At 31 December 2015 Cost Accumulated amortisation Net book amount Year ended 31 December 2016 Opening net book amount Additions Amortisation charge Closing net book amount At 31 December 2016 Cost Accumulated amortisation Net book amount 25452.04 19 April 2017 7:14 AM proof 4 Computer software £’000 842 (779) 63 63 27 (31) 59 869 (810) 59 59 81 (51) 89 950 (861) 89 65 Churchill China plc Annual Report for the year ended 31 December 2016 NOTES TO THE FINANCIAL STATEMENTS continued 15 Investment in associate Cost At 1 January Share of profit At 31 December Impairment At 1 January Reversal of impairment of investment in associate At 31 December Net book value Closing net book amount Group Company 2016 £’000 1,658 157 1,815 427 – 427 2015 £’000 1,524 134 1,658 428 (1) 427 2016 £’000 605 157 762 – – – 2015 restated £’000 471 134 605 – – – 1,388 1,231 762 605 The investment in associate represents a holding of 41.7% (2015: 34.4%) of the issued £1 ordinary shares of Furlong Mills Limited, a company registered in England, whose principal activity is that of a potter’s miller. During the year Furlong Mills Limited repurchased and cancelled shares from a third party shareholder. As a result of this repurchase and cancellation of shares the Group’s holding in the shares of Furlong Mills Limited increased from 34.4% to 41.7%. Share of associate’s assets Share of associate’s liabilities Share of associate’s net assets 2016 £’000 2,634 (742) 1,892 2015 £’000 2,262 (555) 1,707 The total revenue of Furlong Mills Limited for its year ended 31 December 2016 was £8,428,000 (2015: £8,282,000) and profit before tax was £677,000 (2015: £660,000). During the year the Group purchased raw materials to a value of £3,011,000 (2015: £2,657,000) from Furlong Mills Limited. Amounts owed to Furlong Mills Limited at 31 December 2016 were £198,000 (2015: £141,000) (see note 20). The difference between the carrying value of the Group’s interest in associate and the share of associate’s net assets represents an impairment charged in the Group’s financial statements and adjustments in relation to accounting policies. This impairment reflects the Board’s view of the recoverable amount of the investment calculated using a discounted cash flow model. Expected cash flows from the investment have been discounted at a rate of 9.5% (2015: 5.9%). In the Group’s consolidated and Company financial statements the investment is accounted for on the equity basis. A correcting adjustment of £116,000 at 1 January 2015 and a further £134,000 to the comparative balance sheet of the Company at 31 December 2015 has been made to increase the carrying value of the investment in the associate company, Furlong Mills Limited, reflecting the Company’s share of profit after income tax in 2015, in accordance with FRS 101. These adjustments do not affect the carrying value of the investment in associate in the Group’s Consolidated Balance Sheet. 66 25452.04 19 April 2017 7:14 AM proof 4 Churchill China plc Annual Report for the year ended 31 December 2016 16 Investment in subsidiaries Company Cost or valuation At 1 January and 31 December Impairment At 1 January and 31 December Net book value At 31 December 2016 £’000 2015 £’000 2,627 2,627 432 432 2,195 2,195 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 Churchill China (UK) Limited* Country of incorporation England and Wales Description of shares held Ordinary Churchill Ceramics (UK) Limited* England and Wales Ordinary Proportion of nominal value of issued shares held 100% 100% James Broadhurst & Sons Limited* England and Wales Ordinary 100% Churchill China, Inc† USA Ordinary Churchill Housewares Limited* Churchill Tableware Limited* Churchill Fine Bone China Holdings Limited* Churchill Fine Bone China Limited* Elizabethan Fine Bone China Limited* Churchill China (HK) Limited‡ England and Wales England and Wales England and Wales England and Wales England and Wales Hong Kong Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary 100% 100% 100% 100% 100% 100% 100% Principal activity Manufacture and sale of ceramic and related products Provision of management and property services within the Group Provision of management and property services within the Group Sale of ceramic and related products Dormant Dormant Dormant Dormant Dormant Dormant The Directors believe the carrying value of subsidiaries is supported by their underlying net asset values. * Registered address: No.1, Marlborough Way, Sandyford, Stoke on Trent ST6 5NZ, United Kingdom † Registered address: 2043, Corporate Lane, Suite 115, Naperville, Illinois 60563. USA ‡ Registered address: 18/F Edinburgh Tower, The Landmark, 15 Queen’s Road Central, Central, Hong Kong 25452.04 19 April 2017 7:14 AM proof 4 67 Churchill China plc Annual Report for the year ended 31 December 2016 NOTES TO THE FINANCIAL STATEMENTS continued 17 Inventories The Company has no inventory (2015: none). Details of inventory relating to the Group are as follows: Raw materials Work in progress Finished goods 2016 £’000 73 846 8,183 9,102 2015 £’000 62 698 7,600 8,360 The Directors do not consider there is a material difference between the carrying value and replacement cost of inventories. The potential impact of changes in the net realisable value of inventories is shown in note 3. The cost of inventories recognised as an expense and included in the income statements amounted to £27,101,000 (2015: £25,813,000). 18 Trade and other receivables Trade receivables Less: provision for impairment of trade receivables Trade receivables – net Prepayments Receivables from related parties (note 29) Less non current portion: loans to related parties Current portion Group Company 2016 £’000 9,577 (379) 9,198 281 – 9,479 – 9,479 2015 £’000 8,602 (345) 8,257 391 – 8,648 – 8,648 2016 £’000 – – – – 5,454 5,454 5,247 207 2015 £’000 – – – – 4,745 4,745 4,560 185 All non current receivables are due within five years from the balance sheet date. The Group operates a credit risk management policy. Risk attached to the receipt of UK trade receivables is largely controlled through the assessment of the credit quality of each customer, taking into account its financial position, past experience and third party credit information. Risks attaching to export trade receivables are controlled through the use of export credit insurance and confirmed letters of credit. Where these cannot be obtained the credit control department assesses the credit quality of the customer, taking into account its financial position, past experience and other factors. Trade receivables that are less than three months past due and not covered by insurance arrangements are not considered impaired unless there is specific evidence to the contrary. As of 31 December 2016, trade receivables of £6,879,000 (2015: £6,185,000) were fully performing. As of 31 December 2016, trade receivables of £1,025,000 (2015: £819,000) were past due but not impaired. The ageing of these receivables is as follows: 2016 £’000 1,016 5 4 1,025 2015 £’000 819 – – 819 Up to 3 months 3 to 6 months Over 6 months 68 25452.04 19 April 2017 7:14 AM proof 4 Churchill China plc Annual Report for the year ended 31 December 2016 18 Trade and other receivables (continued) As of 31 December 2016 trade receivables with a gross value of £1,647,000 (2015: £1,598,000) were impaired and provided for. The amount of provision for 31 December 2016 was £379,000 (2015: £345,000). The individually impaired receivables relate to customers which are in unexpectedly difficult economic conditions. It was assessed that a portion of the receivables is expected to be recovered. The ageing of these receivables is as follows: Up to 3 months 3 to 6 months Over 6 months 2016 £’000 1,656 1 16 1,673 2015 £’000 1,552 19 27 1,598 The Directors consider that the carrying value of trade and other receivables is approximate to their fair value. Movements on the Group provision for impairment of trade receivables are as follows: At 1 January Provision for receivables impairment Written off during the year At 31 December 2016 £’000 345 34 – 379 2015 £’000 385 (50) 10 345 The creation and release of provision for impaired receivables have been included in ‘other external charges’ in the income statement (note 5). Amounts charged to the allowance account are generally written off, when there is no expectation of recovering additional cash. The carrying amounts of the Group’s trade and other receivables are denominated in the following currencies: Pounds Euros US dollars 2016 £’000 6,559 2,115 805 9,479 2015 £’000 6,499 1,489 660 8,648 During the year the Group realised gains of £75,000 (2015: gains of £nil) on settled forward option contracts that have been recognised in the Income Statement and as at 31 December held forward exchange contracts for the sale of Euros of £6,564,000 (2015: £3,461,000) and the sale of US dollars of £405,000 (2015: £169,000). These contracts are held at their fair value with a loss of £100,000 (2015: gain of £5,000) recognised in relation to the contracts outstanding at the year end. Company As of 31 December 2016, Company receivables of £nil (2015: £nil) were fully performing. Amounts receivable are repayable in accordance with agreed terms. No interest is chargeable. The carrying amounts of the Company’s receivables are denominated in the following currencies: Pounds US dollars 2016 £’000 5,355 99 5,454 2015 £’000 4,669 76 4,745 69 25452.04 19 April 2017 7:14 AM proof 4 Churchill China plc Annual Report for the year ended 31 December 2016 NOTES TO THE FINANCIAL STATEMENTS continued 19 Other financial assets Other financial assets Group Company 2016 £’000 3,005 2015 £’000 2,500 2016 £’000 – 2015 £’000 – Other financial assets represent term deposits made with banks not classed as cash and cash equivalents with maturities of less than one year as at the balance sheet date. The deposits are not impaired. 20 Trade and other payables Trade payables Amounts due to related parties Social security and other taxes Accrued expenses Group Company 2016 £’000 2,573 198 1,206 6,333 10,310 2015 £’000 2,133 141 1,029 5,418 8,721 2016 £’000 – 13 71 – 84 2015 £’000 – 13 54 – 67 All the above liabilities mature within twelve months from 31 December 2016. 21 Deferred income tax Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes relate to the same fiscal authority. The offset amounts are as follows: Group Deferred tax assets: - Deferred tax asset to be recovered after more than 12 months - Deferred tax asset to be recovered within 12 months Deferred tax liabilities: - Deferred tax liabilities to be recovered after more than 12 months - Deferred tax liabilities to be recovered within 12 months Deferred tax asset / (liability) (net) The net movement on the deferred income tax account is as follows: At 1 January Income statement charge (note 10) Tax credits relating to components of comprehensive income Tax credited / (charged) directly to equity (note 26) At 31 December 2016 £’000 1,350 308 1,658 (781) (53) (834) 824 2016 £’000 (88) (144) 12 1,044 824 2015 £’000 668 180 848 (891) (45) (936) (88) 2015 £’000 47 (125) 24 (34) (88) 70 25452.04 19 April 2017 7:14 AM proof 4 Churchill China plc Annual Report for the year ended 31 December 2016 21 Deferred income tax (continued) The movement in deferred income tax assets and liabilities during the year, without taking into consideration the offsetting of balances within the same tax jurisdiction, is as follows: Total £'000 1,070 (110) (24) 936 (90) (12) 834 Total £'000 (1,117) 235 34 (848) 234 (1,044) (1,658) 2015 £’000 136 (102) 34 Deferred tax liabilities At 1 January 2015 Credited to the income statement Credited to other comprehensive income At 31 December 2015 Credited to the income statement Credited to other comprehensive income At 31 December 2016 Deferred tax assets At 1 January 2015 Charged / (credited) to the income statement Charged / (credited) directly to equity At 31 December 2015 Charged / (credited) to the income statement Credited directly to equity At 31 December 2016 Accelerated tax depreciation £'000 Retirement benefit obligation £'000 (109) 38 – (71) (24) – (95) (935) 108 136 (691) 224 (1,017) (1,484) Accelerated tax depreciation £'000 Land and buildings revaluation £'000 834 (108) – 726 (88) – 638 236 (2) (24) 210 (2) (12) 196 Other £'000 (73) 89 (102) (86) 34 (27) (79) The deferred income tax (credited to) / charged to equity during the past year is as follows: Fair value reserves in shareholders’ equity: Tax on remeasurement of defined pension benefits Tax on share based payments 2016 £’000 (1,017) (27) (1,044) Deferred income tax of £2,000 (2015: £2,000) was transferred from other reserves (note 26) to retained earnings (note 26). This represents deferred tax on the difference between the actual depreciation on buildings and the equivalent depreciation based on the historical cost of buildings. Deferred income tax assets are recognised for tax losses carried forward to the extent that the realisation of the related tax benefit through the future taxable profits is probable. The Group has not recognised deferred income tax assets of £917,000 (2015: £971,000) in respect of capital losses amounting to £5,395,000 (2015: £5,395,000) that can be carried forward against future capital gains. Company Deferred tax assets of £72,000 (2015: £78,000) are recognised relating to short term timing differences. 25452.04 19 April 2017 7:14 AM proof 4 71 Churchill China plc Annual Report for the year ended 31 December 2016 NOTES TO THE FINANCIAL STATEMENTS continued 22 Retirement benefit obligations Balance sheet obligations Pension benefits Income statement charge Pension benefits Finance costs 2016 £’000 2015 £’000 8,731 3,837 884 119 725 161 The Group operates four 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, the Churchill China 2006 Group Personal Pension Plan and the Churchill section of the Peoples Pension, an auto enrolment scheme. The last three 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 £784,000 (2015: £725,000). Of this cost, £nil (2015: £nil) related to the Churchill Group Retirement Benefit Scheme, £270,000 (2015: £255,000) was in respect of the Churchill China 1999 Pension Scheme, £255,000 (2015: £263,000) was in respect of the Churchill China 2006 Group Personal Pension Scheme and £30,000 (2015: £24,000) was in respect of UK Auto Enrolment schemes. 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 £26,000 (2015: £25,000). No contributions have been made to the Churchill Group Retirement Benefit Scheme in relation to current service since the date of cessation of the future accrual of benefits on 31 March 2006. A contribution of £1,430,000 (2015: £758,000) was made in respect of the amortisation of past service liabilities during the year. The forward funding rate of the Scheme was agreed with the Scheme Trustees and Actuary following the completion of the 31 May 2014 triennial actuarial valuation in January 2015. The Group agreed to make payments of £715,000 per annum in respect of the amortisation of past service deficits for the ten years to 2025. Following a reduction in yields on gilt investments during 2016, the Scheme Trustees requested that additional funding was put in place to mitigate the effect of a higher scheme deficit. The Group has agreed to make additional contributions in the short term and an additional £715,000 was paid into the Scheme in December 2016. The Group has also agreed to make similar additional contributions in the years from 2017 to 2019 subject to a reassessment of funding at the next triennial actuarial valuation and review of applicable Scheme liability discount rates. The next triennial actuarial valuation is scheduled for commencement at 31 May 2017. Future amortisation payments will be assessed following completion of that valuation. The amounts recognised in the balance sheet are determined as follows: Present value of funded obligations Fair value of plan assets Liability in balance sheet 2016 £’000 50,381 (41,650) 8,731 2015 £’000 41,808 (37,971) 3,837 72 25452.04 19 April 2017 7:14 AM proof 4 Churchill China plc Annual Report for the year ended 31 December 2016 22 Retirement benefit obligations (continued) The movement in the present value of defined benefit obligation over the year is as follows: At 1 January Interest cost Experience gains on liabilities Remeasurements from change in demographic and financial assumptions Benefits paid At 31 December The movement in the fair value of plan assets over the year is as follows: At 1 January Expected return on plan assets Remeasurement of return on plan assets excluding amounts included in interest expense Employer contributions Benefits paid At 31 December Plan assets are comprised as follows: 2016 £’000 41,808 1,566 (703) 8,924 (1,214) 50,381 2016 £’000 37,971 1,447 2,016 1,430 (1,214) 41,650 Equity investment funds Absolute return funds Other investment funds Debt investments Cash and cash equivalents 2016 2015 £’000 21,306 6,425 1,849 9,797 2,273 41,650 51% 15% 4% 24% 6% £’000 19,784 6,843 1,468 8,078 1,798 37,971 2015 £’000 42,731 1,573 (1,006) 88 (1,578) 41,808 2015 £’000 38,057 1,412 (678) 758 (1,578) 37,971 52% 18% 4% 21% 5% The expected return on plan assets under IAS 19 (revised) is calculated at the same rate used to discount scheme liabilities The amounts recognised in the income statement are as follows: Interest cost on defined benefit plans The actual return on plan assets was a gain of £3,463,000 (2015: gain of £734,000). 2016 £’000 119 2015 £’000 161 25452.04 19 April 2017 7:14 AM proof 4 73 Churchill China plc Annual Report for the year ended 31 December 2016 NOTES TO THE FINANCIAL STATEMENTS continued 22 Retirement benefit obligations (continued) At 31 December Present value of funded obligations Fair value of plan assets Liability in balance sheet Experience adjustments on scheme assets: Amount Experience adjustments on scheme liabilities: Amount 2016 £’000 50,381 (41,650) 8,731 2015 £’000 41,808 (37,971) 3,837 2014 £’000 42,731 (38,057) 4,674 2013 £’000 39,241 (36,327) 2,914 2012 £’000 37,330 (32,276) 5,054 2,016 (678) 814 2,204 1,323 703 1,006 395 (88) (590) Remeasurement gains and losses Remeasurement losses of £6,205,000 (2015: gains of £240,000) gross of tax were recognised in the Statement of Other Comprehensive Income during the year. The cumulative amount of actuarial losses recognised in the Statement of Other Comprehensive Income is £18,244,000 (2015: £12,039,000). The principal actuarial assumptions used were as follows: Pension benefits Discount rate Inflation rate – RPI – CPI Rate of increase of pensions in payment Rate of increase of deferred pensions 2016 % per annum 2.75% 3.3% 2.3% 2.35% 2.3% 2015 % per annum 3.8% 3.2% 2.2% 2.2% 2.2% Assumptions regarding future mortality rates are set based on advice in accordance with S1PA actuarial tables and experience. The average life expectancy in years of a pensioner retiring at age 65 at the balance sheet date is as follows: Male Female 2016 Number 20.8 23.1 2015 Number 21.0 23.3 The average life expectancy in years of a pensioner retiring at age 65, 20 years after the balance sheet date, is as follows: 2016 Number 22.5 24.9 2015 Number 22.6 25.1 Male Female 74 25452.04 19 April 2017 7:14 AM proof 4 Churchill China plc Annual Report for the year ended 31 December 2016 22 Retirement benefit obligations (continued) Risks Through its defined benefit pension plan, the Group is exposed to a number of risks, the most significant of which are detailed below: Asset volatility The plan liabilities are calculated using a discount rate set with reference to corporate bond yields; if plan assets underperform this yield, this will create a deficit. The plan holds a significant proportion of equities, which are expected to outperform corporate bonds in the long term while providing volatility and risk in the short term. The debt investments represent investments in UK securities only. The Group believes that due to the long term nature of the plan liabilities and the strength of the supporting group, a level of continuing equity investment is an appropriate element of the Group’s long term strategy to manage the plans efficiently. Changes in bond yields A decrease in corporate bond yields will increase plan liabilities, although this will be partially offset by an increase in the value of the plan’s bond holdings. Inflation risk The Group’s pension obligations are linked to inflation, and higher inflation will lead to higher liabilities (although, in most cases, caps on the level of inflationary increases are in place to protect the plan against extreme inflation). The majority of the plan’s assets are either unaffected by (fixed interest bonds) or loosely correlated with (equities) inflation, meaning that an increase in inflation will also increase the deficit. Life expectancy The plan’s obligations are to provide benefits for the life of the member, so increases in life expectancy will result in an increase in the plan’s liabilities. This is particularly significant where inflationary increases result in higher sensitivity to changes in life expectancy. Sensitivity A sensitivity analysis has been carried out on effect of varying certain assumptions within the calculation of retirement benefit obligations. The effect of a 0.1% increase in the discount rate to 2.85% would be to reduce scheme liabilities by £915,000 (1.8%). The effect of a 0.1% decrease in the discount rate to 2.65% would be to increase scheme liabilities by £938,000 (1.9%). The effect of a 0.1% increase in CPI inflation to 2.4% would increase scheme liabilities by £744,000 (1.5%). The effect of a 0.1% decrease in CPI inflation to 2.2% would reduce scheme liabilities by £728,000 (1.4%). The effect of a 1 year increase to life expectancy would increase scheme liabilities by £1,793,000 (3.6%). The effect of a 1 year reduction in life expectancy would be to reduce scheme liabilities by £1,782,000 (3.5%). The amount of net deficit on retirement benefit schemes is also dependent on the valuation and investment performance of scheme assets. 25452.04 19 April 2017 7:14 AM proof 4 75 Churchill China plc Annual Report for the year ended 31 December 2016 NOTES TO THE FINANCIAL STATEMENTS continued 23 Issued share capital and premium Group and Company At 1 January 2016 Employee share option scheme At 31 December 2016 Number of shares 000s 11,008 22 11,030 Ordinary shares £’000 Share premium £’000 1,101 2 1,103 2,348 – 2,348 The total authorised number of ordinary shares is 14,300,000 (2015: 14,300,000) with a par value of 10p (2015: 10p) per share. All issued shares are fully paid. Share option schemes The Long Term Incentive Plan was introduced in May 2012. Options under this scheme are equity settled and are granted with a fixed exercise price at a discount to the market price of the share at the date of issue. Options vest after three years from the date of grant and expire ten years from the date of grant. Options granted will be exercisable on a pro rata basis based on performance against threshold, target and maximum performance levels. Performance targets are set at the date of each grant by the Remuneration Committee. Payment of the exercise price of options is received in cash. A charge to the Income Statement has been made to reflect the fair value of options granted. Options have been valued using the Black Scholes option pricing model. No market based 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: Long term incentive plan Grant date Share price at grant date Exercise price Number of employees Shares under option 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 16 May 2016 780p 10p 3 30,984 3 15% 10 3 1.4% 2.5% 643p 8 May 2015 547.5p 10p 2 30,927 3 15% 10 3 1.4% 3.0% 491p 1 May 2014 455p 10p 2 34,151 3 15% 10 3 1.4% 3.5% 360p 13 May 2013 345p 10p 2 43,942 3 15% 10 3 1.3% 4.1% 266p The following options exercisable over ordinary shares were outstanding at 31 December 2016 under the Long Term Incentive Plan: Number of shares May 2013 Grant May 2014 Grant May 2015 Grant May 2016 Grant 76 2016 – 34,151 30,927 30,984 96,062 2015 43,942 34,151 30,927 – 109,020 Exercise price 10p 10p 10p 10p Date from which exercisable May 2016 May 2017 May 2018 May 2019 Expiry date May 2023 May 2024 May 2025 May 2026 25452.04 19 April 2017 7:14 AM proof 4 Churchill China plc Annual Report for the year ended 31 December 2016 23 Issued share capital and premium (continued) 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 2016 is set out below. Outstanding at 1 January Granted Exercised Outstanding at 31 December 2016 2015 Weighted average exercise price 10.0p 10.0p 10.0p 10.0p Weighted Average exercise price 10.0p 10.0p 10.0p 10.0p Number ’000 174,347 30,927 (96,254) 109,020 Number ’000 109,020 30,984 (43,942) 96,062 Exercisable at 31 December – – – – There were 30,984 share options granted during the year (2015: 30,927). 2016 2015 Weighted average exercise price Number ’000 Weighted average remaining life (expected) Weighted average remaining life (con- tractual) Weighted average exercise price Weighted average remaining life (expected) Weighted average remaining life (con- tractual) Number ’000 0 – 50p 10p 96,062 1.3 8.3 10p 109,020 1.2 8.2 The weighted average share price for options exercised in the period was 10p (2015: 10p). The total charge during the year for employee share based payment plans was £160,000 (2015: £128,000) before tax, all of which related to equity settled share based payment transactions. 24 Treasury shares Group and Company As at 31 December 2015 Reissue of shares Transfer to retained earnings Purchase of own shares As at 31 December 2016 £’000 144 (2) (142) 575 575 During the year the Group repurchased 75,000 (2015: 20,000) 10p ordinary shares and reissued 21,900 (2015: 46,100) of these under employee share option schemes. The Group currently holds 75,000 (2015: 21,900) shares in Treasury. 25452.04 19 April 2017 7:14 AM proof 4 77 Churchill China plc Annual Report for the year ended 31 December 2016 NOTES TO THE FINANCIAL STATEMENTS continued 25 Other reserves Group Land and buildings revaluation £’000 Currency translation £’000 Share based payment £’000 Other reserves £’000 943 (12) 2 24 – – 957 (12) 2 12 – – 959 29 – – – – 16 45 – – – – 60 105 307 – – – (123) – 184 – – – 43 – 227 253 – – – – – 253 – – – – – 253 Total £’000 1,532 (12) 2 24 (123) 16 1,439 (12) 2 12 43 60 1,544 Balance at 1 January 2015 Depreciation transfer – gross Depreciation transfer – tax Change in deferred tax rate Share based payment Currency translation Balance at 31 December 2015 Depreciation transfer – gross Depreciation transfer – tax Change in deferred tax rate Share based payment Currency translation Balance at 31 December 2016 The land and buildings revaluation reserve is the reserve created when certain land and buildings were revalued in 1992. On adoption of IFRS the Group took the exemption conferred by IFRS 1 to treat this revalued amount as deemed cost on transition because it approximated to fair value at that time. The release between the revaluation reserve and retained earnings is the release to distributable reserves of the additional depreciation on revaluation. Other than the revaluation reserve, there are no restrictions on the distribution of the reserves. Company Other reserves of £227,000 (2015: £184,000) represent provision for share based payment as shown in the above table. 26 Retained earnings At 1 January 2015 Profit for the year Dividends paid in 2015 Depreciation transfer on land and buildings net of tax Share based payment Transfer from Treasury Shares Actuarial gains on retirement benefit obligations net of tax At 31 December 2015 At 1 January 2016 Profit for the year Dividends paid in 2016 Depreciation transfer on land and buildings net of tax Share based payment Transfer from Treasury Shares Actuarial gains on retirement benefit obligations net of tax At 31 December 2016 Group £’000 23,654 4,086 (1,816) 10 352 (209) 104 26,181 26,181 5,285 (2,085) 10 144 (142) (5,188) 24,205 Company £’000 4,819 1,602 (1,816) – 352 (209) – 4,748 4,748 2,926 (2,085) – 144 (142) – 5,591 78 25452.04 19 April 2017 7:14 AM proof 4 Churchill China plc Annual Report for the year ended 31 December 2016 27 Commitments Capital commitments Capital expenditure contracted for at the balance sheet date but not yet incurred is as follows: Property, plant and equipment Intangible assets: Computer software Group Company 2016 £’000 1,331 75 1,406 2015 £’000 1,541 – 1,541 2016 £’000 – – 2015 £’000 – – – Operating lease commitments The Group has financial commitments in respect of non cancellable operating leases for buildings and plant and machinery for which the payments extend over a number of years as follows: Group Company 2016 £’000 2015 £’000 2016 £’000 2015 £’000 Payments under operating leases charged against income during the year Future aggregate minimum commitments under non cancellable operating leases: No later than one year Later than one year and no later than five years 85 55 4 80 82 43 – – – – – – 28 Related party transactions Details of related party transactions for the Group are shown in the Directors’ Report, Remuneration Report and in the Notes to the financial statements appropriate to the type of transaction being dealt with. The Directors do not consider the Company to have an ultimate controlling party. Company Details of related party transactions involving the Company were as follows: Subsidiaries Management charge to Churchill China, Inc Interest received from Churchill China (UK) Limited Dividend received from Churchill China (UK) Limited Loans repaid by Churchill China (UK) Limited Loans outstanding (mainly from Churchill China (UK) Limited) 29 Financial instruments by category 2016 £’000 1 3 3,000 (2,316) 5,441 2015 £’000 7 5 1,700 (576) 4,745 The accounting policies for financial instruments have been applied to the line items in the accounts. All financial assets including cash and cash equivalents are classified as loans and receivables, with the exception of financial assets available for sale, in both 2016 and 2015, as disclosed in note 17. 30 Events after the reporting period On 6 January 2017 the Group received a offer to purchase certain surplus land which the Directors resolved to accept on 17 January 2017. This offer exceeds the carrying value of the land and no impairment of the asset is required. This sale had not completed by the date of approval of the financial statements. 25452.04 19 April 2017 7:14 AM proof 4 79 Churchill China plc Annual Report for the year ended 31 December 2016 FIVE YEAR FINANCIAL RECORD Revenue Operating profit Share of results of associate net of impairment Finance cost Profit before income tax Income tax expense Profit for the year 2012 Restated* £’000 41,435 2,830 18 (131) 2,717 (571) 2,146 2013 2014 2015 2016 £’000 43,157 3,371 116 (117) 3,370 (609) 2,761 £’000 44,518 4,249 116 (48) 4,317 (901) 3,416 £’000 46,829 4,959 135 (80) 5,014 (928) 4,086 £’000 51,102 6,398 157 (40) 6,515 (1,230) 5,285 Dividends 1,529 1,564 1,619 1,816 2,085 Net assets employed 26,461 28,432 28,406 30,925 28,625 Ratios Operating margin Earnings before interest, tax, depreciation and amortisation (£000) Basic earnings per share (p) 6.8% 4,422 19.6 7.8% 4,967 25.2 9.5% 10.6% 12.5% 5,876 31.2 6,454 37.3 8,114 48.2 * Historic figures have been restated to reflect the introduction of IAS 19 (revised) re post employment pension benefits in 2013. 80 25452.04 19 April 2017 7:14 AM proof 4 Churchill China plc Annual Report for the year ended 31 December 2016 NOTICE OF ANNUAL GENERAL MEETING Notice is hereby given that the Annual General Meeting of Churchill China plc will be held at No.1, Marlborough Way, Tunstall, Stoke-on-Trent on Thursday 18 May 2017 at 12 noon for the following purposes: To consider and, if thought fit, to pass the following resolutions which will be proposed as ordinary resolutions: 1. 2. That the reports of the Directors and the Auditors and the Financial Statements for the year ended 31 December 2016 be received. That a final dividend of 14.8p on each ordinary share be declared in respect of the year ended 31 December 2016. 3. That A C Bromfield be elected as a Director. 4. That D M O’Connor be re-elected as a Director. 5. That A J McWalter be re-elected as a Director. 6. That the Auditors, PricewaterhouseCoopers LLP, be reappointed. 7. That the Audit Committee be authorised to fix the auditors’ remuneration for the year ending 31 December 2017. 8. That the Annual Report on Remuneration for the year ended 31 December 2016 be approved. 9. That the Directors be and they are hereby authorised generally and unconditionally pursuant to section 551 of the Companies Act 2006 (“the Act”), and in substitution for any subsisting authority pursuant to that section which remains unexercised at the commencement of this meeting, which subsisting authority shall be revoked, to exercise all the powers of the Company (a) to allot shares in the Company, and (b) to grant rights to subscribe for or to convert any security into shares in the Company (“Allotment Rights”) in either case, to such persons, at such times and subject to such terms and conditions as the Directors may determine. The maximum amount of shares which may be allotted or made the subject of Allotment Rights pursuant to this authority shall be shares with an aggregate nominal value of £365,172 provided that (unless previously revoked varied or renewed) this authority shall expire at the end of the next Annual General Meeting (or, if earlier, at the close of business on 18 August 2018 ), save that the Company may, before such expiry, make an offer or agreement which would or might require shares to be allotted or rights to subscribe for or to convert any security into shares to be granted after such expiry. To consider and, if thought fit, to pass the following resolutions which will be proposed as special resolutions: 10. That if resolution 9 is passed, the Directors be authorised to allot equity securities (as defined in the Act) for cash under the authority given by that resolution and/or to sell ordinary shares held by the Company as treasury shares for cash as if section 561 of the Act did not apply to any such allotment or sale, such authority to be limited to: (i) the allotment of equity securities in connection with any rights issue or open offer (each as referred to in the London Stock Exchange’s AIM Rules for Companies) or any other pre-emptive offer that is open for acceptance for a period determined by the Directors to the holders of ordinary shares on the register on any fixed record date in proportion to their holdings of ordinary shares (and, if applicable, to the holders of any other class of equity security in accordance with the rights attached to such class), subject in each case to such exclusions or other arrangements as the Directors may deem necessary or appropriate in relation to fractions of such securities, the use of more than one currency for making payments in respect of such offer, any such shares or other securities being represented by depositary receipts, treasury shares, any legal or practical problems in relation to any territory or the requirements of any regulatory body or any stock exchange; and (ii) the allotment of equity securities or sale of treasury shares (otherwise than under paragraph (i) above) up to a nominal amount of £54,775, such authority to expire at the end of the next Annual General Meeting of the Company (or, if earlier, at the close of business on 18 August 2018), but, in each case, prior to its expiry the Company may make offers, and enter into agreements, which would, or might, require equity securities to be allotted (and treasury shares to be sold) after the authority expires and the Directors may allot equity securities (and sell treasury shares) under any such offer or agreement as if the authority had not expired. 25452.04 19 April 2017 7:14 AM proof 4 81 Churchill China plc Annual Report for the year ended 31 December 2016 NOTICE OF ANNUAL GENERAL MEETING 11. That if resolution 9 is passed, the Directors be authorised in addition to any authority granted under resolution 10 to allot equity securities (as defined in the Act) for cash under the authority given by that resolution and/or to sell ordinary shares held by the Company as treasury shares for cash as if section 561 of the Act did not apply to any such allotment or sale, such authority to be: (i) limited to the allotment of equity securities or sale of treasury shares up to a nominal amount of £54,775; and (ii) used only for the purposes of financing (or refinancing, if the authority is to be used within six months after the original transaction) a transaction which the Directors determine to be an acquisition or other capital investment of a kind contemplated by the Statement of Principles on Disapplying Pre-Emption Rights most recently published by the Pre-Emption Group prior to the date of this notice, such authority to expire at the end of the next Annual General Meeting of the Company (or, if earlier, at the close of business on 18 August 2018), but, in each case, prior to its expiry the Company may make offers, and enter into agreements, which would, or might, require equity securities to be allotted (and treasury shares to be sold) after the authority expires and the Directors may allot equity securities (and sell treasury shares) under any such offer or agreement as if the authority had not expired. 12. That the Directors be authorised generally and unconditionally for the purposes of Sections 693 and 701 of the Act to make market purchases (within the meaning of Section 693(4) 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: (i) the maximum aggregate number of Ordinary Shares hereby authorised to be purchased is 1,095,517; (ii) the minimum price which may be paid for an Ordinary Share, exclusive of all expenses, shall be 10p; (iii) the maximum price which may be paid for an Ordinary Share, exclusive of all expenses, shall be an amount equal to 5% above the average of the middle market quotations for an Ordinary Share as derived from the AIM section of the London Stock Exchange Daily Official List for the five business days immediately preceding the date on which such Ordinary Share is purchased. Unless previously renewed, varied or revoked, the authority hereby conferred shall expire at the conclusion of the Company’s next Annual General Meeting. 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. By Order of the Board D J S Taylor Company Secretary Dated 21 April 2017 Registered Office No.1, Marlborough Way Tunstall Stoke-on-Trent ST6 5NZ Registered Number 02709505 The Directors of the Company consider that all the proposals to be considered at the Annual General Meeting are in the best interests of the Company and its members as a whole and are most likely to promote the success of the Company for the benefit of its members as a whole. The Directors unanimously recommend that you vote in favour of all the proposed resolutions. 82 25452.04 19 April 2017 7:14 AM proof 4 Churchill China plc Annual Report for the year ended 31 December 2016 NOTES 1. Members are entitled to appoint a proxy to exercise all or any of their rights to attend and to speak and vote on their behalf at the meeting. A member may appoint more than one proxy in relation to the AGM provided that each proxy is appointed to exercise the rights attached to a different share or shares held by that member. A proxy need not be a member of the Company. A form of proxy which may be used to make such appointment and give proxy instructions accompanies this notice. Instructions for use are shown on the form. If you do not have a form of proxy and believe that you should have one, or if you require additional forms, please contact our registrars, Equiniti , on 0371 384 2287. If calling from overseas, please call +44 (0)121 415 7047. Lines are open 8.30 a.m. – 5.00 p.m., Monday – Friday. To appoint more than one proxy, you may photocopy the proxy form. 2. To be valid, any form of proxy or other instrument appointing a proxy must be received by post or (during normal business hours only) by hand at the offices of the Company’s registrars, Equiniti Limited, Aspect House, Spencer Road, Lancing, West Sussex, BN99 6DA, no later than 12 noon on 16 May 2017. If you return more than one proxy appointment, that received last by the Registrar before the latest time for the receipt of proxies will take precedence. You are advised to read the terms and conditions of use carefully. 3. The return of a completed form of proxy will not prevent a member attending the AGM and voting in person if he/she wishes to do so. 4. Any corporation which is a member can appoint one or more corporate representatives who may exercise on its behalf all of its powers as a member provided that they do not do so in relation to the same shares. 5. To be entitled to attend and vote at the AGM (and for the purpose of the determination by the Company of the votes they may cast), members must be registered in the Register of Members of the Company at 6.30 p.m. on 16 May 2017 (or, in the event of any adjournment, on the date which is two days before the time of the adjourned meeting). Changes to the Register after the relevant deadline shall be disregarded in determining the rights of any person to attend and vote at the meeting. Voting at the meeting will be conducted by way of a show of hands, unless a poll is correctly called for. 6. As at 21 April 2017 (being the last practicable date prior to publication of this Notice), the Company’s total issued equity share capital consists of 11,030,172 ordinary shares, carrying one vote each. The Company holds 75,000 ordinary shares in treasury. The total number of voting rights in the Company is 10,955,172. 7. Except as provided above, members who wish to communicate with the Company in relation to the AGM should do so using the following means: (1) by writing to the Company Secretary at the Registered Office address; or (2) by writing to the Registrars, Equiniti Limited, Aspect House, Spencer Road, Lancing, West Sussex, BN99 6DA. No other methods of communication will be accepted. In particular, you may not use any electronic address provided either in this Notice or in any related documents for any purposes other than expressly stated. 8. Copies of the Directors’ Service Contracts and the non-executive Directors’ letters of appointment will be available for inspection at the Company’s Registered Office address on weekdays (Saturdays and public holidays excepted) during business hours from the date of this Notice until the conclusion of the AGM. EXPLANATORY NOTES on the RESOLUTIONS The notes on the following pages give an explanation of certain of the proposed resolutions. 1. Resolution 3: A C Bromfield has been appointed to the Board since the date of the last AGM and, in accordance with the Articles of Association, must retire and be elected at the next AGM. The basis upon which the Board believes that she should be elected is that A C Bromfield will bring additional knowledge of and experience in the management and development of a market-focused manufacturing company to the Board and will also improve the effectiveness of the operation of the Board in its management of the Group’s strategy and operations. 2. Resolutions 4 and 5: in accordance with the Company’s Articles of Association at every AGM the number of Directors nearest to, but not exceeding one-third must retire by rotation. D M O’Connor and A J McWalter are retiring by rotation and resolutions 4 and 5 respectively seek approval for their re-election as a Director. Biographical details for the Directors are set out on in the Directors’ Report. Each of the Directors has had a formal performance evaluation and the Board believes that each of them continues to be effective and demonstrates commitment to the role. 3. Resolution 8: this is a resolution to approve the Annual Report on Directors’ Remuneration on pages 28 to 36 of the Annual Report. As an AIM listed company, the Company is not required to comply with all of the requirements in this respect under The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013. The Company has chosen to disclose its Remuneration Policy on pages 29 to 32 of the Annual Report although the Policy is not the subject matter of Resolution 8. 25452.04 19 April 2017 7:14 AM proof 4 83 Churchill China plc Annual Report for the year ended 31 December 2016 NOTICE OF ANNUAL GENERAL MEETING 4. Resolution 9 is an ordinary resolution authorising the Directors at any time prior to 30 June 2018 (or, if earlier, the conclusion of the next Annual General Meeting) to allot shares (and to grant rights to subscribe for, or convert any securities into, shares up to an aggregate nominal value equivalent to approximately 1/3 of the issued share capital (excluding shares held in treasury) of the Company as at 21 April 2017. The Directors have no present intention to exercise this authority which is designed to preserve flexibility. The number of treasury shares held by the Company as at 21 April 2017 was 75,000 which represents 0.7% of the issued share capital as at that date. 5. Resolution 10: under Section 570 of the Act, when new shares are allotted, or treasury shares are sold, for cash, they must, subject to certain limited exceptions, first be offered to existing shareholders pro rata to their holdings. This special resolution empowers the Directors to: (a) allot shares of the Company in connection with a rights issue, open offer or other similar issue; and (b) otherwise allot shares of the Company, or sell treasury shares for cash, up to an aggregate nominal value of £54,775 (representing approximately 5% of the total issued equity share capital, excluding shares held in treasury, as at 21 April 2017 being the last practicable date prior to the publication of this Notice) as if the pre- emption rights of Section 570 did not apply. 6. Resolution 11: this resolution additionally authorises the Directors to allot shares of the Company, or sell treasury shares for cash, up to an aggregate nominal value of £54,775 (representing approximately 5% of the total issued equity share capital, excluding shares held in treasury as at 21 April 2017 being the last practicable date prior to the publication of this Notice) as if the pre-emption rights of section 570 did not apply provided that the proceeds of such allotment and/or sale are used only for the purposes of an acquisition or other capital investment of a kind contemplated by The Pre-emption Group’s Statement of Principles. The Principles provide that specified capital investment means one or more specific capital investment related uses for the proceeds of an issuance of equity securities, in respect of which sufficient information regarding the effect of the transaction on the Company, the assets the subject of the transaction and (where appropriate) the profits attributable to them is made available to shareholders to enable them to reach an assessment of the potential return. The Directors have no immediate plans to make use of these powers. In line with best practice, the Company confirms that it has issued 0.7% of its issued share capital (excluding shares held in treasury) on a non-pro rata basis over the last three years, and it confirms its intention to adhere to the provisions in the Principles regarding cumulative usage of authorities of no more than 7.5% of the issued ordinary share capital (excluding shares held in treasury) within a rolling three year period. The authorities granted by resolutions 10 and 11 shall cease to have effect at the conclusion of the next AGM or on 18 August 2018, whichever is the earlier. 7. Resolution 12 renews the Directors’ current authority to make limited market purchases of the Company’s ordinary shares. The power is limited to a maximum aggregate number of 1,095,517 ordinary shares (representing approximately 10% of the issued share capital excluding shares held in treasury as at 21 April 2017 (being the last practicable date prior to publication of this Notice) and details the minimum and maximum prices that can be paid, exclusive of expenses. Any purchases of ordinary shares would be made by means of market purchase through the London Stock Exchange. Current legislation allows companies to hold shares acquired by way of market purchase in treasury, rather than having to cancel them. The Directors may use the authority to purchase shares and hold them in treasury (and subsequently sell or transfer them out of treasury as permitted in accordance with legislation) rather than cancel them, subject to institutional guidelines applicable at the time. Shares will only be purchased if to do so would result in an increase in earnings per share and is in the best interests of shareholders generally. The Board has previously indicated its intention to continue to return surplus cash to shareholders via on-market purchase of its own shares where it is not required to finance the organic expansion of the business, acquisitions and dividend payments. The authority conferred by this resolution will expire at the conclusion of the next AGM. 84 25452.04 19 April 2017 7:14 AM proof 4 25452.04 19 April 2017 7:14 AM proof 4 25452.04 19 April 2017 7:14 AM proof 4 25452.04 19 April 2017 7:14 AM proof 425452.04 19 April 2017 7:14 AM proof 4CHINA PLCChurchill China plcNo.1 Marlborough Way, Tunstall, Stoke-on-Trent, ST6 5NZ, EnglandT: +44 (0) 1782 577566 www.churchill1795.com©Churchill China plc 2017