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2023 ReportANNUAL REPORT 2018 26692 12 June 2019 9:40 pm Proof 4 PFP Over 220 years of... INNOVATION, PASSION & EXPERTISE Within the hospitality sector, the choice of tableware must meet the highest standards for presentation, practicality and performance. Over 220 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. 26692 12 June 2019 9:40 pm Proof 4 PFP Churchill China plc Annual Report for the year ended 31 December 2018 01 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 Five Year Performance Financial Highlights Directors, Secretary and Advisers Chairman’s Statement Strategic Report Directors' Report Corporate Governance Remuneration Report Nomination Committee Report Audit Committee Report Independent Auditors’ Report to the Members of Churchill China plc Consolidated Income Statement for the year ended 31 December 2018 Consolidated Statement of Comprehensive Income for the year ended 31 December 2018 Consolidated Balance Sheet as at 31 December 2018 Company Balance Sheet as at 31 December 2018 Consolidated Statement of Changes in Equity for the year ended 31 December 2018 Company Statement of Changes in Equity for the year ended 31 December 2018 Consolidated Cash Flow Statement for the year ended 31 December 2018 Reconciliation of Operating Profit to Net Cash Inflow from Operating Activities Notes to the Financial Statements for the year ended 31 December 2018 Five Year Financial record Notice of Annual General Meeting 2 4 5 6 14 20 23 25 32 33 34 38 39 40 41 42 43 44 45 46 69 70 26692 12 June 2019 9:40 pm Proof 4 PFP 51.1 53.4 57.5 44.5 46.8 60 50 40 30 20 13.9 12.5 9.5 10.6 Churchill China plc Annual Report for the year ended 31 December 2018 10 02 Five Year Performance 0 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 Revenue (£m) £57.5m 7.4% *Operating Profit (£m) £9.2m 24% 60 50 44.5 40 46.8 44.5 53.4 51.1 51.1 46.8 57.5 53.4 57.5 30 20 10 0 2014 2015 2014 2016 2015 2017 2016 2018 2017 2018 10 20 9 8 15 7 6 5 10 4 3 5 2 1 0 20 15 10 5 0 9.5 4.2 2014 2014 9.2 16.1 13.9 16.1 7.5 13.9 12.5 6.4 12.5 10.6 5.0 10.6 9.5 7.5 6.4 5.0 4.2 2015 2015 2014 2016 2016 2015 2017 2017 2016 2018 2018 2017 2018 2014 2015 2016 2017 2018 16.1 9.4 Revenue increased by 7% demonstrating the continued success of our strategic approach with continued strong progress in hospitality export markets. Improved gross margin and stable costs have contributed to the improvement in Operating Profit. *Operating Margin (%) 16.1% 2.2% *Pre Tax Profit (£m) 70 £9.4m 26% 35 30 20 15 10 10 9 8 7 6 5 4 3 2 1 5 0 4.2 9.2 9.2 16.1 7.5 13.9 7.5 6.4 12.5 6.4 10.6 5.0 5.0 9.5 4.2 60 50 40 30 20 10 10 9 8 7 6 5 4 3 2 1 10 9 8 7 6 5 4 3 2 8 0 0 1 2 4.2 7 0 0 2 9.4 25 9.4 Hospitality by Market 6.4 5.0 5.0 4.2 7.5 6.4 7.5 20 15 10 5 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 3 1 0 2 4 1 0 2 5 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 2017 2018 56% 44% 60% 40% Export Home 0 20 40 60 80 100 2014 2014 2015 2014 2015 2016 2015 2016 2017 2016 2017 2018 2017 2018 2018 2014 2015 2014 2016 2015 2017 2016 2018 2017 2018 Another year of improved operating margin growth, with further conversion of our output to innovative and higher margin added value products. Profit before tax has increased 26% largely as a result of our improved operating performance. • Adjusted EPS up 25.8% to 69.6p • Basic EPS up 12.3% to 65.6p • Final dividend up 18% to 20.3p • Cash generated from operations £8.3m (2017: £7.7m) 40 7.5 6.4 *Excluding exceptional items. 70 50 30 60 10 Other Highlights 9 8 7 6 5 4 3 2 7 0 1 0 2 8 0 0 2 9 0 0 2 20 10 4.2 0 7 1 0 0 0 2 2 5.0 1 8 1 0 0 0 2 2 2 9 1 0 0 0 2 2 2015 3 0 1 1 0 0 2 2 5 2 1 1 0 0 2 2 4 1 1 1 0 0 2 2 2016 6 3 1 1 0 0 2 2 7 4 1 1 0 0 2 2 2017 8 5 1 1 0 0 2 2 8 1 0 2 6 7 1 1 0 0 2 2 2018 35 30 9.4 25 20 15 10 5 2017 2018 20 15 10 5 0 Hospitality Value Added Series EPS Hospitality Value Added Series 35 30 EPS Hospitality Value Added Series EPS Revenue by Market Dividends 25 Dividends Hospitality by Market Hospitality by Market 40% 60% 44% 2017 2017 56% 56% 56% Value Added Sales Standard Sales 44% 44% 20 2018 40 60 2018 60% 80 100 60% 40% 40% 20 0 40 20 60 40 80 60 100 80 100 t o m e rs & Distribution s Identify Revenue by Market Revenue by Market e P 0 C u e rvic e S 2017 20 15 10 5 0 10 9 8 7 6 5 4 3 2 1 EPS Dividends 45% 33% 11% 11% 40% 36% 11% 13% 2017 2018 Export Home Export Home UK Europe ROW North America 60 50 40 30 20 10 0 10 9 8 7 6 5 4 3 2 1 51.1 53.4 57.5 44.5 46.8 2014 2015 2016 2017 2018 9.2 7.5 6.4 5.0 4.2 70 60 50 40 30 20 10 60 50 40 30 20 10 0 10 9 8 7 6 5 4 3 2 1 70 60 50 40 30 20 10 35 30 25 15 5 0 2014 2015 2016 2017 2018 2014 o p l e UK Review Assess UK Europe ROW Dividends Hospitality by Market 2017 20 40% 2017 40% 60% 2018 10 44% 2018 2017 44% 56% 56% 56% 20 0 40 20 2018 60 40 80 60 60% 100 80 100 40% 60% 26692 Value Added Sales 12 June 2019 9:40 pm Value Added Sales Proof 4 PFP Standard Sales Standard Sales 2018 44% Sustainable 2017 45% Advantage 45% 33% 11% 11% 33% 11% 11% Europe 36% 11% 13% 40% 36% 11% 13% ROW North America North America 40% 2018 Export Home M a n u f a c t urin g n In n o vatio Controls Document 7 0 0 2 8 0 0 2 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 3 1 0 2 4 1 0 2 5 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 0 20 40 60 80 100 Hospitality Value Added Series Revenue by Market P 2017 2018 40% 60% 44% 56% 0 20 40 60 80 100 t o m e rs & Distribution s C u t o m e rs & Distribution s C u Identify Identify e rvic e S e rvic e S Value Added Sales Standard Sales 2017 Sustainable 45% Advantage Sustainable Advantage 40% 2018 e o p l e P e o 33% p l 11% e 11% 36% 11% 13% North America UK Europe ROW M a n u f M a a n c t urin g u f a c t urin g n In n o vatio n In n o vatio Review Review Assess Assess Controls Document Controls Document t o m e rs & Distribution s C u Identify Sustainable Advantage e rvic e S M a n u f a c t urin g P e o p l e n In n o vatio Review Assess Controls Document Churchill China plc Annual Report for the year ended 31 December 2018 03 “ This performance clearly demonstrates the continued success of our strategic approach” 26692 12 June 2019 9:40 pm Proof 4 PFP 04 Churchill China plc Annual Report for the year ended 31 December 2018 Financial Highlights Revenue Operating profit before exceptional item Exceptional items Operating profit Share of results of associate company Net finance cost Profit before exceptional items and income tax Exceptional items Profit before income tax Dividends paid Key ratios 2018 £’000 57,479 9,237 (541) 8,696 185 (34) 9,388 (541) 8,847 2017 £’000 53,530 7,460 315 7,775 159 (159) 7,460 315 7,775 2,840 2,433 Operating margin before exceptional items 16.1% 13.9% Earnings before interest, tax, depreciation, amortisation and exceptional items (£000) Adjusted earnings per share* Basic earnings per share Diluted adjusted earnings per share* Diluted earnings per share Dividends per share paid 10,941 69.6p 65.6p 69.0p 65.0p 25.9p 9,081 55.3p 58.4p 54.8p 57.9p 22.2p * Adjusted earnings per share and diluted adjusted earnings per share are calculated after deduction of the post tax effect of exceptional items. 26692 12 June 2019 9:40 pm Proof 4 PFP Churchill China plc Annual Report for the year ended 31 December 2018 05 Directors, Secretary and Advisers 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 Bromfield *•+ Company Secretary and Registered Office D J S Taylor ACA No.1 Marlborough Way Sandyford Stoke-on-Trent Staffordshire ST6 5NZ Independent Auditors PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Cornwall Court 19 Cornwall Street Birmingham B3 2DT Solicitors Addleshaw Goddard One St. Peters Sq. Manchester M2 3DE Stockbrokers and Advisers N+1 Singer 1 Bartholomew Lane London EC2N 2AX * Member of the Audit Committee • Member of the Remuneration Committee + Member of the Nomination Committee Bankers Lloyds Bank plc 8th Floor 40 Spring Gardens Manchester M2 1EN Registrars Equiniti Aspect House Spencer Road Lancing West Sussex BN99 6ZX 26692 12 June 2019 9:40 pm Proof 4 PFP 06 Churchill China plc Annual Report for the year ended 31 December 2018 Chairman’s Statement “ Focusing on a single year’s performance does not fully reflect the strength of our business.” Introduction I am, once again, pleased to report another strong performance from our business in the year. We have increased our revenue by 7%, our operating profits and our profits before exceptional items by 24% and 26% respectively. This performance clearly demonstrates the continued success of our strategic approach. Progress has again been made in growing our export revenues and in a further conversion of our output to innovative and higher margin added value products. However, we believe that simply focusing on a single year’s performance does not fully reflect the strength of our business or the transformation achieved in our operations over the longer term. Our business has developed substantially over the last five years from 2013 in line with our business strategy. Sales to Hospitality customers have increased from £32.7m to £52.4m at a compound annual rate of almost 10%, with Group exports rising from 39% to 60% of our business. The proportion of Hospitality revenue represented by added value products with higher margins has risen from 10% to 44%, with a consequent increase in operating margin from 8% to over 16%. The trading environment in the UK, alongside that of many businesses, is subject to increased uncertainty, but we believe we have a robust business model. Our plans will evolve, but we will continue to emphasise growth in export markets where there is a significant opportunity to improve our market share and in further development of innovative products which offer outstanding value to our customers. We have the capacity to deliver the investment needed to implement these plans and to sustain long term value growth for our shareholders. 26692 12 June 2019 9:40 pm Proof 4 PFP Churchill China plc Annual Report for the year ended 31 December 2018 07 26692 12 June 2019 9:40 pm Proof 4 PFP 51.1 53.4 57.5 44.5 46.8 60 50 40 30 20 10 0 20 15 10 5 0 13.9 12.5 9.5 10.6 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 16.1 9.4 7.5 6.4 9.2 08 10 9 8 7 Churchill China plc Annual Report for the year ended 31 December 2018 6 5 4 3 2 1 Chairman’s Statement 10 9 8 7 6 5 4 3 2 1 Business 5.0 4.2 6.4 7.5 4.2 5.0 Financial Review 2014 2015 2016 2017 2018 Total revenues increased by 7% to £57.5m (2017: £53.5m) with further strong growth in Hospitality export revenues more than offsetting lower Retail sales. UK revenues were 4% lower at £23.0m (2017: £24.0m) with EPS the reduction largely attributable to more difficult retail markets. Export revenues were £5.0m higher (+17%) at £34.5m (2017: £29.5m). 60 70 30 35 Dividends Gross margins have again improved as we continued to grow sales of added value product. 40 20 25 15 50 30 20 10 Operating profit before exceptional items increased by 24% to £9.2m (2017: £7.5m). Operating margins before exceptional items improved to 16.1% (2017: 13.9%). Operating profit benefited from increased revenues, the continued move towards added value, differentiated, products and from a stable cost base. 0 7 1 0 0 0 2 2 Earnings before interest, tax, depreciation and amortisation increased by 20% to £10.9m (2017: £9.1m). 8 0 0 2 9 0 0 2 1 1 0 2 2 1 0 2 3 1 0 2 4 1 0 2 5 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 10 5 Profit before exceptional items and income tax rose by 26% to £9.4m (2017: £7.5m), largely as a result of our strong operating performance, but with some additional contribution from an improved performance from our associated company Furlong Mills and higher interest receipts. In Hospitality Value Added Series the five years to the end of 2018 we have increased profit before income tax at a compound rate of 22% per annum. 50 40 30 20 10 2017 2018 60 Adjusted earnings per share improved by 26% to 69.6p (2017: 55.3p). 60% 40% 44% Value Added Sales Changes in the law relating to the equalisation of statutory Guaranteed Minimum Pensions benefits will affect our legacy defined benefit pension 56% scheme. Accordingly, a one-off exceptional non-cash charge of £0.6m has been provided in 2018 reflecting the cumulative effect of these 0 53.4 changes. Additionally, sums previously provided for costs relating to the disposal of property which are no longer required have been released, generating an exceptional credit to profit of £0.1m. In 2017 we disposed of a surplus property; the profit on disposal of £0.3m was also treated as exceptional. Standard Sales 100 20 40 20 10 15 60 80 57.5 44.5 46.8 51.1 9.5 Reported profit before tax rose to £8.8m from £7.8m in 2017. t o m e rs & Distribution 5 Basic earnings per share, including the above exceptional items, improved by 12% to 65.0p (2017: 58.4p). C u s 2014 0 P l e o p e M e S 2018 2016 2015 2014 e rvic Sustainable Advantage 0 2017 We have also continued to generate good operating cash flows; operating cash generation was £8.3m (2017: £7.7m). Working capital requirements were higher than last year at £1.5m (2017: £0.2m) reflecting an increase in accounts receivable on higher sales. Inventory levels remained controlled despite higher sales, a wider product range and good customer service. The cash spend on capital projects was £2.1m 10 (2017: £2.2m). We expect capital spend to rise in 2019 as we continue to 9 invest in capacity, capability and efficiency. At the year end, net cash 8 and deposit balances had risen by £1.8m to £17.4m (2017: £15.6m). 7.5 7 Dividend 6 5 The Board is recommending an 18% increase in the final dividend to 20.3p 4 4.2 per share (2017: 17.2p) giving a total of 29.0p for the year (2017: 24.6p). We 3 are pleased that the sustained growth in profitability and continued cash 2 generation has allowed us to raise the dividend. If approved, the final 1 dividend will be paid on 24 May 2019 to shareholders on the register on 26 April 2019, with the ex dividend date being 25 April 2019. 10 9 8 7 6 5 4 3 2 1 In n o vatio urin n g t 5.0 6.4 9.2 4.2 f c a a u n 2014 2015 2016 2017 2018 2014 EPS and Dividend Growth 70 60 50 40 30 20 10 EPS Dividends 35 30 25 20 15 10 5 7 0 0 2 8 0 0 2 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 3 1 0 2 4 1 0 2 5 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 Our business has performed strongly across the year. The good progress reported in the first half has been matched by further progress in the second half. We have grown our sales in Hospitality and particularly in export and much of this increase has come from added value products. 2018 2017 We have continued to reduce our exposure to less attractive Retail markets. Exports now represent 60% of Group revenues. 2015 2016 2014 Total sales to our Hospitality customers increased by £5.0m (10%) and reached a new record of £52.4m (2017: £47.4m). Hospitality sales now represent over 90% of Group revenue. Hospitality by Market Hospitality by Market 2017 2018 56% 44% 60% 40% Export Home 0 20 40 60 80 100 We have continued to grow our position in overseas markets whilst maintaining a leading position within the UK. Overall export sales grew by 19% despite a slight headwind from currency. Over the last five years our Hospitality export sales have risen by an average of over 20% per year. Growth has again been strongest in Europe with continued progress in most countries. Our early stage investment in Rest of the World markets is also beginning to gain traction and we are pleased with the rate of growth in developing regions. Revenue by Market UK 33% 11% 11% 45% 2017 Our performance in the UK has stabilised following a much improved performance in the second half of 2018. We revised our approach to the UK in 2017 to reflect changing market dynamics by increasing 2018 management focus and targeting new product introductions. We are pleased with the progress made. Our established market position means we benefit from a consistent level of replacement sales. North America Europe ROW 40% 13% 11% 36% 16.1 Churchill’s core values are innovation, technical performance and service. 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. 10.6 12.5 13.9 Identify “ Our business has performed strongly across the year.” 2015 2016 2017 Assess Review 2018 Our increased profitability reflects both growth in revenue and particularly a further shift of our product range towards added value products. We carefully research market requirements and develop new products to meet these needs which allow us to improve our margins whilst offering substantial value to our customers. Sales of added value products now represent over 44% of our Hospitality sales. Whilst Stonecast continues to be the standout performer, our Studio Prints range, combining innovative materials with our existing print capability, continues to grow strongly. Our innovative market offer is increasingly differentiated from our closest competitors. Document Controls 7.5 9.4 6.4 5.0 Retail operations have again reduced in scale as we have withdrawn from certain sectors of the UK market which have become unprofitable. Revenues were lower at £5.1m (2017: £6.1m). Operations 2017 2016 2015 The changes in our business create additional demands on our 2018 operational team and we have worked hard to ensure that the manufacturing strategy is closely aligned with our business plan. During the year we increased the capacity and efficiency of our added value product manufacturing and completed projects improving the flexibility of our production process. This allows us to balance the challenge of a producing wider product range and maintaining cost and service levels. Hospitality by Market We expect to increase the level of investment in manufacturing in 2019. Expenditure on a further factory extension and on an additional fast fire kiln have already been approved and we expect to make progress on these and other projects over the year. 2017 2018 56% 44% 60% 40% Export Home 0 20 40 60 80 100 Hospitality Value Added Series 26692 12 June 2019 9:40 pm Proof 4 PFP Revenue by Market 40% 60% 45% 33% 11% 11% 2017 2018 Value Added Sales Standard Sales 2017 2018 44% 56% 40% 36% 11% 13% UK Europe ROW North America 0 20 40 60 80 100 t o m e rs & Distribution s C u Identify Sustainable Advantage e rvic e S M a n u f a c t urin g P e o p l e n In n o vatio Review Assess Controls Document Churchill China plc Annual Report for the year ended 31 December 2018 09 Our Production and Technical teams have delivered substantial additional value during the year. Our traditional strength of efficient and effective manufacturing continues to serve us well, but has been supplemented by significant progress in other areas. Our capacity to innovate new products has been significantly improved by the production re-engineering and materials development work carried out over the longer term Furlong Mills In February 2019 we announced the acquisition of a further 9.5% of the equity of Furlong Mills Limited for £454,000, taking our percentage shareholding to 55.6%. Furlong is a ceramic materials manufacturer based in Stoke on Trent and provides processed clay body and glaze to Churchill and other major manufacturers. Our investment secures a very important part of our supply chain and over the longer term reinforces our capacity to extend our technical ceramics capability. We have held an investment in Furlong for almost forty years and are pleased to now hold a larger interest. Brexit We have reviewed Churchill’s exposure to various Brexit scenarios. A major part of our revenue is earned outside the UK and our manufacturing process, in part, relies upon materials and equipment sourced from overseas. Our detailed Brexit planning is ongoing and we believe we have identified and developed plans to mitigate the effect of disruption on our trading model. We have completed a number of projects including securing and stocking an outbound logistics facility in the Netherlands to service our European business, improving our systems and establishing larger safety stocks of key raw materials. We have also developed detailed contingency plans in other areas. The UK government has recently announced that import tariff levels on most ceramic tableware products remain at 2018 levels. Our plans are founded on our core principles which are the provision of value to our customers and maintenance of a high level of service. Whilst these actions may not fully offset all the effects of the Brexit process we believe that we have prepared for the forward uncertainty sensibly and that we have the flexibility to manage the level of risk to our business. 26692 12 June 2019 9:40 pm Proof 4 PFP 10 Churchill China plc Annual Report for the year ended 31 December 2018 Chairman’s Statement People During the year we have made significant progress in improving the alignment of our workforce with our business plans. We have focused on training, both in terms of operational skills and the personal development of our employees. The continuous improvement programme continues to deliver substantial benefits to the business both in terms of productivity and delivering more rewarding roles to our staff. We have increased the level of engagement within our workforce and have invested time in establishing development and succession plans at all levels of the business. One of the major objectives in our forward plan is to ensure that we have the right people across our business to meet our aspirations. Our workforce is skilled, loyal and well motivated and they create and embody the core values that serve us well. Once again I am grateful for their effort and commitment across the year. 26692 12 June 2019 9:40 pm Proof 4 PFP Churchill China plc Annual Report for the year ended 31 December 2018 11 “ Our workforce is skilled, loyal and well motivated and they create and embody the core values that serve us well” 26692 12 June 2019 9:40 pm Proof 4 PFP 12 Churchill China plc Annual Report for the year ended 31 December 2018 Chairman’s Statement Prospects 2018 has been a very successful year for Churchill; we have exceeded our expectations in relation to business and financial performance and the growth we have achieved sits well in relation to our longer term progress. I am, however, most pleased by the manner in which we have delivered this performance, which is wholly in line with our strategic objectives. The progress we have made in moving the focus of our business towards Hospitality and export markets, the increased margin we achieve from innovative and differentiated products and the significant reinvestment of this profit in further development all follow the path we established several years ago. We believe that this will be the basis of continued success in the future. 2019 has started well and we believe that we can, subject to external conditions, make further progress. However, we remain a business focused on the long term. Churchill has a robust and well invested business model supported by a strong financial position. Our market and product development plans continue to deliver profitable opportunities for growth and to create value for our business and all its stakeholders. Alan McWalter Chairman 26 March 2019 26692 12 June 2019 9:40 pm Proof 4 PFP Churchill China plc Annual Report for the year ended 31 December 2018 13 “ Churchill has a robust and well invested business model supported by a strong financial position” 26692 12 June 2019 9:40 pm Proof 4 PFP 51.1 53.4 57.5 44.5 46.8 16.1 13.9 12.5 9.5 10.6 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 14 Churchill China plc Annual Report for the year ended 31 December 2018 9.4 7.5 Strategic Report 5.0 6.4 4.2 The Directors present their Strategic Report for the Group for the year ended 31 December 2018. 2014 2015 A review of the operations of the Group during the year and its future prospects are given in the Chairman’s Statement on page 06 and in the following pages. 2017 2018 2016 Principal activity and business environment Dividends 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 Hospitality by Market are generated from production from our UK manufacturing plant, supplemented by products sourced from third party suppliers. Approximately sixty per cent of our revenues are earned from export markets although we have a substantial business in the UK. Our principal exports are to Europe and North America. 56% 44% 2017 60% 2018 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. 100 20 40 60 80 0 40% Export Home 20 15 10 5 0 10 9 8 7 6 5 4 3 2 1 EPS 60 50 40 30 20 10 0 10 9 8 7 6 5 4 3 2 1 70 60 50 40 30 20 10 9.2 7.5 6.4 5.0 4.2 2014 2015 2016 2017 2018 35 30 25 20 15 10 5 7 0 0 2 8 0 0 2 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 3 1 0 2 4 1 0 2 5 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 0 20 40 60 80 100 t o m e rs & Distribution s C u Sustainable Advantage e rvic e S M a n u f a c t urin g P e o p l e n In n o vatio Hospitality Value Added Series Revenue by Market Revenue by Market 2017 2018 40% 60% 44% 56% Value Added Sales Standard Sales 2017 2018 45% 33% 11% 11% 40% 36% 11% 13% UK Europe North America ROW 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 our markets have grown in overall terms during the year, with lower market growth in certain markets being supported by faster progress in more rapidly developing geographies. 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 of the export markets we serve. Growth in the UK market has slowed, reflecting economic and political uncertainty and a reduction in new investment in pubs, restaurants and hotels. Identify Review Assess 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 expansion of our manufacturing operations. Forecasts for the UK and our major export markets suggest that economic growth will continue in 2019, although the benefits of this may be offset by other macro-economic changes. Document Controls 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. Churchill is not a global consumer brand, but 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. This technical advantage has been developed over many years and we hold significant intellectual property in our materials and processes. 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 operate from a number of smaller locations and representative offices around the world. 60 50 40 30 20 10 0 People 51.1 Sustainable Advantage Customers 44.5 46.8 57.5 53.4 Innovation Service Manufacturing 2014 2015 2016 2017 2018 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. We have increased our investment in training and development to provide more fulfilling roles 10 for our staff and improve the effectiveness and productivity of our 9 workforce. 8 7 6 5 4 3 2 1 Churchill has long enjoyed a market leading reputation for service. Our operational plans are geared towards meeting high levels of on time 6.4 delivery both in the UK and overseas. We hold extensive inventories to meet these service requirements and have emphasised flexibility and responsiveness within our manufacturing process. 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. 2016 2014 2015 2018 2017 5.0 4.2 9.2 7.5 Strategy 70 60 The Group’s objective is to generate long term benefits to all 35 stakeholders in the business by the provision of value to customers 30 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. 40 50 20 25 15 30 20 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 lead us towards development of our position in hospitality markets worldwide. 10 10 5 1 1 0 2 0 1 0 2 9 0 0 2 8 0 0 2 7 0 0 2 2 1 Our strategic process is designed to allow us to identify markets where 0 2 we may profitably grow our revenues on a long term basis. We research customer product requirements and the distribution structure in new markets and, if they offer profit opportunities, 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. 3 1 0 2 4 1 0 2 5 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 20 15 10 5 0 10 9 8 7 6 5 4 3 2 1 13.9 12.5 9.5 10.6 2014 2015 2016 2017 2018 16.1 9.4 7.5 6.4 5.0 4.2 2014 2015 2016 2017 2018 EPS Dividends Hospitality by Market 2017 2018 56% 44% 60% 40% Export Home 0 20 40 60 80 100 Hospitality Value Added Series Hospitality Value Added Series Revenue by Market One of the key elements of our sustainable market advantage is the success of our innovation process. We have developed this process to research and identify market trends, to design new products to satisfy these trends and to confirm their acceptability. We believe we now produce market leading products offering significant added value to our customers. 2017 2018 40% 60% 44% 56% Value Added Sales Standard Sales 2017 2018 45% 33% 11% 11% 40% 36% 11% 13% UK Europe ROW North America 0 20 40 60 80 100 26692 12 June 2019 9:40 pm Proof 4 PFP t o m e rs & Distribution s C u Identify Sustainable Advantage e rvic e S M a n u f a c t urin g P e o p l e n In n o vatio Review Assess Controls Document Churchill China plc Annual Report for the year ended 31 December 2018 15 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. Our target is to deliver progressive increases in the proportion of added value products within our business. We invest steadily in increasing our production capability and in improving our ability to offer 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 for the long term in our UK manufacturing facility. 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. 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 technical performance and in the systems which support the fulfilment of our contract with our customers. We invest to maintain the performance of our products and to extend our capabilities. 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 logistics 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. Performance A more detailed report on our performance is contained in the Chairman’s Statement on page 06. Hospitality markets have generally performed well. Innovation within our product range, extension of our distribution network and increased sales and marketing resource have all contributed to strong growth in revenues and improved margins. 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 but growing market share. We have again increased our investment in building our business in 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, with the UK market in particular being subdued during the year. This lower level of performance was consistent with our expectations. The imposition of EU duties on Chinese imports has been positive for all UK ceramics manufacturers. Anti dumping duties, first introduced in 2012, were due to expire in 2018. However the European ceramics federation (FEPF) has lodged a request for an expiry review given evidence of continued dumping. Anti dumping duties are expected to remain in force in the medium term until the the conclusion of this review and may be renewed for a further period. The effect of the withdrawal of the UK from the EU on Anti dumping duties and other duties in the UK has not yet been clarified. Material and labour costs have again risen at slightly higher rates than underlying inflation, energy costs have increased more markedly. We have invested significantly in new products and our manufacturing process over several years and a number of these investments have contributed to our improved margin position through cost reduction and extending our ability to offer cost-effective added value products to our customers. 26692 12 June 2019 9:40 pm Proof 4 PFP 16 Churchill China plc Annual Report for the year ended 31 December 2018 Principal risks and uncertainties The Group’s operations are subject to a number of risks, which are formally reviewed by the Board in a regular and systematic manner. The risks are identified and assessed on the basis of the likelihood of occurrence and the severity of the impact on the Group’s business model and strategy. The Group then implements processes and controls to appropriately manage and mitigate these risks. The principal business risks currently affecting the Group are set out below: Identify Review Scale Mitigate Document Risk Change = Risk Market and Economic Change Brexit Currency Exposure Manufacturing and Supply Chain = = Risk Description 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 impact of the 2016 Brexit Referendum and 2019 date for the UK leaving the European Union is not yet clear in respect of its impact on future trading conditions including the rate of economic growth in the UK market, any changes to tariffs or non tariff barriers, changes to trading conditions that may apply to UK businesses trading with the European Union and exchange rates. The Brexit process has introduced a number of variables into our operating environment. In the long term, it is believed that the Group’s strategies of developing revenues outside of the UK and in building sales of differentiated hospitality product where there is a higher level of repeat business would act to mitigate the impact of any adverse changes. In the short term the Group has identified Brexit as a key risk area and has invested substantial management resource in the development and implementation of a number of contingency plans to address possible changes arising from the United Kingdom’s exit from the European Union and Single Market. Our principal target has been to secure our market position and service levels within Europe. We have established a logistics facility in the Netherlands, improved our systems and processes in our export operations and mitigated key risk areas in our UK manufacturing. 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. Over 85% 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. We also assess the impact of new technologies in our manufacturing process. Where new developments have the potential to impact on either our commercial position or cost competitiveness we develop appropriate plans to respond to these changes. 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 at Board, management and operational levels, training and investment in risk mitigation. 26692 12 June 2019 9:40 pm Proof 4 PFP Risk Change = Risk Cyber Security Regulation, Compliance and Taxation Churchill China plc Annual Report for the year ended 31 December 2018 17 Risk Description Our business increasingly uses information technology to manage our operations and deliver value. We aim to take appropriate steps to secure our systems from failure or malicious action. 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 (‘ADD’) by the EU on imports from China has generally been positive to the Group’s trading operations. This Duty is currently under expiry review by the EU and its application may change following the completion of this review. ADD will continue in force at least until the determination of this review. The operation of ADD and other tariffs 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. 26692 12 June 2019 9:40 pm Proof 4 PFP 18 Churchill China plc Annual Report for the year ended 31 December 2018 Key performance indicators Operating cash generation Revenue and revenue growth The absolute levels of revenue and revenue growth are reviewed regularly by business and geographic destination through the year against previous year, current year targets and against strategic expectations. 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. Revenue Group Hospitality Retail UK Export 2018 £m 57.5 52.4 5.1 23.0 34.5 2017 £m 53.5 47.4 6.1 24.0 29.5 Growth % 7.4% 10.5% –16.5% –4.2% 16.8% Sales to Hospitality customers performed well, recording growth against a strong comparative. Retail sales were lower, reflecting our strategic focus on profit rather than scale in this market. Group export sales rose by 16.8%, largely as our European and Rest of the World markets again delivered returns on the investments we have made. UK revenues reduced reflecting a fall in activity levels in Retail market. Operating profit and profit before exceptional items and income tax The level of operating profit and significant factors affecting its delivery are reviewed and controlled on a regular basis. Operating profit before exceptional items Operating margin Profit before exceptional items and income tax Exceptional items Profit before income tax 2018 £m 9.2 16.1% 9.4 (0.6) 8.8 2017 £m 7.5 13.9% 7.5 0.3 7.8 Growth % 23.8% 25.8% 12.9% Group operating profit before exceptional items increased by 23.8%. The main components of this increase were strong sales growth in export markets and improved gross margins from our focus on increasing the proportion of added value sales within our business. Overhead cost levels increased as we continued to invest in market and new product development. Operating margins before exceptional items increased satisfactorily to 16.1% (2017: 13.9%) reflecting an increased mix of added value product and withdrawal from less profitable market sectors and cost controls. The level of profit before exceptional items and income tax is reviewed on a monthly basis against previous performance and target levels. Profit before exceptional items and income tax grew by 25.8% mainly as a result of the strong increase in operating profits. The notional interest charge associated with our pension scheme fell during the year and our net cash interest received increased. Exceptional items, where they are recognised, are reviewed as part of the regular assessment of profit performance. Exceptional cost: Pensions past service charge and the release of prior year cost provisions against the disposal of property totalling £0.6m. (2017: Exceptional profit on disposal of property, plant and equipment of £0.3m.) Operating cash generation Percentage of operating profit Percentage of operating profit (3 year average) Growth % 6.7% 2018 £m 8.3 89% 2017 £m 7.7 100% 97% 104% Operating cash generation was maintained at satisfactory levels. The growth in operating profit was offset by a rise in working capital requirement to support increased trading levels, principally higher accounts receivable on additional revenues. Payments in respect of pension deficit amortisation continued at a level of £1.4m per annum. 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 2018 £m 9.9 2017 £m 9.8 The rise in inventory holding levels reflects increased additional work in progress to allow more effective manufacturing. 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 enjoy a leading position 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 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 26 March 2019 26692 12 June 2019 9:40 pm Proof 4 PFP Churchill China plc Annual Report for the year ended 31 December 2018 19 26692 12 June 2019 9:40 pm Proof 4 PFP 20 Churchill China plc Annual Report for the year ended 31 December 2018 Directors’ Report The Directors present their annual report and the audited consolidated financial statements of the Group for the year ended 31 December 2018. 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 38. A review of the operations and future prospects of the Group is given in the Chairman’s Statement on page 06 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 2018 and 31 December 2017: Ordinary dividend: Final dividend 2017 17.2p (Final dividend 2016: 14.8p) per 10p ordinary share Interim dividend 2018 8.7p (2017: 7.4p) per 10p ordinary share 2018 £’000 2017 £’000 1,886 954 2,840 1,621 812 2,433 The Directors now recommend payment of the following dividend: Ordinary dividend: Final dividend 2018 20.3p (2017: 17.2p) per 10p ordinary share 2,224 1,886 Dividends on treasury shares held by the Company are waived. 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* B M Hynes * A C Bromfield* * Non Executive The Directors retiring by rotation are D J S Taylor and J A Roper who being eligible, offer themselves for re-election. The unexpired terms of the service contracts of D J S Taylor and J A Roper are both twelve months. The biographical details of the Directors are as follows: David O’Connor, Chief Executive Officer, has worked for Churchill for 28 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. David has worked in a number of roles within the UK ceramics industry, initially within production management and has developed an extensive knowledge of logistics, product sourcing and marketing. 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. David Taylor, Finance Director and Company Secretary has worked for the Group for 27 years. He was appointed to the Board in 1993. Following qualification as a Chartered Accountant with KPMG, he worked in a number of finance roles in the manufacturing sector before joining Churchill in 1992. Since joining Churchill, David has developed wide experience across the business. James Roper, Sales and Marketing Director joined Churchill in 2001. James has worked in a number of sales and marketing roles across Churchill’s business and has extensive experience in the development of the Group’s strategy particularly in relation to product innovation and distribution channel management. He has an MBA from Manchester Business School. He was appointed to the Board in 2015. Alan McWalter, Non Executive Chairman joined the Group in January 2011. He is also Chairman of Belfield Group and Newmarket Travel and the Senior Independent Director at SDL plc. He has previously held Chairmanship and Non Executive roles with numerous quoted and private companies. He was an Executive Director of Marks and Spencer and Kingfisher Group companies and held high level marketing and general management appointments in the Consumer Goods and Retail 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. Andrew has significant long term experience in general and financial management. Brendan Hynes, Non Executive Director and Senior Independent Director, is currently Chairman of Swallowfield plc and a Non Executive Director of Footasylum plc alongside other appointments. He was Chief Executive Officer of Nichols plc from 2007 to 2013 having previously been Finance Director. He has extensive experience of strategy development, business and financial management in public companies. Brendan is a Fellow of the Chartered Institute of Management Accountants and has an MBA from Manchester Business School. He joined the Board in 2013. Angela Bromfield, Non Executive Director, is currently a Non Executive director at Zotefoams plc and Harworth Group plc. She has had a broad based international career in manufacturing, distribution and construction held a number of senior roles in listed companies including Morgan Sindall plc. Angela has a degree in Chemistry from Reading University and an MBA from Warwick Business School. 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 code and supporting policies covering bribery and corruption, modern slavery and whistle-blowing. Churchill 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 recognises that well trained and motivated employees are central 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 employee training and development programme is an important part of our operations. We have continued to work with our local further educational colleges and training organisations to provide functional and vocational training for employees and 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. 26692 12 June 2019 9:40 pm Proof 4 PFP Churchill China plc Annual Report for the year ended 31 December 2018 21 We remain committed to our graduate training programme helping local graduates into our industry. In the fifteen years since we established this initiative we have recruited many graduates who now hold senior posts within the business and are key to our succession plans for the future. We have established an apprenticeship scheme alongside our graduate programme. Our Masterclass programme, involving staff from across our Company, has proved valuable in unlocking the potential of employees within the business. Members of the Masterclass teams are given support in developing problem solving skills and in developing their overall capabilities. We operate 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 recognises all our employee’s 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. Churchill is aware that it has many stakeholders, including its customers, employees, suppliers and neighbours alongside our shareholders. We seek to operate in a sustainable manner which recognises the needs of all of these groups. 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 re-used 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 processes. We run on-going 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. Churchill has developed a formal brand framework which highlights the values which we believe embody our business. Many of these values reflect our commitment to our stakeholders. This brand framework is used daily within our business to guide our operations. 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. 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 currently has no net debt 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 £8.3m of cash flow from operating activities and after payment of corporate taxation of £1.3m, invested £2.1m in capital projects and returned £3.2m 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. 26692 12 June 2019 9:40 pm Proof 4 PFP 22 Churchill China plc Annual Report for the year ended 31 December 2018 Directors’ Report 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 12 March 2019 exceeded 3% of the Company’s issued share capital: Shareholder Investec Wealth and Investment Hargreave Hale Limited S Roper Rathbone Nominees Limited E S & S J Roper Henderson Global Investors Limited M J & G Roper Share repurchase Number of ordinary shares 1,457,023 1,071,560 941,500 816,464 507,765 434,900 352,065 Percentage 13.3% 9.8% 8.6% 7.5% 4.6% 4.0% 3.2% The maximum number of shares held in treasury by the Company during the year was 74,922 10p ordinary shares. During the year the Company repurchased 38,000 (2017: 27,000) 10p ordinary shares at a total cost of £388,000 (2017: £271,000) in order to improve overall Shareholder return. 30,927 (2017: 34,151) shares were re-issued in respect of employee share option schemes for a total consideration of £3,000 (2017: £3,000). The Company retains a power, subject to the fulfilment of certain conditions and as approved at the 2018 Annual General Meeting, for the further purchase of its own shares. Political contributions The Group made no political contributions (2017: £nil) during the year. Events occurring after the reporting period On 25 February 2019 Churchill China plc acquired an additional 9.5% of the issued share capital of Furlong Mills Limited, for a total consideration of £454,000, funded from the Group’s existing cash resources. This, together with the existing holding immediately prior to the transaction of 46.1%, gives the Company a majority shareholding of 55.6%. Furlong Mills Limited has previously been accounted for as an associated company and will be consolidated into the Group’s accounts from the above date. 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 Company and of the profit or loss of the Group and Company for that period. In preparing the financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • state whether applicable IFRSs as adopted by the European Union have been followed for the Group financial statements and United Kingdom Accounting Standards, comprising FRS 101, have been followed for the Company financial statements, subject to any material departures disclosed and explained in the financial statements; • make judgements and accounting estimates that are reasonable and prudent; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and Company will continue in business. The Directors are also responsible for safeguarding the assets of the Group and Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. 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 Group and Company and enable them to ensure that the financial statements comply with the Companies Act 2006. 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. Directors’ confirmations In the case of each Director in office at the date the Directors’ Report is approved: • • so far as the Director is aware, there is no relevant audit information of which the Group and Company’s auditors are unaware; and 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. Disclosure of information to auditors In the case of each of the Director 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. All Directors have taken 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. Statement of Directors’ responsibilities in respect of the financial statements Independent auditors The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulation. The auditors, PricewaterhouseCoopers LLP, have indicated their willingness to continue in office and a resolution that they be re-appointed will be proposed at the Annual General Meeting. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the Group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and Company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 101 ‘Reduced Disclosure Framework’, and applicable law). By order of the Board D J S Taylor Company Secretary 26 March 2019 26692 12 June 2019 9:40 pm Proof 4 PFP Churchill China plc Annual Report for the year ended 31 December 2018 23 Corporate Governance This statement is not audited. The Company is quoted on the Alternative Investment Market of the London Stock Exchange and uses the Quoted Companies Alliances ‘Corporate Governance’ (‘the Code’) as a benchmark to define and review its governance procedures. The Company complies with the Code. The Code establishes ten principles of Corporate Governance grouped into three areas: the encouragement to deliver sustainable growth; the responsibility to maintain a dynamic management framework; and an aim to build trust with Shareholders and other stakeholders. The Board supports the aims of the Code and seeks to exceed rather than simply meet the requirements it sets out. Many of the requirements of the Code are addressed through this Annual Report and further information may be found on the Investor pages of the Company’s website, www.churchill1795.com. 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. The Board is led by the Chairman, Alan McWalter. It is felt that the current composition and operation of the Board is adequate to provide the necessary skills and experience to lead and manage the business and to ensure a balance of power and authority. A review of the effectiveness of the Board is carried out on a regular basis. 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, has been appointed. The Board acknowledges its role in defining and promoting the culture of the business. This culture is defined within the Company’s brand values. It encourages all our employees, including Board members, to bring innovation, commitment and integrity to their roles. The Code recommends that the boards of quoted companies include at least two 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. As Chairman, A J McWalter is considered to be independent as he was independent at the time of his appointment. A D Roper is not considered to be independent 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 A J McWalter B M Hynes J A Roper A C Bromfield Meetings held Meetings attended 13 13 13 13 13 13 13 12 13 13 13 12 13 13 The Directors consider that the Board of Directors include key management for all areas of the business and that there are no other key management which require disclosure. There are three sub-committees of the Board. 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. 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 Nomination Committee, which is wholly composed of Non Executive Directors, meets at least twice per year to discuss forward Board succession. A formal process has been established to deal with succession planning across the business. The Committee also considers the training and development needs of Directors. The Nomination Committee is chaired by A J McWalter. Terms of reference for all three Committees and a Remuneration Policy statement have been agreed by the Board. Shareholder engagement The Company has a wide range of Shareholders including major financial institutions and private investors. Regular contact is made with Shareholders through presentations, direct contact and most importantly both formally and informally at the Company’s Annual General Meeting. David Taylor, Finance Director and Company Secretary, is the main point of contact for Shareholders, but all Directors are encouraged to meet with investors. The Board considers feedback received from Shareholders carefully. 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. 26692 12 June 2019 9:40 pm Proof 4 PFP 24 Churchill China plc Annual Report for the year ended 31 December 2018 Corporate Governance 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 26 March 2019 26692 12 June 2019 9:40 pm Proof 4 PFP Churchill China plc Annual Report for the year ended 31 December 2018 25 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 the following: • The review of the Company’s Remuneration Policy to ensure that it remained appropriate; • Base salary levels were assessed to ensure that the changes in the experience and performance of job holders was reflected in pay 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; and • Performance targets for vesting and the level of grant of new awards under the Long Term Incentive Plan (‘LTIP’) in May 2018 were considered. 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 Group has continued make solid progress against its performance and strategic targets. Profit performance in 2018 was again strong with operating and pre tax profits ahead of the previous year. We have continued to implement our long term strategy successfully and the operating and financial performance of the business reflects this progress. Revenue growth has continued in hospitality export markets, reflecting the investments made over a number of years. The proportion of our sales of higher margin added value products has also increased satisfactorily. Underpinning these developments we have made good progress in improving our operational capability and in aligning our workforce to the business’s strategic targets. In financial terms we grew operating profit before exceptional costs by 24% and pre tax profit before exceptional costs by 26%. Cash and deposit balances have grown by £1.8m to £17.4m. We have increased the dividend declared in relation to the year by 18%. Total Shareholder return over the year was more restrained given general falls in UK equity values, but still exceeded the AIM All Share Index. Our compound return over the last five years at 22% is well ahead of the corresponding figure for AIM as a whole (2%). Given this strong performance, we are pleased to report that annual profit related bonus payments to Directors were at a maximum level. The challenging targets under our LTIP have also been achieved. Overall the aggregate cost of Board remuneration fell by 1%, principally as a result of a reduction in the value of LTIP shares vesting. The review of the Remuneration Policy during the year did not result in any substantial changes. 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 is 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 J D Massey (HR Director, Churchill China (UK) Limited) attended the Remuneration Committee meetings. D M O’Connor withdraws from any meeting where his remuneration is discussed. Directors’ remuneration policy This section of the Remuneration Report is not audited. This section sets out the Company’s Directors’ Remuneration policy. 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 has applied from 2018. 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. 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. 26692 12 June 2019 9:40 pm Proof 4 PFP 26 Churchill China plc Annual Report for the year ended 31 December 2018 Remuneration Report Future policy table This section of the Remuneration Report is not audited. Executive Directors The table below describes each of the elements of the remuneration package for the Executive Directors. Purpose and link to strategy Basic pay Core element of fixed remuneration to help recruit and retain employees of the appropriate calibre and experience Operation Maximum potential value Performance metrics 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 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: • Average change in salary for the • An Executive Director assuming Not applicable, although overall performance of the individual and the Company is considered by the Remuneration Committee when setting and reviewing salaries. workforce as a whole Annual Bonus Rewards the achievement of annual financial and strategic business targets as well as the delivery of personal objectives 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. 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. Executive Directors are entitled to earn up to 100% of basic pay as a bonus. 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. 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. 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. Not applicable. Executive Directors are entitled to receive repayment of costs deemed necessary for them to perform their duties. Other benefits may be provided based on individual circumstances including, but not limited to, housing or relocation expenses. 26692 12 June 2019 9:40 pm Proof 4 PFP Purpose and link to strategy Pensions Provide market competitive post- employment benefits to help recruit and retain employees of the appropriate calibre and experience Churchill China plc Annual Report for the year ended 31 December 2018 27 Operation Maximum potential value Performance metrics Up to 10% of basic pay under the defined contribution scheme. Not applicable. Executive Directors are entitled to membership of Company pension schemes in operation from time to time. 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. 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. 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 The Company operates an LTIP approved by Shareholders on 16 May 2012. 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. For maximum performance, 100% of the award vests. Straight line vesting applies between threshold, target and maximum vesting. 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 claw back is operated. LTIP payments are non-pensionable. There were no significant changes to Remuneration Policy during the year. Non-Executive Directors This section of the Remuneration Report is not audited. 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 significant changes to Remuneration Policy during the year. 26692 12 June 2019 9:40 pm Proof 4 PFP 28 Churchill China plc Annual Report for the year ended 31 December 2018 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 strategic and 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 This section of the Remuneration Report is not audited. 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 pro-active 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. Annual report on remuneration This section of the Remuneration Report is audited. Emoluments of the Directors were as follows: 2018 Executive D J S Taylor D M O’Connor J A Roper Non Executive A J McWalter A D Roper B M Hynes A C Bromfield 2017 Executive D J S Taylor D M O’Connor J A Roper Non Executive A J McWalter A D Roper B M Hynes A C Bromfield Salary £ Benefits £ Pension and pay in lieu of pension £ Annual bonus £ Long term incentive plan £ Total remuneration £ 211,159 274,300 195,713 75,000 86,575 42,232 42,232 817 566 566 – – – – 18,555 24,103 11,116 150,029 194,891 133,000 98,126 123,481 89,560 – – – – – – – – – – – – 478,686 617,341 429,955 75,000 86,575 42,232 42,232 927,211 1,949 53,774 477,920 311,167 1,772,021 206,040 267,650 186,700 75,000 84,476 41,208 41,208 779 530 530 – – – – 18,105 23,519 11,043 146,377 189,952 121,856 – – – – – – – – 175,246 204,602 – – – – – 546,547 686,253 320,129 75,000 84,476 41,208 41,208 902,282 1,839 52,667 458,185 379,848 1,794,821 26692 12 June 2019 9:40 pm Proof 4 PFP Churchill China plc Annual Report for the year ended 31 December 2018 29 This section of the Remuneration Report is not audited On 1 August 2018, the salaries of all Directors, with the exception of A J McWalter and J A Roper, rose by 2.5% in line with the general inflationary rise given to employees. A J McWalter’s salary is reviewed triennially, the last increase being on 1 May 2016. J A Roper’s salary increased by 9.1% to reflect his increased experience and responsibilities within the business. 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 2017 and 2018. Pension costs above represent contributions made by the Group to defined contribution schemes. Performance bonuses Performance bonuses were awarded given the achievement of growth in Operating Profit before exceptional items substantially above target levels and also successful performance against personal objectives. During 2018 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 2018 threshold profit bonus levels were payable on the achievement of an operating profit before exceptional items of £7,610,000, on target profit levels were payable on the achievement of operating profits before exceptional items of £8,010,000 and maximum target profit levels were operating profits before exceptional items of £8,400,000. Profit based awards during the year were of 56% of base salary and personal objectives represented 14% of base salary. No change has been made in the operation of annual profit bonus scheme for 2019, 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. D J S Taylor Long Term Incentive Plan (2015 grant) Long Term Incentive Plan (2016 grant) Long Term Incentive Plan (2017 grant) Long Term Incentive Plan (2018 grant) D M O’Connor Long Term Incentive Plan (2015 grant) Long Term Incentive Plan (2016 grant) Long Term Incentive Plan (2017 grant) Long Term Incentive Plan (2018 grant) J A Roper Long Term Incentive Plan (2016 grant) Long Term Incentive Plan (2017 grant) Long Term Incentive Plan (2018 grant) Number of options 31 December 2017 Number of options granted Number of options exercised Number of options 31 December 2018 Date from which exercisable 14,123 10,159 11,685 – 16,804 12,698 15,179 – 8,127 9,737 – – – – 11,216 – – – 14,570 – – 9,347 (14,123) – – – (16,804) – – – – – – – 10,159 11,685 11,216 – 12,698 15,179 14,570 8,127 9,737 9,347 May 2018 May 2019 May 2020 May 2021 May 2018 May 2019 May 2020 May 2021 May 2019 May 2020 May 2021 Expiry date May 2025 May 2026 May 2027 May 2028 May 2025 May 2026 May 2027 May 2028 May 2026 May 2027 May 2028 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 numbers 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. On 4 May 2018, 35,133 options were granted, at a level representing 60% of base salary. The market price of the Company’s shares at the date of grant was 1,117.5p. For the options granted on 4 May 2018, 100% of the shares will vest given an increase of 40% in adjusted EPS* (‘maximum performance’) in the year to 31 December 2020 over the base year of 31 December 2017, 40% of the above shares for an increase of 33% in adjusted EPS (‘target performance’) and 25% of the above shares for an increase of 26% 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. Share price movements during the year This section of the Remuneration Report is not audited. The market price of the Company’s shares at the end of the financial year was 940p (2017: 1,142.5p). The range of prices for the year to 31 December 2018 was 811p to 1,290p (2017: 837.5p to 1,162.5p) per ordinary share. 26692 12 June 2019 9:40 pm Proof 4 PFP 30 Churchill China plc Annual Report for the year ended 31 December 2018 Remuneration Report 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. Directors are allowed to exchange pension benefits for additional salary as long as this is at no additional cost to the Group. Pension contributions and payments in lieu of contributions made by the Group were as shown on page 28 and were at an equivalent rate of 10% of basic salary for D J S Taylor and D M O’Connor and 7% for J A Roper. 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. A D Roper and B M Hynes have fixed term contracts of one year’s duration expiring on 15 August 2019 and 24 September 2019 respectively. A C Bromfield has 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 Director’s 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 2018 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 2018 637,430 59,555 49,020 5,000 4,000 2018 637,430 60,555 48,520 5,000 4,000 1,000,835 1,034,835 983 983 1,756,823 1,791,323 A D Roper’s interest in the 10p ordinary shares of the Company at 31 December 2018 represented 5.8% (2017: 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 2018 represented 9.1% (2017: 9.4%) of the Company’s issued share capital. There has been no change in the interests set out above between 31 December 2018 and 26 March 2019. Director shareholding requirements This section of the Remuneration Report is not audited. 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. All the Executive Directors met this requirement. 26692 12 June 2019 9:40 pm Proof 4 PFP Churchill China plc Annual Report for the year ended 31 December 2018 31 Shareholder consultation This section of the Remuneration Report is not audited. 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 2018 Annual General Meeting, the standard resolution in relation to the approval of the Report of the Remuneration Committee contained in the Annual Report for 2017 was passed; 99.5% of votes were cast in favour of the resolution, 0.2% against, with abstentions of 0.3%. Performance Graph This section of the Remuneration Report is not audited. Total Shareholder Return 350 300 250 200 150 100 50 0 2013 2014 2015 2016 2017 2018 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 fallen. Further increases to dividends have been offset by a fall in the Company’s share price as equity values have generally decreased. Our overall five year return has remained positive at an average compound rate of 22% (AIM: 2%). Over the five year period total Shareholder return from the Group has been 167% whilst that achieved by the AIM index as a whole was 8%. In the year to 31 December 2018 the overall return from the Group was -16%, (AIM: -17%). 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 26 March 2019 26692 12 June 2019 9:40 pm Proof 4 PFP 32 Churchill China plc Annual Report for the year ended 31 December 2018 Nomination Committee Report Annual Statement The Board established a separate Nomination Committee during the year. The Committee has considered a number of matters since its formation including: • Consideration of the current and future structure, size and composition of the Board, including assessment of its skills, knowledge and experience; • Development of a formal succession plan process covering the Company’s Board and the Board of its principal subsidiary Churchill China (UK) Limited; and • Review of the results of the Board evaluation process The Nomination Committee operates under Terms of Reference agreed by the Board. A J McWalter Chair of the Nomination Committee 26 March 2019 26692 12 June 2019 9:40 pm Proof 4 PFP Churchill China plc Annual Report for the year ended 31 December 2018 33 Audit Committee Report Annual Statement The Audit Committee has considered a number of matters since the beginning of 2018 including: • Review of the annual and interim financial results and the Annual Report; • Agreement of the Audit Plan for the year to 31 December 2018 including the scope of work to be carried out; • Consideration of the Report of the external auditors, PricewaterhouseCoopers LLP, to the Audit Committee; • Consideration of a number of detailed financial and disclosure areas including the effect of changes in the operation of the Group on segmental disclosures, the procedures used to value inventory and the potential impact of changes to accounting standards in respect of revenue recognition, financial instruments and leased assets on the Group’s financial statements; and • Review of the independence, effectiveness and level of fees to be paid to the external auditors. Financial reporting and significant financial issues The Audit Committee assesses whether suitable accounting policies have been adopted, whether management have made appropriate estimates and judgements and reviews reports prepared by management in relation to major judgements. The Audit Committee has assessed the Group’s accounting policies and procedures in relation to the valuation of inventory, a key area of focus for the business. The value of inventory at 31 December 2018 was £9.9m (2017: £9.8m). The Committee is satisfied that the Group’s policies and procedures are appropriate and have been consistently applied. Internal audit The Company does not use 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. B M Hynes Chair of the Audit Committee 26 March 2019 26692 12 June 2019 9:40 pm Proof 4 PFP 34 Churchill China plc Annual Report for the year ended 31 December 2018 Independent auditors’ report to the members of Churchill China plc Report on the audit of the financial statements 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 2018 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 (United Kingdom Accounting Standards, comprising FRS 101 “Reduced Disclosure Framework”, and applicable law); and the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. • • We have audited the financial statements, included within the Annual Report and Financial Statements (the “Annual Report”), which comprise: the consolidated and company balance sheets as at 31 December 2018; the consolidated income statement and consolidated statement of comprehensive income, the consolidated cash flow statement, and the consolidated and company statements of changes in equity for the year then ended; and the notes to the financial statements, which include a description of the significant accounting policies. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities under ISAs (UK) are further described in the Auditors’ responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We remained independent of the group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, which includes the FRC’s Ethical Standard, as applicable to listed entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. Our audit approach Overview • Overall group materiality: £438,000 (2017: £387,000), based on 5% of profit before tax. • Overall company materiality: £114,000 (2017: £96,000), based on 1% of total assets. • We conducted a full scope audit of all UK statutory entities which make up the consolidated results, accounting for 98% of consolidated revenue, 98% of profit before tax and 97% of total assets. • We audited the consolidation adjustments to group materiality to formulate the consolidated results of the group, as presented in the Annual Report. • Inventory Valuation Method - group. Materiality Audit scope Key audit matters The scope of our audit As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. In particular, we looked at where the directors made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits we also addressed the risk of management override of internal controls, including evaluating whether there was evidence of bias by the directors that represented a risk of material misstatement due to fraud. 26692 12 June 2019 9:40 pm Proof 4 PFP Churchill China plc Annual Report for the year ended 31 December 2018 35 Key audit matters Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters, and any comments we make on the results of our procedures thereon, were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. This is not a complete list of all risks identified by our audit. Key audit matter How our audit addressed the key audit matter Inventory Valuation Method - Group Refer to the Audit Committee Report on page 33, the critical accounting estimates and judgements in note 3 to the accounts on page 52, and note 17 (Inventory). We focused on this area because the group uses a standard cost approach to calculate the cost of inventories throughout the year which involves elements of judgement. The group then ensures that this standard cost is materially appropriate by comparing the standard cost against actual costs as recorded in production. In addition, the Net Realisable Value (NRV) of the products within inventory at the period end is evaluated to ensure that the valuation is appropriately stated at the lower of cost or NRV. We performed audit procedures to test the method of calculating standard cost. We compared the respective elements of this standard cost with actual costs incurred based on underlying management information to ensure there was no material difference. We checked the arithmetical accuracy of the calculations within the standard costing basis. We checked that the overheads absorbed were directly attributable costs such as direct materials, direct labour and overheads. We also checked production levels to ensure inefficiencies were not absorbed. On a sample basis, we tested that the valuation of inventory is stated at the lower of cost or NRV. No issues were noted from our testing. We determined that there were no key audit matters applicable to the company to communicate in our report. How we tailored the audit scope We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the structure of the group and the company, the accounting processes and controls, and the industry in which they operate. The group is structured, and operates, as one consolidated business unit with one immaterial component in the US. The group financial statements are predominantly a consolidation of four UK statutory entities, comprising the group’s main trading entity Churchill China (UK) Limited, the plc holding company, Churchill China plc, Churchill Ceramics UK Limited and a dormant subsidiary, James Broadhurst & Sons Limited. Each of these subsidiaries are subject to their own financial statements audit. In establishing the overall approach to the group audit we have allocated materiality across the components as appropriate and designed our audit testing for each financial statement line item based on the size and nature of the transactions and balances that are aggregated to form that line item and our assessment of the risk of material misstatement. We used our professional judgement to determine the nature and extent of testing required over each line item in the financial statements. As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. In particular, we looked at where the Directors made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits we also addressed the risk of management override of internal controls, including evaluating whether there was evidence of bias by the Directors that represented a risk of material misstatement due to fraud. Materiality The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and in aggregate on the financial statements as a whole. Based on our professional judgement, we determined materiality for the financial statements as a whole as follows: Group financial statements Company financial statements Overall materiality £438,000 (2017: £387,000). How we determined it 5% of profit before tax. £114,000 (2017: £96,000). 1% of total assets. Rationale for benchmark applied Based on the benchmarks used in the Annual Report, profit before tax is the primary measure used by the shareholders in assessing the performance of the Group, and is a generally accepted auditing benchmark. The company is not a profit oriented entity and is a holding company. As such it is considered that total assets is the most appropriate basis upon which to determine materiality. For each component in the scope of our group audit, we allocated a materiality that is less than our overall group materiality. The range of materiality allocated across components was between £114,000 and £416,000. We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £20,000 (Group audit) (2017: £18,000) and £5,000 (Company audit) (2017: £4,500) as well as misstatements below those amounts that, in our view, warranted reporting for qualitative reasons. 26692 12 June 2019 9:40 pm Proof 4 PFP 36 Churchill China plc Annual Report for the year ended 31 December 2018 Independent auditors’ report to the members of Churchill China plc Conclusions relating to going concern ISAs (UK) require us to report to you when: • • the directors’ use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or the directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the group’s and company’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue. We have nothing to report in respect of the above matters. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the group’s and company’s ability to continue as a going concern. For example, the terms on which the United Kingdom may withdraw from the European Union, which is currently due to occur on 29 March 2019, are not clear, and it is difficult to evaluate all of the potential implications on the group’s trade, customers, suppliers and the wider economy. Reporting on other information The other information comprises all of the information in the Annual Report other than the financial statements and our auditors’ report thereon. The directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of assurance thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to conclude whether there is a material misstatement of the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report based on these responsibilities. With respect to the Strategic Report and Directors’ Report, we also considered whether the disclosures required by the UK Companies Act 2006 have been included. Based on the responsibilities described above and our work undertaken in the course of the audit, ISAs (UK) require us also to report certain opinions and matters as described below. Strategic Report and Directors’ Report In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic Report and Directors’ Report for the year ended 31 December 2018 is consistent with the financial statements and has been prepared in accordance with applicable legal requirements. In light of the knowledge and understanding of the group and company and their environment obtained in the course of the audit, we did not identify any material misstatements in the Strategic Report and Directors’ Report. Responsibilities for the financial statements and the audit Responsibilities of the directors for the financial statements As explained more fully in the Statement of Directors’ responsibilities set out on page 22, the directors are responsible for the preparation of the financial statements in accordance with the applicable framework and for being satisfied that they give a true and fair view. The directors are also responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the group’s and the company’s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or the company or to cease operations, or have no realistic alternative but to do so. Auditors’ responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at: www.frc.org.uk/ auditorsresponsibilities. This description forms part of our auditors’ report. Use of this report 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. 26692 12 June 2019 9:40 pm Proof 4 PFP Churchill China plc Annual Report for the year ended 31 December 2018 37 Other required reporting Companies Act 2006 exception reporting 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 • certain disclosures of directors’ remuneration specified by law are not made; 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. Mark Skedgel (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Birmingham 26 March 2019 26692 12 June 2019 9:40 pm Proof 4 PFP 38 Churchill China plc Annual Report for the year ended 31 December 2018 Consolidated income statement for the year ended 31 December 2018 Revenue Operating profit before exceptional items Exceptional items Operating profit Share of results of associate company Finance income Finance costs Profit before exceptional items and income tax Exceptional items Profit before income tax Income tax expense Profit for the year attributable to owners of the Company Adjusted earnings per ordinary share Diluted adjusted earnings per ordinary share Basic earnings per ordinary share Diluted earnings per share All of the above figures relate to continuing operations. Note 4 5 5 5 15 8 8 5 10 11 11 11 11 2018 £’000 57,479 9,237 (541) 8,696 185 110 (144) 9,388 (541) 8,847 2017 £’000 53,530 7,460 315 7,775 159 66 (225) 7,460 315 7,775 (1,649) (1,361) 7,198 69.6p 69.0p 65.6p 65.0p 6,414 55.3p 54.8p 58.4p 57.9p The notes on pages 46 to 68 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 £4,693,000 (2017: £3,332,000). 26692 12 June 2019 9:40 pm Proof 4 PFP Churchill China plc Annual Report for the year ended 31 December 2018 39 Consolidated statement of comprehensive income for the year ended 31 December 2018 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: 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 2018 £’000 2017 £’000 (175) 1,344 23 (152) 7,198 7,046 (33) 1,311 6,414 7,725 7,046 7,725 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 Comprehensive Income has been presented. 26692 12 June 2019 9:40 pm Proof 4 PFP 40 Churchill China plc Annual Report for the year ended 31 December 2018 Consolidated balance sheet as at 31 December 2018 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 Note 2018 £’000 2017 £’000 13 14 15 21 17 18 19 20 21 22 23 23 24 25 26 14,847 91 1,732 1,107 17,777 9,911 9,719 3,001 14,380 37,011 54,788 14,542 101 1,547 1,197 17,387 9,816 8,650 3,000 12,577 34,043 51,430 (9,561) (1,063) (10,024) (831) (10,624) (10,855) (754) (5,443) (16,821) 37,967 1,103 2,348 (729) 1,703 33,542 37,967 (775) (5,907) (17,537) 33,893 1,103 2,348 (579) 1,565 29,456 33,893 The notes on pages 46 to 48 are an integral part of these consolidated financial statements. The financial statements on pages 38 to 68 were approved by the Board of Directors on 26 March 2019 and were signed on its behalf by: D M O’Connor Director D J S Taylor Director Company number 02709505 26692 12 June 2019 9:40 pm Proof 4 PFP Churchill China plc Annual Report for the year ended 31 December 2018 41 Company balance sheet as at 31 December 2018 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 Note 15 16 21 18 18 20 23 23 24 25 26 2018 £’000 1,106 2,198 88 3,392 7,718 220 80 8,018 (120) 7,898 11,290 11,290 1,103 2,348 (729) 416 8,152 11,290 2017 £’000 921 2,195 101 3,217 6,130 206 113 6,449 (97) 6,352 9,569 9,569 1,103 2,348 (579) 291 6,406 9,569 The notes on pages 46 to 48 are an integral part of these financial statements. The financial statements on pages 38 to 68 were approved by the Board of Directors on 26 March 2019 and were signed on its behalf by: D M O’Connor Director D J S Taylor Director 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 £4,693,000 (2017: £3,332,000). 26692 12 June 2019 9:40 pm Proof 4 PFP 42 Churchill China plc Annual Report for the year ended 31 December 2018 Consolidated statement of changes in equity for the year ended 31 December 2018 Retained earnings £’000 Issued share capital £’000 Share premium account £’000 Treasury shares £’000 Other reserves £’000 Total equity £’000 24,205 1,103 2,348 (575) 1,544 28,625 Balance at 1 January 2017 Comprehensive Income: Profit for the year Other comprehensive income/(expense): Depreciation transfer – gross Depreciation transfer – tax Re-measurement of post employment benefit obligations – net of tax Currency translation Total comprehensive income Transactions with owners 6,414 12 (2) 1,344 – 7,768 Dividends relating to 2016 and 2017 (note 12) (2,433) Proceeds of share issue Share based payment Deferred tax – share based payment Treasury shares (note 24) Total transactions with owners – 123 57 (264) (2,517) – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 3 – – (7) (4) – 6,414 (12) 2 – (33) (43) – – 64 – – 64 – – 1,344 (33) 7,725 (2,433) 3 187 57 (271) (2,457) Balance at 31 December 2017 Comprehensive Income: Profit for the year Other comprehensive income/(expense): Depreciation transfer – gross Depreciation transfer – tax Re-measurement of post employment benefit obligations – net of tax Currency translation Total comprehensive income Transactions with owners Dividends relating to 2017 and 2018 (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 2018 29,456 1,103 2,348 (579) 1,565 33,893 7,198 12 (2) (175) – 7,033 (2,840) – 137 (9) (235) (2,947) 33,542 – – – – – – – – – – – – – – – – – – – – – – – – 1,103 2,348 – – – – – – – 3 – – (153) (150) (729) – 7,198 (12) 2 – 23 13 – – 125 – – 125 1,703 – – (175) 23 7,046 (2,840) 3 262 (9) (388) (2,972) 37,967 26692 12 June 2019 9:40 pm Proof 4 PFP Churchill China plc Annual Report for the year ended 31 December 2018 43 Company statement of changes in equity for the year ended 31 December 2018 Dividends relating to 2016 and 2017 (note 12) (2,433) Balance at 1 January 2017 Comprehensive Income: Profit for the year Total comprehensive income Transactions with owners Proceeds of share issue Share based payment Deferred tax – share based payment Treasury shares (note 24) Total transactions with owners Balance at 31 December 2017 Comprehensive Income: Profit for the year Total comprehensive income Transactions with owners Dividends relating to 2017 and 2018 (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 2018 Retained earnings £’000 Issued share capital £’000 Share premium account £’000 Treasury shares £’000 Other reserves £’000 Total equity £’000 5,591 1,103 2,348 (575) 227 8,694 3,332 3,332 – 123 57 (264) (2,517) – – – – – – – – – – – – – – – – – – – 3 – – (7) (4) – – – – 64 – – 64 3,332 3,332 (2,433) 3 187 57 (271) (2,457) 6,406 1,103 2,348 (579) 291 9,569 4,693 4,693 (2,840) – 137 (9) (235) (2,947) 8,152 – – – – – – – – – – – – – – – – 1,103 2,348 – – – 3 – – (153) (150) (729) – – – – 125 – – 125 416 4,693 4,693 (2,840) 3 262 (9) (388) (2,972) 11,290 26692 12 June 2019 9:40 pm Proof 4 PFP 44 Churchill China plc Annual Report for the year ended 31 December 2018 Consolidated cash flow statement for the year ended 31 December 2018 Cash flows from operating activities Cash generated from operations (see page 45) Interest received* Interest paid Income tax paid Net cash generated from operating activities Cash flows from 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 Net (purchase)/sale 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 2018 £’000 8,260 110 (1) (1,321) 7,048 (2,042) 80 (58) (2,020) 3 (388) (2,840) (1) (3,226) 1,802 12,577 1 14,380 2017 £’000 7,743 66 – (1,198) 6,611 (2,155) 1,139 (54) (1,070) 3 (271) (2,433) 5 (2,696) 2,845 9,734 (2) 12,577 * 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. 26692 12 June 2019 9:40 pm Proof 4 PFP Churchill China plc Annual Report for the year ended 31 December 2018 45 Reconciliation of operating profit to net cash inflow from operating activities Continuing operating activities Operating profit Adjustments for: Depreciation and amortisation Gain on disposal of property, plant and equipment Charge for share based payments Defined benefit pension cash contribution (see note 22) Pension current service charge – non cash exceptional item Changes in working capital: Inventory Trade and other receivables Trade and other payables Net cash inflow from operations 2018 £’000 2017 £’000 8,696 7,775 1,725 (91) 262 (1,430) 611 (95) (1,039) (379) 8,260 1,621 (317) 187 (1,430) – (714) 785 (164) 7,743 26692 12 June 2019 9:40 pm Proof 4 PFP 46 Churchill China plc Annual Report for the year ended 31 December 2018 Notes to the financial statements for the year ended 31 December 2018 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 A number of new standards and amendments to standards and interpretations are effective for annual periods beginning on 1 January 2018, which has been adopted in preparing the Group’s consolidated financial statements. 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 Group uses forward time option contracts to manage hedge currency exposures rather than more complex financial instruments. As these are relatively simple instruments with a high level of certainty as to their value there has been no material change to the classification or measurement of the effect of these instruments compared to the figures and disclosures previously required in the financial statements. The Group carries trade and other receivables as a normal part of its business operations. IFRS 9 clarifies the requirement to provide for expected losses on underperforming receivables. The Group has reviewed the impact on IFRS 9 on its provisioning policy, which has not resulted in any material change to classification or measurement of trade and other receivables. The Group maintains credit insurance on a proportion of its trade receivables and operates on secured terms in relation to further balances. Further details of the Group’s provisioning policy are given in note 18. IFRS 9 has had no material impact on the recognition, classification or measurement on the Group’s results for the year ending 31 December 2018. IFRS 15, ‘Revenue from contracts with customers’ outlines the 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. The Group sells tangible products on a point in time basis and as such it is generally straightforward to recognise when a sale has been completed. There is some complexity in relation to the operation of volume related retrospective rebates, forward sale discount structures, other discounts and rebates, warranty claims and customers’ limited rights to return unsold product. The Group has well-established systems to manage and collate exposure in these areas and provides appropriate amounts based on contractual liability and expected costs. As such, there has been no material impact on the Group’s results for the year ending 31 December 2018. IFRS 15 also impacts the presentation of assets and liabilities which relate to the customer contracts. The financial statements are required to provide enough information to determine where the Group has unconditional rights to payments and receipts (e.g. Trade Receivables/Payables) or conditional rights to payment and receipts, which are deemed to be contract assets or liabilities which are to be presented separately. Following review of the standard, there has been no impact on the presentation of asset or liabilities. 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. (b) New standards and interpretations not yet adopted IFRS 16 ‘Leases’ replaces IAS 17 ‘Leases’ and is effective for accounting periods beginning on or after 1 January 2019. IFRS 16 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 the majority of operating leases will be accounted for on balance sheet for lessees, with exception of low value or short term assets. The Group has assessed the impact of the new standard and based on the Group’s leases and as at 31 December 2018, an asset and corresponding lease liability would have been recognised of £0.3m respectively. The impact on the Income Statement would have been immaterial on both measurement and classification had the Group adopted the new standard early. 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. 26692 12 June 2019 9:40 pm Proof 4 PFP Churchill China plc Annual Report for the year ended 31 December 2018 47 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. Segment reporting Segmental information is 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 arising directly from a business segment is identified to that segment. 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 control 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 review 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 an 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 charges 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. 26692 12 June 2019 9:40 pm Proof 4 PFP 48 Churchill China plc Annual Report for the year ended 31 December 2018 Notes to the financial statements continued 1. Summary of significant accounting policies continued 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. 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. 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. 26692 12 June 2019 9:40 pm Proof 4 PFP Churchill China plc Annual Report for the year ended 31 December 2018 49 1. Summary of significant accounting policies continued 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 managements’ 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 2 on cost or valuation Plant Motor vehicles Fixtures and fittings 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. 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 or 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. 26692 12 June 2019 9:40 pm Proof 4 PFP 50 Churchill China plc Annual Report for the year ended 31 December 2018 Notes to the financial statements continued 1. Summary of significant accounting policies continued 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 large proportion of the Group’s outstanding Trade Receivables are covered by credit insurance; however, where this is not in place the Group applies the IFRS 9 expected credit loss model when reviewing the provision against Trade Receivables. Industry and sector information is reviewed to ensure any factors that would affect the future ability of these receivables to be collected is recognised. 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. 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. Cash flow statement The Company is not required to produce a cash flow statement in relation to its operations as one is produced for the consolidated Group of companies. 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. 26692 12 June 2019 9:40 pm Proof 4 PFP Churchill China plc Annual Report for the year ended 31 December 2018 51 2. Financial risk management continued (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. At 31 December 2018, if Sterling had strengthened/weakened by 5% against the US dollar with all other variables held constant, post tax profit for the year would have been £97,000 (2017: £100,000) lower/higher, mainly as a result of foreign exchange gains on translation of US dollar denominated trade receivables, payables and cash balances. Equity would have been a further £22,000 (2017: £20,000) lower/higher mainly as a result of differences in the translation of US dollar investments in subsidiary undertakings. If Sterling had strengthened/weakened by 5% against the Euro with all other variables held constant, post tax profit for the year would have been £642,000 (2017: £544,000) lower/higher, mainly as a result of foreign exchange gains 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 2018, had the interest rates achieved been 10% higher with all other variables held constant then post tax profit for the year would have been £10,000 (2017: £7,000) higher. 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 significant 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 Santander UK plc Other Other financial assets are as follows: Lloyds Bank plc National Westminster Bank plc Credit rating Aa3 Aa3 Min A Credit rating Aa3 A3 2018 £’000 11,295 3,039 46 14,380 2018 £’000 2,750 251 3,001 2017 £’000 11,730 780 67 12,577 2017 £’000 2,750 250 3,000 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). (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. 26692 12 June 2019 9:40 pm Proof 4 PFP 52 Churchill China plc Annual Report for the year ended 31 December 2018 Notes to the financial statements continued 2. Financial risk management continued (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 3 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 net realisable value of excess inventories were to be 10% higher than management’s estimates the value of this provision would reduce by £266,000. If the net realisable value of excess inventories were to be 10% lower than management’s estimates the value of this provision would increase by £194,000. (b) Pension benefits The present value of the pension obligations depends 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. 4. Segmental analysis Market segment – Revenue Hospitality Retail Geographical segment – Revenue United Kingdom Rest of Europe North America Rest of the World 2018 £’000 52,357 5,122 57,479 2018 £’000 23,008 21,306 6,734 6,431 57,479 2017 £’000 47,395 6,135 53,530 2017 £’000 24,016 17,688 6,470 5,356 53,530 26692 12 June 2019 9:40 pm Proof 4 PFP Churchill China plc Annual Report for the year ended 31 December 2018 53 4. Segmental analysis continued The total assets of the business are allocated as follows: United Kingdom £54,037,000 (2017: £50,709,000), Rest of Europe £56,000 (2017: £56,000), North America £686,000 (2017: £656,000), Rest of the World £9,000 (2017: £9,000). Capital expenditure was made as follows: United Kingdom £2,079,000 (2017: £2,133,000), Europe £nil (2017: £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) Pension equalisation charges - exceptional Other external charges Depreciation and amortisation charges Profit on disposal of property, plant and equipment Profit on disposal of property, plant and equipment - exceptional Foreign exchange gain/(loss) 2018 £’000 (107) 4,736 4,744 21,146 611 16,131 1,725 (21) (70) (112) 2017 £’000 (720) 4,448 5,128 20,195 – 15,297 1,621 (2) (315) 103 Total cost of sales, distribution costs and administrative expenses 48,783 45,755 During the year, changes to the law in relation to the calculation of Guaranteed Minimum Pensions (‘GMPs’) required that defined benefit pension schemes must equalise the GMP benefits between men and women. The Churchill Group Retirement Benefit Scheme includes such benefits and as such a one off sum of £611,000 has been provided for in 2018 reflecting the cumulative effect of these changes. Given the size and nature of this adjustment it has been treated as exceptional. A related deferred tax credit of £104,000 has also been treated as exceptional. Additionally sums previously provided for costs relating to the disposal of property which are no longer required have been released, generating an exceptional credit to profit of £70,000. In 2017 the Group disposed of surplus property at Whieldon Road, Stoke on Trent for a total consideration of £1,100,000. The profit arising on this sale of £315,000 was treated as exceptional given its size and nature. A deferred tax credit of £28,000 arising on the sale was also been treated as exceptional. 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 other than Directors (2017: none). 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) Defined benefit pension cost – exceptional (see note 22) 2018 Number 2017 Number 430 201 631 2018 £’000 18,367 1,717 563 237 262 21,146 611 21,757 424 194 618 2017 £’000 17,539 1,686 528 255 187 20,195 – 20,195 26692 12 June 2019 9:40 pm Proof 4 PFP 54 Churchill China plc Annual Report for the year ended 31 December 2018 Notes to the financial statements continued 7. Employee benefit expense continued 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 (2017: 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 auditor: Fees payable to the Company’s auditors for the audit of the Company and consolidated financial statements (Company £3,000; 2017: £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 10. Income tax expense Group Current tax – current year – adjustment in respect of prior periods Deferred tax (note 21) Current year Income tax expense 2018 £’000 110 110 (143) (1) (144) (34) 2018 £’000 10 90 100 2018 £’000 1,609 (57) 1,552 97 1,649 2017 £’000 66 66 (225) – (225) (159) 2017 £’000 10 82 92 2017 £’000 1,248 (71) 1,177 184 1,361 The Finance Act 2016 included legislation to reduce the main rate of Corporation Tax from 20% to 17% from April 2020. Deferred tax balances have been measured accordingly. 26692 12 June 2019 9:40 pm Proof 4 PFP Churchill China plc Annual Report for the year ended 31 December 2018 55 10. Income tax expense 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 Treatment of tax on share of profit of associate company Use of previously unrecognised capital losses Other Tax charge The weighted average applicable tax rate was 19.0% (2017: 19.25%). 2018 £’000 8,847 1,680 16 (57) (35) – 45 2017 £’000 7,775 1,497 18 (71) (31) (58) 6 1,649 1,361 During the year a credit of £37,000 (2017: charge of £275,000) in relation to deferred tax arising from actuarial gains and losses on the Group’s defined benefit pension obligation and a charge of £9,000 (2017: credit of £57,000) in relation to deferred taxation on share based payments were adjusted directly within equity. 11. Earnings per ordinary share Basic earnings per ordinary share is based on the profit after income tax and on 10,966,966 (2017: 10,964,462) ordinary shares, being the weighted average number of ordinary shares in issue during the year. Adjusted earnings per share is calculated after adjusting for the post tax effect of exceptional items (see note 5). Basic earnings per share (Based on earnings £7,198,000 (2017: £6,414,000)) Add/(less): Exceptional Items: £437,000 (2017: (£343,000)) Adjusted earnings per share (based on adjusted earnings £7,635,000 (2017: £6,071,000)) 2018 Pence per share 2017 Pence per share 65.6 4.0 69.6 58.4 (3.1) 55.3 Diluted earnings per ordinary share is based on the profit after income tax and on 11,069,061 (2017: 11,062,013) ordinary shares, being the weighted average number of ordinary shares in issue during the year of 10,966,966 (2017: 10,964,462) increased by 102,065 (2017: 97,551) shares, being the weighted average number of ordinary shares which would have been issued if the outstanding options to acquire shares in the Group had been exercised at the average share price during the year. Diluted adjusted earnings per share is calculated after adjusting for the post tax effect of exceptional items (see note 5). Diluted basic earnings per share (Based on earnings £7,198,000 (2017: £6,414,000)) Add/(less): Exceptional Items: £437,000 (2017: £343,000)) Diluted adjusted earnings per share (based on adjusted earnings £7,635,000 (2017: £6,071,000)) 2018 Pence per share 2017 Pence per share 65.0 4.0 69.0 57.9 (3.1) 54.8 26692 12 June 2019 9:40 pm Proof 4 PFP 56 Churchill China plc Annual Report for the year ended 31 December 2018 Notes to the financial statements continued 12. Dividends The dividends paid in the year were as follows: Ordinary Final dividend 2017 17.2p (Final dividend 2016: 14.8p) per 10p ordinary share Interim 2018 8.7p per 10p ordinary share paid (Interim 2017: 7.4p) The Directors now recommend payment of the following dividend: Ordinary dividend 2018 £’000 1,886 954 2,840 2017 £’000 1,621 812 2,433 Final dividend 2018 20.3p (2017: 17.2p) per 10p ordinary share 2,224 1,886 Dividends on treasury shares held by the Company are waived. 13. Property, plant and equipment The Company has no property, plant and equipment (2017: none). Details of property, plant and equipment relating to the Group are as follows: Group At 1 January 2017 Cost Accumulated depreciation Net book amount Year ended 31 December 2017 Opening net book amount Additions Disposals Depreciation charge Closing net book amount At 31 December 2017 Cost Accumulated depreciation Net book amount Year ended 31 December 2018 Opening net book amount Additions Disposals Depreciation charge Closing net book amount At 31 December 2018 Cost Accumulated depreciation Net book amount Freehold land and buildings £’000 13,957 (3,166) 10,791 10,791 40 (797) (309) 9,725 12,898 (3,173) 9,725 9,725 – – (249) 9,476 12,898 (3,423) 9,475 Plant £’000 21,822 (18,385) 3,437 3,437 1,775 – (988) 4,224 23,600 (19,376) 4,224 4,224 1,429 – (1,176) 4,478 25,030 (20,552) 4,478 Motor vehicles £’000 Fixtures and fittings £’000 864 (392) 472 472 83 (37) (125) 393 818 (425) 393 393 179 (59) (118) 395 795 (400) 395 2,759 (2,562) 197 197 154 – (151) 200 1,718 (1,518) 200 200 413 – (114) 499 2,131 (1,632) 499 Total £’000 39,402 (24,505) 14,897 14,897 2,052 (834) (1,573) 14,542 40,229 (25,687) 14,542 14,542 2,021 (59) (1,657) 14,847 40,854 (26,007) 14,847 26692 12 June 2019 9:40 pm Proof 4 PFP Churchill China plc Annual Report for the year ended 31 December 2018 57 14. Intangible assets The Company has no intangible assets (2017: none). Details of intangible assets relating to the Group are as follows: Group At 1 January 2017 Cost Accumulated amortisation Net book amount Year ended 31 December 2017 Opening net book amount Additions Amortisation charge Closing net book amount At 31 December 2017 Cost Accumulated amortisation Net book amount Year ended 31 December 2018 Opening net book amount Additions Amortisation charge Closing net book amount At 31 December 2018 Cost Accumulated amortisation Net book amount 15. Investment in associate Cost At 1 January Share of profit At 31 December Impairment At 1 January and 31 December Net book value Closing net book amount Computer software £’000 950 (861) 89 89 60 (48) 101 925 (824) 101 101 58 (68) 91 983 (892) 91 Company 2018 £’000 Company 2017 £’000 Group 2018 £’000 1,974 185 2,159 Group 2017 £’000 1,815 159 1,974 921 185 1,106 427 427 – 1,732 1,547 1,106 762 159 921 – 921 The investment in associate represents a holding of 46.1% (2017: 41.7%) 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 ended 31 December 2018 the Group purchased 4.4% of the issued £1 ordinary shares of Furlong Mills Limited from another Shareholder, resulting in the holding of 46.1% at the reporting date. Following the reporting period, on 25 February 2019 the Group purchased a further 9.5% of the issued £1 shares from another Shareholder, increasing the Group’s shareholding to 55.6%. (See note 30 for additional details.) 26692 12 June 2019 9:40 pm Proof 4 PFP 58 Churchill China plc Annual Report for the year ended 31 December 2018 Notes to the financial statements continued 15. Investment in associate continued Share of associate’s assets Share of associate’s liabilities Share of associate’s net assets 2018 £’000 3,132 (878) 2,254 2017 £’000 2,842 (791) 2,051 The total revenue of Furlong Mills Limited for its year ended 31 December 2018 was £9,670,000 (2017: £8,725,000) and profit before tax was £619,000 (2017: £612,000). During the year the Group purchased raw materials to a value of £3,274,000 (2017: £3,040,000) from Furlong Mills Limited. Amounts owed to Furlong Mills Limited at 31 December 2018 were £114,000 (2017: £148,000) (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% (2017: 9.5%). In the Group’s consolidated and Company financial statements the investment is accounted for on the equity basis. 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 2018 £’000 2017 £’000 2,627 2,627 432 432 2,198 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 Country of incorporation Churchill China (UK) Limited* England and Wales Churchill Ceramics (UK) Limited* England and Wales James Broadhurst & Sons Limited* England and Wales Churchill China, Inc† Churchill Ceramica Iberia, S.L.‡ USA Spain Churchill Housewares Limited* England and Wales Churchill Tableware Limited* England and Wales Churchill Fine Bone China Holdings* Limited England and Wales Churchill Fine Bone China Limited* England and Wales Elizabethan Fine Bone China* Limited England and Wales Churchill China (HK) Limited§ Hong Kong Description of shares held Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Proportion of nominal value of issued shares held 100% 100% 100% 100% 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 Provision of sales and management services within the Group 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: Ortega y Gasset, 22-24, Planta 3ª 28006 Madrid § Registered address: 18/F Edinburgh Tower, The Landmark, 15 Queen’s Road Central, Central, Hong Kong 26692 12 June 2019 9:40 pm Proof 4 PFP Churchill China plc Annual Report for the year ended 31 December 2018 59 17. Inventories The Company has no inventory (2017: none). Details of inventory relating to the Group are as follows: Raw materials Work in progress Finished goods 2018 £’000 53 1,532 8,326 9,911 2017 £’000 64 1,305 8,447 9,816 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 £29,841,000 (2017: £27,318,000). The movement in impairment provisions against the value of inventory in relation to slow moving and obsolete items during the year was an increase of £872,000 (2017: decrease of £164,000). 18. Trade and other receivables Trade receivables Less: provision for impairment of trade receivables Trade receivables – net Prepayments Receivables from related parties (note 28) Less non-current portion: loans to related parties Current portion Group 2018 £’000 9,715 (308) 9,407 309 – 9,719 – 9,719 2017 £’000 8,590 (269) 8,321 329 – 8,650 – 8,650 Company 2018 £’000 2017 £’000 – – – – 7,938 7,938 7,718 220 – – – – 6,336 6,336 6,130 206 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 2018, trade receivables of £7,561,000 (2017: £6,332,000) were fully performing. As of 31 December 2018, trade receivables of £558,000 (2017: £713,000) were past due but not impaired. The ageing of these receivables is as follows: Up to 3 months 3 to 6 months Over 6 months 2018 £’000 543 8 7 558 2017 £’000 694 13 6 713 As of 31 December 2018 trade receivables with a gross value of £1,596,000 (2017: £1,605,000) were impaired and provided for. The amount of provision for 31 December 2018 was £308,000 (2017: £269,000). 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 The Directors consider that the carrying value of trade and other receivables is approximate to their fair value. 2018 £’000 1,589 – 7 2017 £’000 1,596 6 3 1,596 1,605 26692 12 June 2019 9:40 pm Proof 4 PFP 60 Churchill China plc Annual Report for the year ended 31 December 2018 Notes to the financial statements continued 18. Trade and other receivables continued Movements on the Group provision for impairment of trade receivables are as follows: At 1 January Increase/(decrease) in provision for receivables impairment Written off during the year At 31 December 2018 £’000 269 28 11 308 2017 £’000 379 (125) 15 269 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. We have assessed amounts receivable from related parties in accordance with the expected credit loss model prescribed by IFRS 9. The provision for impairment against these balances is considered to be immaterial. The carrying amounts of the Group’s trade and other receivables are denominated in the following currencies: Pounds Euros US dollars 2018 £’000 5,811 3,012 896 9,719 2017 £’000 5,671 2,092 887 8,650 During the year the Group realised gains of £29,000 (2017: losses of £61,000) 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 Euro of £8,875,000 (2017: £5,907,000) and the sale of US dollars of £500,000 (2017: £595,000). These contracts are held at their fair value with a loss of £42,000 (2017: loss of £42,000) recognised in relation to the contracts outstanding at the year end. Company As of 31 December 2018, Company trade receivables of £nil (2017: £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 2018 £’000 7,827 111 7,938 2017 £’000 6,238 98 6,336 We have assessed amounts receivable from related parties in accordance with the expected credit loss model prescribed by IFRS 9. The provision for impairment against these balances is considered to be immaterial. 19. Other financial assets Other financial assets Group Company 2018 £’000 3,001 2017 £’000 3,000 2018 £’000 – 2017 £’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 All the above liabilities mature within twelve months from the year end. Group Company 2018 £’000 3,823 114 635 4,989 9,561 2017 £’000 3,096 148 1,126 5,654 10,024 2018 £’000 – 13 91 16 120 2017 £’000 – 13 82 2 97 26692 12 June 2019 9:40 pm Proof 4 PFP Churchill China plc Annual Report for the year ended 31 December 2018 61 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 (net) The net movement on the deferred income tax account is as follows: At 1 January Income statement charge (note 10) Tax credited/(charged) directly to equity (note 26) At 31 December 2018 £’000 777 330 1,107 (715) (39) (754) 353 2018 £’000 422 (97) 28 353 2017 £’000 878 319 1,197 (720) (55) (775) 422 2017 £’000 824 (184) (218) 422 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: Deferred tax liabilities At 1 January 2017 Credited to the income statement At 31 December 2017 Credited to the income statement At 31 December 2018 Deferred tax assets At 1 January 2017 Charged to the income statement Charged/(credited) directly to equity At 31 December 2017 Charged to the income statement (Credited)/charged directly to equity At 31 December 2018 Accelerated tax depreciation £’000 Land and buildings revaluation £’000 Total £’000 834 (59) 775 (21) 754 Total (1,658) 243 218 (1,197) 118 (28) 196 (2) 194 (2) 192 Other (79) 28 (57) (108) 4 9 (95) (1,107) 638 (57) 581 (19) 562 Accelerated tax depreciation Retirement benefit obligation (95) 10 – (85) (1) – (86) (1,484) 205 275 (1,004) 115 (37) (926) 26692 12 June 2019 9:40 pm Proof 4 PFP 62 Churchill China plc Annual Report for the year ended 31 December 2018 Notes to the financial statements continued 21. Deferred income tax continued The deferred income tax (credited to) / charged to equity during the past year is as follows: Fair value reserves in Shareholders’ equity: Tax on re-measurement of defined pension benefits Tax on share based payments 2018 £’000 2017 £’000 (37) 9 (28) 275 (57) 218 Deferred income tax of £2,000 (2017: £2,000) was transferred from other reserves (note 25) 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 £866,000 (2017: £866,000) in respect of capital losses amounting to £5,092,000 (2017: £5,092,000) that can be carried forward against future capital gains. Company Deferred tax assets of £88,000 (2017: £101,000) are recognised relating to short term timing differences. 22. Retirement benefit obligations Balance sheet obligations Pension benefits Income statement charge Pension benefits Pension benefits: Past service charge - exceptional Finance costs 2018 £’000 2017 £’000 5,443 5,907 800 611 143 783 – 225 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 £1,411,000 (2017: £783,000) including an exceptional charge of £611,000 (2017: nil). Of this cost, £611,000 (2017: £nil) related to the Churchill Group Retirement Benefit Scheme, £312,000 (2017: £288,000) was in respect of the Churchill China 1999 Pension Scheme, £184,000 (2017: £205,000) was in respect of the Churchill China 2006 Group Personal Pension Scheme and £67,000 (2017: £35,000) 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 £28,000 (2017: £28,000). During the year, changes to the law in relation to the calculation of Guaranteed Minimum Pensions (‘GMPs’) required that defined benefit pension schemes must equalise the GMP benefits between men and women. The Churchill Group Retirement Benefit Scheme includes such benefits and as such a one-off sum of £611,000 has been provided for in 2018 reflecting the cumulative effect of these changes. Given the size and nature of this adjustment it has been treated as exceptional. A related deferred tax credit of £104,000 has also been treated as exceptional. 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 (2017: £1,430,000) 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 2017 triennial actuarial valuation in July 2018. The Group has agreed to make payments of £1,430,000 per annum in respect of the amortisation of past service deficits for three years to 2020 and £1,284,000 per annum in respect of the amortisation of past service deficits, for the following seven years to 2027. The deficit in the Scheme is a liability of the Group as Scheme employer and the deficit amortisation payments aimed at removing this deficit may vary dependent on changes in the assumptions underlying the calculation of liabilities and actual experience. The Group takes into account the level of present and future payments into the Scheme along with capital expenditure and other investments, when considering the allocation of available cash flow and setting dividend policy. As previously stated, payments into the Scheme were increased by 100% in 2016. In 2017 dividends paid increased by 17% and have increased by 17% in 2018. 26692 12 June 2019 9:40 pm Proof 4 PFP Churchill China plc Annual Report for the year ended 31 December 2018 63 22. Retirement benefit obligations continued 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 The movement in the present value of defined benefit obligation over the year is as follows: At 1 January Interest cost Past service cost - exceptional Experience losses/(gains) on liabilities Re-measurements 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 Re-measurement of return on plan assets excluding amounts included in interest expense Employer contributions Benefits paid At 31 December Plan assets are comprised as follows: Equity investment funds Absolute return funds Other investment funds Debt investments Cash and cash equivalents 2018 £’000 19,043 5,616 1,876 13,998 2,022 42,555 45% 13% 4% 33% 5% 2018 £’000 47,998 2017 £’000 51,125 (42,555) (45,218) 5,443 5,907 2018 £’000 51,125 1,321 611 70 (3,871) (1,258) 47,998 2018 £’000 45,218 1,178 (4,013) 1,430 (1,258) 42,555 2017 £’000 23,081 6,165 2,027 11,725 2,220 45,218 2017 £’000 50,381 1,391 – (1) 781 (1,427) 51,125 2017 £’000 41,650 1,166 2,399 1,430 (1,427) 45,218 51% 14% 4% 26% 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 loss of £2,835,000 (2017: gain of £3,565,000). 2018 £’000 143 2017 £’000 225 26692 12 June 2019 9:40 pm Proof 4 PFP 64 Churchill China plc Annual Report for the year ended 31 December 2018 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 2018 £’000 2017 £’000 2016 £’000 2015 £’000 2014 £’000 47,998 (42,555) 5,443 51,125 (45,218) 5,907 50,381 (41,650) 8,731 41,808 (37,971) 3,837 (4,013) 2,399 2,016 (678) (70) 1 703 1,006 42,731 (38,057) 4,674 814 395 Re-measurement gains and losses Re-measurement gains of £142,000 (2017: gains of £1,619,000) 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 £16,837,000 (2017: £16,625,000). 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 2018 % per annum 2.95% 3.2% 2.2% 2.2% 2.2% Assumptions regarding future mortality rates are set based on advice in accordance with S2PA 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 2018 Years 20.9 22.9 The average life expectancy in years of a pensioner retiring at age 65, 20 years after the balance sheet date, is as follows: Male Female 2018 Years 22.6 24.8 2017 % per annum 2.6% 3.3% 2.3% 2.3% 2.3% 2017 Years 20.8 22.9 2017 Years 22.5 24.7 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 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. The Trustees investment aim is to meet pension liabilities as they fall due. 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 plans’ 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. 26692 12 June 2019 9:40 pm Proof 4 PFP Churchill China plc Annual Report for the year ended 31 December 2018 65 22. Retirement benefit obligations continued Life expectancy The plans’ obligations are to provide benefits for the life of the member, so increases in life expectancy will result in an increase in the plans’ 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 0.25% decrease in the discount rate to 2.75% would be to increase scheme liabilities by £2,093,000 (4.4%). The effect of a 0.25% increase in CPI inflation to 2.45% would increase scheme liabilities by £1,025,000 (3.6%). The effect of a 1 year increase to life expectancy would increase scheme liabilities by £1,665,000 (3.5%). The amount of net deficit on retirement benefit schemes is also dependent on the valuation and investment performance of scheme assets. 23. Issued share capital and share premium account Group and Company At 1 January 2018 and 31 December 2018 Number of shares 000s 11,030 Ordinary shares £’000 1,103 Share premium £’000 2,348 The total authorised number of ordinary shares is 14,300,000 (2017: 14,300,000) with a par value of 10p (2017: 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 4 May 2018 5 May 2017 16 May 2016 1,117.5p 1047.5p 10p 3 10p 3 780p 10p 3 8 May 2015 547.5p 10p 2 35,133 36,601 30,984 30,927 3 10% 10 3 1.4% 2.4% 901p 3 15% 10 3 1.4% 2.5% 847p 3 15% 10 3 1.4% 2.5% 643p 3 15% 10 3 1.4% 3.0% 491p The following options exercisable over ordinary shares were outstanding at 31 December 2018 under the Long Term Incentive Plan: Number of shares May 2015 Grant May 2016 Grant May 2017 Grant May 2018 Grant 2018 – 30,984 36,601 35,133 102,718 2017 30,927 30,984 36,601 – 98,512 Exercise price Date from which exercisable Expiry date 10p 10p 10p 10p May 2018 May 2025 May 2019 May 2026 May 2020 May 2027 May 2021 May 2028 26692 12 June 2019 9:40 pm Proof 4 PFP 66 Churchill China plc Annual Report for the year ended 31 December 2018 Notes to the financial statements continued 23. Issued share capital and share premium account 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 2018 is set out below. Outstanding at 1 January Granted Exercised Outstanding at 31 December Exercisable at 31 December 2018 Number ’000 98,512 35,133 (30,927) 102,718 – 2018 Weighted average exercise price 10.0p 10.0p 10.0p 10.0p – 2017 Number ’000 96,062 36,601 (34,151) 98,512 – 2017 Weighted average exercise price 10.0p 10.0p 10.0p 10.0p – There were 35,133 share options granted during the year (2017: 36,601). 2018 2018 2018 2018 2017 2017 2017 2017 Weighted average exercise price 10p Number ’000 102,718 0 – 50p Weighted average remaining life (expected) Weighted average remaining life (contractual) Weighted average exercise price 1.5 8.5 10p Weighted average remaining life (expected) Weighted average remaining life (contractual) 1.3 8.3 Number ’000 98,512 The weighted average share price for options exercised in the period was 10p (2017: 10p). The total charge during the year for employee share based payment plans was £263,000 (2017: £187,000) before tax, all of which related to equity settled share based payment transactions. 24. Treasury shares Group and Company As at 31 December 2017 Re-Issue of shares Transfer to retained earnings Purchase of own shares As at 31 December 2018 £’000 579 (3) (235) 388 729 During the year the Group re-purchased 38,000 (2017: 27,000) 10p ordinary shares and re-issued 30,927 (2017: 34,151) under employee share option schemes. The Group currently holds 74,922 (2017: 67,849) shares in Treasury. 25. Other reserves Group Balance at 1 January 2017 Depreciation transfer – gross Depreciation transfer – tax Share based payment Currency translation Balance at 31 December 2017 Depreciation transfer – gross Depreciation transfer – tax Share based payment Currency translation Balance at 31 December 2018 Land and buildings revaluation £’000 Currency translation £’000 Share based payment £’000 959 (12) 2 – – 949 (12) 2 – – 939 105 – – – (33) 72 – – – 23 95 227 – – 64 – 291 – – 125 416 Other reserves £’000 253 – – – – Total £’000 1,544 (12) 2 64 (33) 253 1,565 – – – – (12) 2 125 23 253 1,703 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. 26692 12 June 2019 9:40 pm Proof 4 PFP Churchill China plc Annual Report for the year ended 31 December 2018 67 25. Other reserves continued Company Other reserves of £416,000 (2017: £291,000) represent provision for share based payment as shown in the above table. 26. Retained earnings At 1 January 2017 Profit for the year Dividends paid in 2017 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 2017 At 1 January 2018 Profit for the year Dividends paid in 2018 Depreciation transfer on land and buildings net of tax Share based payment Transfer from Treasury Shares Actuarial losses on retirement benefit obligations net of tax At 31 December 2018 27. Commitments Group £’000 24,205 6,414 (2,433) 10 180 (264) 1,344 29,456 29,456 7,198 Company £’000 5,591 3,332 (2,433) – 180 (264) – 6,406 6,406 4,693 (2,840) (2,840) 10 128 (235) (175) – 128 (235) – 33,542 8,152 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 2018 £’000 729 95 824 2017 £’000 460 41 501 Company 2018 £’000 – – – 2017 £’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: 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 Group 2018 £’000 124 121 198 2017 £’000 95 152 321 Company 2018 £’000 2017 £’000 – – – – – – 26692 12 June 2019 9:40 pm Proof 4 PFP 68 Churchill China plc Annual Report for the year ended 31 December 2018 Notes to the financial statements continued 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 Dividend received from Churchill Ceramics (UK) Limited Loans repaid by Churchill China (UK) Limited Loans outstanding (mainly from Churchill China (UK) Limited) 29. Financial instruments by category 2018 £’000 10 – 3,750 1,056 (2,147) 7,926 2017 £’000 7 – 3,450 – (2,568) 6,323 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 2018 and 2017, as disclosed in note 17. 30. Events occurring after the reporting period On 25 February 2019 Churchill China plc acquired an additional 9.5% of the issued share capital of Furlong Mills Limited, for a total consideration of £454,000, funded from the Group’s existing cash resources. This, together with the existing holding immediately prior to the transaction of 46.1%, gives the Company a majority shareholding of 55.6%. Furlong Mills Limited has previously been accounted for as an associated company and will be consolidated into the Group’s accounts from the above date. In the last audited accounts of Furlong Mills Limited (to 31 December 2017), revenue was £8.6m, which included £3.0m of sales to Churchill China and profit before tax was £504,000. Net assets at 31 December 2017 were £4,856,000. 26692 12 June 2019 9:40 pm Proof 4 PFP Five year financial record Churchill China plc Annual Report for the year ended 31 December 2018 69 Revenue Operating profit before exceptional items Exceptional items Operating profit Share of results of associate net of impairment Finance cost Profit before exceptional items and income tax Exceptional items Profit before income tax Income tax expense Profit for the year Dividends paid Net assets employed Ratios Operating margin* Earnings before interest, tax, depreciation and amortisation (£000)* Basic earnings per share (p) Adjusted earnings per share (p)* * Before exceptional items 2014 £’000 44,518 2015 £’000 46,829 4,249 – 4,249 116 (48) 4,317 – 4,317 (901) 3,416 1,619 4,959 – 4,959 135 (80) 5,014 – 5,014 (928) 4,086 1,816 28,406 30,925 9.5% 5,876 31.2 31.2 10.6% 6,454 37.3 37.3 2016 £’000 51,102 6,398 – 6,398 157 (40) 6,515 – 6,515 (1,230) 5,285 2,085 28,625 12.5% 8,114 48.2 48.2 2017 £’000 53,530 7,460 315 7,775 159 (159) 7,460 315 7,775 (1,361) 6,414 2,433 33,893 13.9% 9,081 58.4 55.3 2018 £’000 57,479 9,237 (541) 8,696 185 (34) 9,388 (541) 8,847 (1,649) 7,198 2,840 37,967 16.1% 10,941 65.6 69.6 26692 12 June 2019 9:40 pm Proof 4 PFP 70 Churchill China plc Annual Report for the year ended 31 December 2018 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 Friday 17 May 2019 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. That the reports of the Directors and the Auditors and the Financial Statements for the year ended 31 December 2018 be received. 2. That a final dividend of 20.3p on each ordinary share be declared in respect of the year ended 31 December 2018. 3. That D J S Taylor be re-elected as a Director. 4. That J A Roper be re-elected as a Director. 5. That the Auditors, PricewaterhouseCoopers LLP, be re-appointed. 6. That the Audit Committee be authorised to fix the auditors’ remuneration for the year ending 31 December 2019. 7. That the Annual Report on Remuneration for the year ended 31 December 2018 be approved. 8. 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 £365,175 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 17 August 2020), 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: 9. That if resolution 8 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 £54,776, 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 17 August 2020), 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. 10. That if resolution 8 is passed, the Directors be authorised in addition to any authority granted under resolution 9 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 £54,776; 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 17 August 2020), 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. 11. 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 1,095,525 ; (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 per cent 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 16 April 2019 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. 26692 12 June 2019 9:40 pm Proof 4 PFP Churchill China plc Annual Report for the year ended 31 December 2018 71 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 8.30am – 5pm, Monday – Friday (excluding public holidays in England and Wales). 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 15 May 2019. 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 6.30pm on 15 May 2019 (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 16 April 2019 (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 74,922 ordinary shares in treasury. The total number of voting rights in the Company is 10,955,250. 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. 26692 12 June 2019 9:40 pm Proof 4 PFP 72 Churchill China plc Annual Report for the year ended 31 December 2018 Notice of Annual General Meeting continued EXPLANATORY NOTES ON THE RESOLUTIONS The notes on the following pages give an explanation of certain of the proposed resolutions. 1. Resolutions 3 and 4: 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 J S Taylor and J A Roper are retiring by rotation and resolutions 3 and 4 respectively seek approval for their re-election as a Director (D J S Taylor and J A Roper). Biographical details for the Directors are set out on in the Directors’ Report. 2. 3. 4. 5. 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. Resolution 7: this is a resolution to approve the Annual Report on Directors’ Remuneration on pages 28 to 31 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 26 to 27 of the Annual Report although the Policy is not the subject matter of Resolution 7. Resolution 8 is an ordinary resolution authorising the Directors at any time prior to 17 August 2020 (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 16 April 2019. 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 16 April 2019 was 74,922 which represents 0.7% of the issued share capital as at that date. Resolution 9: 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 £54,776 (representing approximately 5% of the total issued equity share capital, excluding shares held in treasury, as at 16 April 2019) (being the last practicable date prior to the publication of this Notice) as if the pre-emption rights of Section 570 did not apply. Resolution 10: 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 £54,776 (representing approximately 5% of the total issued equity share capital, excluding shares held in treasury as at 16 April 2019)(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 0.2% of its issued share capital (excluding shares held in treasury) on a non-pro rata basis over the last 3 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 per cent of the issued ordinary share capital (excluding shares held in treasury) within a rolling 3 year period. The authorities granted by resolutions 9 and 10 shall cease to have effect at the conclusion of the next AGM or on 17 August 2020, whichever is the earlier. 6. Resolution 11 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 1,095,525 ordinary shares (representing approximately 10 per cent of the issued share capital excluding shares held in treasury as at 16 April 2019 (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. 26692 12 June 2019 9:40 pm Proof 4 PFP Churchill China plc Annual Report for the year ended 31 December 2018 26692 12 June 2019 9:40 pm Proof 4 PFP churchill1795.com Churchill1795 @churchill1795 @Churchill_1795 Tel: +44 (0) 1782 577566 Fax: +44 (0) 1782 524355 email: info@churchill1795.com HEAD OFFICE & STOKE SHOWROOM No. 1 Marlborough Way Tunstall Stoke-on-Trent ST6 5NZ LONDON SHOWROOM Business Design Centre Suite 102 52 Upper Street Islington London N1 0QH MADRID SHOWROOM Calle Princesa No 2 7ta Planta Puertas 4 y 5 Madrid 28008 España Tel: 910 004 929 ©Churchill China plc 2019 In the printing of this brochure, every effort has been made to ensure perfect reproduction of product colours, but due to printing limitations, they may not be an exact match to the actual product. BS 8654 BS 4034 BS 12875 p5 26692 12 June 2019 9:40 pm Proof 4 PFP
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