Choice Hotels International Annual Report 2018

FY2018 Annual Report · Choice Hotels International

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ANNUAL REPORT 2018

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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.

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Churchill China plc Annual Report for the year ended 31 December 2018

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

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51.1

53.4

57.5

44.5

46.8

13.9

12.5

9.5

10.6

Churchill China plc Annual Report for the year ended 31 December 2018

Five Year Performance

2014

2015

2016

2017

2018

2014

2015

2016

2017

2018

Revenue (£m)

£57.5m

7.4%

*Operating Profit (£m)

£9.2m

24%

44.5

46.8

44.5

53.4

51.1

46.8

57.5

53.4

57.5

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

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)

£9.4m

26%

10
9
8
7
6
5
4
3
2
1

4.2

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

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

Hospitality by Market

6.4

5.0

4.2

7.5

6.4

7.5

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

100

2014

2014
2015

2014

2015
2016

2015

2016
2017

2016

2017
2018

2017

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)

7.5

6.4

*Excluding exceptional items.

10
Other Highlights
9
8
7
6
5
4
3
2
7
0
1
0
2

8
0
0
2

9
0
0
2

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

9.4

2017

2018

5
0

Hospitality Value Added Series

EPS

Hospitality Value Added Series

EPS

Hospitality Value Added Series

EPS

Revenue by Market

Dividends

Hospitality by Market

40%

60%

44%

2017

56%

Value Added Sales

Standard Sales

44%

2018

60%

100

60%

40%

20
0

100

t o m e rs & Distribution

Identify

Revenue by Market

C u

e
rvic

e
S

2017

EPS

Dividends

45%

33%

11%

40%

36%

11%

13%

2017

2018

Export

Home

Export

Home

Europe

ROW

North America

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

2014

2015

2016

2017

2018

2014

Review

Assess

Europe

ROW

Dividends

Hospitality by Market

2017

40%

2017

40%

60%

2018

44%

2018

2017

44%

56%

2018

60%

100

40%

60%

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Value Added Sales

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Standard Sales

2018

44%

Sustainable

2017

45%

Advantage

45%

33%

11%

33%

11%

Europe

36%

11%

13%

40%

36%

11%

13%

ROW

North America

40%

2018

Export

Home

urin

In n o vatio

Controls

Document

100

Hospitality Value Added Series

Revenue by Market

2017

2018

40%

60%

44%

56%

100

t o m e rs & Distribution

C u

t o m e rs & Distribution

C u

Identify

rvic

Value Added Sales

Standard Sales

2017

Sustainable

45%

Advantage

Sustainable

Advantage

40%

2018

33%

11%

36%

11%

13%

North America

Europe

ROW

urin

In n o vatio

Review

Assess

Controls

Document

Controls

Document

t o m e rs & Distribution

C u

Identify

Sustainable

Advantage

rvic

urin

In n o vatio

Review

Assess

Controls

Document

Churchill China plc Annual Report for the year ended 31 December 2018

“

This performance clearly
demonstrates the continued
success of our strategic
approach”

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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.

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Churchill China plc Annual Report for the year ended 31 December 2018

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

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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.

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Churchill China plc Annual Report for the year ended 31 December 2018

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51.1

53.4

57.5

44.5

46.8

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

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).

Dividends

Gross margins have again improved as we continued to grow sales of
added value product.

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

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.

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

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

2014

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

5.0

6.4

9.2

4.2

2014

2015

2016

2017

2018

2014

EPS and Dividend Growth

EPS

Dividends

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

2017

2018

56%

44%

60%

40%

Export

Home

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

33%

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

100

Hospitality Value Added Series

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Revenue by Market

40%

60%

45%

33%

11%

2017

2018

Value Added Sales

Standard Sales

2017

2018

44%

56%

40%

36%

11%

13%

Europe

ROW

North America

100

t o m e rs & Distribution

C u

Identify

Sustainable

Advantage

rvic

urin

In n o vatio

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Assess

Controls

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Churchill China plc Annual Report for the year ended 31 December 2018

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.

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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

“ Our workforce is skilled,
loyal and well motivated
and they create and
embody the core values
that serve us well”

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Proof 4 PFP

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

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Churchill China plc Annual Report for the year ended 31 December 2018

“ Churchill has a robust
and well invested
business model
supported by a strong
financial position”

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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

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

40%

Export

Home

10
9
8
7
6
5
4
3
2
1

EPS

9.2

7.5

6.4

5.0

4.2

2014

2015

2016

2017

2018

100

t o m e rs & Distribution

C u

Sustainable

Advantage

rvic

urin

In n o vatio

Hospitality Value Added Series

Revenue by Market

2017

2018

40%

60%

44%

56%

Value Added Sales

Standard Sales

2017

2018

45%

33%

11%

40%

36%

11%

13%

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.

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

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.

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.

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

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

100

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%

40%

36%

11%

13%

Europe

ROW

North America

100

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t o m e rs & Distribution

C u

Identify

Sustainable

Advantage

rvic

urin

In n o vatio

Review

Assess

Controls

Document

Churchill China plc Annual Report for the year ended 31 December 2018

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.

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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.

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Risk
Change
=

Risk
Cyber Security

Regulation,
Compliance and
Taxation

Churchill China plc Annual Report for the year ended 31 December 2018

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.

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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

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

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Churchill China plc Annual Report for the year ended 31 December 2018

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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.

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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.

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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

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

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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

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.

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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

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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.

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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.

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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

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.

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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

817

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

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

779

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

902,282

1,839

52,667

458,185

379,848

1,794,821

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Churchill China plc Annual Report for the year ended 31 December 2018

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.

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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

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.

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Churchill China plc Annual Report for the year ended 31 December 2018

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

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

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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

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Churchill China plc Annual Report for the year ended 31 December 2018

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

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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.

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Churchill China plc Annual Report for the year ended 31 December 2018

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.

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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.

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Churchill China plc Annual Report for the year ended 31 December 2018

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

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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

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

(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

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

(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

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

14,847

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

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

2018
£’000

1,106

2,198

3,392

7,718

220

8,018

(120)

7,898

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

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

26692

12 June 2019 9:40 pm

Proof 4 PFP

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

(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

(264)

(2,517)

–

(7)

(4)

–

6,414

(12)

–

(33)

(43)

–

1,344

(33)

7,725

(2,433)

187

(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

(2)

(175)

–

7,033

(2,840)

–

137

(9)

(235)

(2,947)

33,542

–

1,103

2,348

–

(153)

(150)

(729)

–

7,198

(12)

–

125

–

125

1,703

–

(175)

7,046

(2,840)

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

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

–

123

(264)

(2,517)

–

(7)

(4)

–

3,332

(2,433)

187

(271)

(2,457)

6,406

1,103

2,348

(579)

291

9,569

4,693

(2,840)

–

137

(9)

(235)

(2,947)

8,152

–

1,103

2,348

–

(153)

(150)

(729)

–

125

–

125

416

4,693

(2,840)

262

(9)

(388)

(2,972)

11,290

26692

12 June 2019 9:40 pm

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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)

(58)

(2,020)

(388)

(2,840)

(1)

(3,226)

1,802

12,577

14,380

2017
£’000

7,743

–

(1,198)

6,611

(2,155)

1,139

(54)

(1,070)

(271)

(2,433)

(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.

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Churchill China plc Annual Report for the year ended 31 December 2018

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

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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

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

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

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.

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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.

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Churchill China plc Annual Report for the year ended 31 December 2018

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

Min A

Credit
rating

Aa3

2018
£’000

11,295

3,039

14,380

2018
£’000

2,750

251

3,001

2017
£’000

11,730

780

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.

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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

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Churchill China plc Annual Report for the year ended 31 December 2018

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

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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

(143)

(1)

(144)

(34)

2018
£’000

100

2018
£’000

1,609

(57)

1,552

1,649

2017
£’000

(225)

–

(225)

(159)

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.

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Churchill China plc Annual Report for the year ended 31 December 2018

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

(57)

(35)

–

2017
£’000

7,775

1,497

(71)

(31)

(58)

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

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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

(797)

(309)

9,725

12,898

(3,173)

9,725

–

(249)

9,476

12,898

(3,423)

9,475

Plant
£’000

21,822

(18,385)

3,437

1,775

–

(988)

4,224

23,600

(19,376)

4,224

1,429

–

(1,176)

4,478

25,030

(20,552)

4,478

Motor
vehicles
£’000

Fixtures and
fittings
£’000

864

(392)

472

(37)

(125)

393

818

(425)

393

179

(59)

(118)

395

795

(400)

395

2,759

(2,562)

197

154

–

(151)

200

1,718

(1,518)

200

413

–

(114)

499

2,131

(1,632)

499

Total
£’000

39,402

(24,505)

14,897

2,052

(834)

(1,573)

14,542

40,229

(25,687)

14,542

2,021

(59)

(1,657)

14,847

40,854

(26,007)

14,847

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Churchill China plc Annual Report for the year ended 31 December 2018

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)

(48)

101

925

(824)

101

(68)

983

(892)

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

–

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.)

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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

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

Proportion of
nominal value
of issued shares
held

100%

Principal activity

Manufacture and sale of ceramic and
related products

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

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

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Churchill China plc Annual Report for the year ended 31 December 2018

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

1,532

8,326

9,911

2017
£’000

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

7,718

220

–

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

558

2017
£’000

694

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

–

2017
£’000

1,596

1,605

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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

308

2017
£’000

379

(125)

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

6,336

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

–

120

2017
£’000

–

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Churchill China plc Annual Report for the year ended 31 December 2018

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)

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)

(57)

(108)

(95)

(1,107)

638

(57)

581

(19)

562

Accelerated
tax
depreciation

Retirement
benefit
obligation

(95)

–

(85)

(1)

–

(86)

(1,484)

205

275

(1,004)

115

(37)

(926)

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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)

(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.

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Churchill China plc Annual Report for the year ended 31 December 2018

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%

33%

2018
£’000

47,998

2017
£’000

51,125

(42,555)

(45,218)

5,443

5,907

2018
£’000

51,125

1,321

611

(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%

26%

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

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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)

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%

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%

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.

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Churchill China plc Annual Report for the year ended 31 December 2018

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

780p

10p

8 May
2015

547.5p

10p

35,133

36,601

30,984

30,927

10%

1.4%

2.4%

901p

15%

1.4%

2.5%

847p

15%

1.4%

2.5%

643p

15%

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

May 2018

May 2025

May 2019

May 2026

May 2020

May 2027

May 2021

May 2028

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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

–

2017

Number
’000

96,062

36,601

(34,151)

98,512

–

2017

Weighted
average
exercise
price

10.0p

–

There were 35,133 share options granted during the year (2017: 36,601).

2018

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)

–

949

(12)

–

939

105

–

(33)

–

227

–

291

–

125

416

Other
reserves
£’000

253

–

Total
£’000

1,544

(12)

(33)

253

1,565

–

(12)

125

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.

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Churchill China plc Annual Report for the year ended 31 December 2018

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)

180

(264)

1,344

29,456

7,198

Company
£’000

5,591

3,332

(2,433)

–

180

(264)

–

6,406

4,693

(2,840)

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

824

2017
£’000

460

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

152

321

Company

2018
£’000

2017
£’000

–

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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

–

3,750

1,056

(2,147)

7,926

2017
£’000

–

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.

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Five year financial record

Churchill China plc Annual Report for the year ended 31 December 2018

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

10.6%

6,454

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

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

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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:

That the reports of the Directors and the Auditors and the Financial Statements for the year ended 31 December 2018 be received.

That a final dividend of 20.3p on each ordinary share be declared in respect of the year ended 31 December 2018.

That D J S Taylor be re-elected as a Director.

That J A Roper be re-elected as a Director.

That the Auditors, PricewaterhouseCoopers LLP, be re-appointed.

That the Audit Committee be authorised to fix the auditors’ remuneration for the year ending 31 December 2019.

That the Annual Report on Remuneration for the year ended 31 December 2018 be approved.

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:

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,

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.

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Churchill China plc Annual Report for the year ended 31 December 2018

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.

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.

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.

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.

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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.

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.

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Churchill China plc Annual Report for the year ended 31 December 2018

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